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I mean, if you don’t have a company match, why would you rather invest in your 401k rather than a Roth IRA? Wouldn’t you rather pay the taxes now and have it grow tax free, rather than having to pay a higher tax rate at 65?
I don’t understand why some people max out their 401k and don’t even think about maxing out their Roth.
perhaps they feel when the pay checks or 2 paychecks stop coming in they will be in a lower bracket then they are now.
just the fact the brackets allow each year more and more to go through at lower and lower tax rates means even if you are the same or even higher it still may be better to defer paying the tax.
another few years and 100k will be in the 25% bracket with much going through way lower.
Roth makes a lot more sense now but it only became an option 15 years ago and contributions were pretty limited. Now the strategy recommended is to use a 401K to get max match and then add to a Roth.
Roth makes a lot more sense now but it only became an option 15 years ago and contributions were pretty limited. Now the strategy recommended is to use a 401K to get max match and then add to a Roth.
Unless you're in a high tax bracket. Then it's not so black and white.
The biggest benefit of a ROTH is you can pass it down tax-free to your children.
Disagree. The biggest benefit is it grows TAX FREE! Why would you not want 30+ years of tax free growth?!
I meant that's the biggest benefit of a ROTH IRA over a 401k.
The benefit of a Roth IRA over a 401k in terms of tax is not guaranteed unless you know your tax bracket now is less than it will be 30 years from now. Both 401k and Roth IRA will yield the same benefit if your tax bracket remains the same.
Disagree. The biggest benefit is it grows TAX FREE! Why would you not want 30+ years of tax free growth?!
because given equal pretax amounts and gains they are the same bottom line. there will not be 1 penny difference if you even up the amounts.
you are pre-paying the taxes on your roth with money outside the roth. put the same pretax amount in the 401k and they will equal the same thing.
in fact if taxes stay the same the deferred would do better since tax brackets will allow more through at lower rates as time goes on.
as long as gains are the same it will be the same result.
people think because the roth grows tax free it will be more but it really will not . to get 5k in a roth in the 255 tax bracket you need to spend 6666.00 pretax. you would need to compare putting that same 6666.00 in a 401k to even things up.
Last edited by mathjak107; 02-28-2013 at 02:27 PM..
because given equal pretax amounts and gains they are the same bottom line. there will not be 1 penny difference if you even up the amounts.
you are pre-paying the taxes on your roth with money outside the roth. put the same pretax amount in the 401k and they will equal the same thing.
in fact if taxes stay the same the deferred would do better since tax brackets will allow more through at lower rates as time goes on.
as long as gains are the same it will be the same result.
people think because the roth grows tax free it will be more but it really will not . to get 5k in a roth in the 255 tax bracket you need to spend 6666.00 pretax. you would need to compare putting that same 6666.00 in a 401k to even things up.
An example of the point above is as follows: Imagine you made an extra $5,000 in the 25% bracket. And that you get 7% returns every year and you want to know how much you have after 30 years if you withdrew it all at once.
Option 1: Put into a 401K. All 5K goes in because it's pre-tax.
= Initial Amount * return^time * (1 - future tax rate) = 5,000*(1.07^30) * (1-.25) = $28,546.
Option 2: Put it into a Roth. Less than 5K (in fact, 3/4 of it) goes in post-tax.
= Post-tax amount * return^time * (no taxes here) = (1-.25) *5000*1.07^30 = $28,546
Obviously you're just shifting that (1-t) 'net of tax' term from the end to the beginning, but it's independent of the compounding factor. Here was assumed 't' was the same.
You can see from the bolded underline parts that your tax bracket now and later affect which one returns a higher number (or possibly the same).
lower current tax since it is pre-tax and you get taxed on less income now
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