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I want to save a little more than the company match but I am not sure with one is the best. I used to think that pre-tax is the way to go because it will lower my tax brackets now. But I am not quite sure as I think about it more. Here is why ...
I) Assume I am at a 25% tax bracket now and I save $X per year on pretax basis. You can substitute $X with any number (say $5,000) from here on if that makes it simpler. If I retire t years from now and I earn a rate of return r, I will have $X(1+r)^t. If I am going to be at the same tax bracket when I withdraw the funds, I will have 0.75*X(1+r)^t
Ii). If I save on a post tax basis, I will be saving $0.75*X per year which will grow to 0.75*X(1+r)^t
Am I missing something? (I know there will be differences in tax between now and the future, etc ).
Well sure, IF tax brackets are never changed and IF you expect to withdrawl the exact same amount of money in retirement as you currently make, then it will be a wash. But that's unlikely. So if your income is going up in retirement, it favors post-tax now, and vice-versa. And then the other consideration is the brackets. Not only may the %'s change (likely), but the amount of money in each bracket will change as well (certain). The latter factor would seem to favor pre-tax savings.
the price of admission is the same into a taxable account as a roth.
the taxable account is forever taxed and the roth never taxed so thats a no brainer.
it is alot more difficult to chose 401k ,traditional ira or roth.
Well, it's taxed before you put the money into the account at whatever tax rate you are at that year
jc102=most people that are informed on this will tell you to have both, pre and post tax accounts. The biggest reason for the Roth is it doesn't have a required minimum distribution so if you don't need the money, you can leave it in there to continue to earn on those dollars while you spend down your taxable accounts or if you do need the funds, withdraw a mix of funds to lessen the tax burden. Just putting in the company match is not going to set you up well for retirement unless you have a huge match of 8% or so.
Well sure, IF tax brackets are never changed and IF you expect to withdrawl the exact same amount of money in retirement as you currently make, then it will be a wash. But that's unlikely. So if your income is going up in retirement, it favors post-tax now, and vice-versa. And then the other consideration is the brackets. Not only may the %'s change (likely), but the amount of money in each bracket will change as well (certain). The latter factor would seem to favor pre-tax savings.
The tax brackets may change but it could go either way. I just looked at the post WWII marginal tax rates. They were high in earlier periods but they go up and down in the last 3 decades. So it all depends on the politics, the revenue the economy generates, whether we are in war, etc - all these are unpredictable and it is not unreasonable to assume the current tax bracket. What I am saying is taxes could go up or down. (The amount of money I will be withdrawing makes a huge difference, I totally agree).
Well, it's taxed before you put the money into the account at whatever tax rate you are at that year
jc102=most people that are informed on this will tell you to have both, pre and post tax accounts. The biggest reason for the Roth is it doesn't have a required minimum distribution so if you don't need the money, you can leave it in there to continue to earn on those dollars while you spend down your taxable accounts or if you do need the funds, withdraw a mix of funds to lessen the tax burden. Just putting in the company match is not going to set you up well for retirement unless you have a huge match of 8% or so.
I was not sure if pre tax was a better option or not. I guess it is always best to randomize when in doubt. Yes the company matches about that amount.
Well, it's taxed before you put the money into the account at whatever tax rate you are at that year
jc102=most people that are informed on this will tell you to have both, pre and post tax accounts. The biggest reason for the Roth is it doesn't have a required minimum distribution so if you don't need the money, you can leave it in there to continue to earn on those dollars while you spend down your taxable accounts or if you do need the funds, withdraw a mix of funds to lessen the tax burden. Just putting in the company match is not going to set you up well for retirement unless you have a huge match of 8% or so.
Of course a roth and taxable account are funded with after tax dollars but if the op is deciding which way to go between those two it is a no brainer for the roth in that case.
Last edited by mathjak107; 07-11-2013 at 07:07 AM..
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