DISQUS

Loi Tran · 3 years ago

They will "supercharge" their investments with money that will be taxed, but everything will be taxed once they withdraw. Too bad no one knows what the tax rates will be when they retire.

Anon · 3 years ago

"A worker in the 25 percent tax bracket could save $2,500 in income tax by putting $10,000 into a traditional 401(k), allowing him to save more, supercharging investment results."

This is false. It does not matter if taxes are taken out before or after an investment, the result is the same (given the same tax rate). For example (assume 200% return):

(10000 * 2) * .75 = 15000
(10000 * .75) * 2 = 15000

evin · 3 years ago

The Philadelphia article is inaccurate. Assuming your current tax rate is the same as your tax rate during retirement and you're not maxing out your 401(k), both options are equivalent. Suppose I have $5000 pre-tax money to invest, and my marginal tax rate is 25%. Suppose that over 35 years, my investment will grow 7-fold.

Traditional 401(k): $5000 * 7 = $35000, minus 25% tax is $26250.

Roth 401(k): $5000 minus 25% tax is $3750. Times 7 is the same $26250.

If my tax rate will be lower when I retire, the traditional 401(k) makes more sense. If it will be higher, the Roth 401(k) makes more sense. In any case, I should put some money in the traditional 401(k) because when I retire, I will still have tax deductions and the first few dollars of my income will be taxed at a lower rate.

However, if you are currently maxing out your 401(k) and Roth IRA and want to save even more, then the Roth 401(k) makes much more sense. Your limit is still $15000, but these are after-tax dollars, so they are worth more. You end up being able to to significantly increase your tax-advantaged savings.

Jonathan · 3 years ago

I agree with Loi, the Philly article doesn't do a good job pointing out that bigger amount put away just gets taxed later instead of now. In my calculations, even if I keep the same tax bracket as now, I'm ahead with a Roth. Of course these are based on assumptions, but so are theirs.

I think one main difference is just pyschological. You FEEL like you have more money saved up with a regular 401k.

jim · 3 years ago

I'd do the Roth 401k if my company offered it but unfortunately they don't.

Paul · 3 years ago

"allowing him to save more, supercharging investment results"

I agree that the math is wrong. But I would also like to point out that this article, like many others, implies that your rate of return will be higher if you save more money -- thus classically confusing nominal dollar return and real percentage return. $1,000 at 5% is no better than $100 at 5%. Except that it is more money -- but that doesn't have anything to do with the "investment results."

Dan Melson · 3 years ago

Um, you're missing a major point (more than one, actually, but I'll stick with main issue)

Both a traditional 401k and a Roth are tax deferred.

However, you contribute pre-tax dollars to traditional, and when withdrawn, it is taxed, together with any and all earnings at full rate.

Roth is after tax money, so it is leveraged right from the beginning. If you put the same numerical number of dollars in, you have more effective dollars in the account. But even if you put a lessened number of dollars in to reflect the money you would otherwise spend in taxes, not just the contribution but every penny in earnings is tax exempt when withdrawn. This means that the earnings in the account (as opposed to contributions) are never taxed.

Under current tax code, this has all kinds of implications. For instance, it means that the income withdrawn from Roth accounts doesn't bump you up in marginal bracket, it doesn't cause you to hit income limits, and it doesn't cause your social security to be taxable or more taxable if that is still a factor when you retire.

It is still possible for traditional 401s to come out ahead, but the necessary assumptions verge upon torturing the data.

empty spaces · 3 years ago

Another thing to consider is if you actually end up losing money in it like so many people in 2000, its better if you didn't pay taxes on it to begin with!!

Anon · 3 years ago

"Under current tax code, this has all kinds of implications. For instance, it means that the income withdrawn from Roth accounts doesn’t bump you up in marginal bracket, it doesn’t cause you to hit income limits, and it doesn’t cause your social security to be taxable or more taxable if that is still a factor when you retire."

But, it can have exactly that effect today. Depending on your income, removing a $15k above-the-line deduction (by switching from traditional to Roth) could eliminate your ability to fund a Roth IRA and take any number of other deductions and credits.

It is unfortunate that you cannot characterize the contributions at the end of the year, rather than the beginning, so that such calculations can be made.

retireat30 · 3 years ago

The "superchargin returns" argument is precisely wrong. You actually get to contribute more in after tax terms to a ROTH than to a traditional 401k/IRA. The $15,000 after tax you contribute is equivalent to contributing about $19,500 to a traditional plan (at 33% tax).

It is scary that a large newspaper wouldn't run the numbers on something like that before printing them. It takes about 20 minutes in excel.

retireat30 · 3 years ago

Rather, I meant to say, you have a higher maximum in ROTH. If you aren't contributing the max, then it doesn't really matter either way.