76.8% Return on 401K

[Hay Dude]

The thing with comparing Roth vs traditional is everyone is comparing them at TODAYS tax rates. Weather you pay taxes on the front end or the back end.....if the interest rates and tax rates are the SAME.....the end investment is going to be the SAME.

NO ONE is investing today and also cashing out today.

ITs simply a question of weather you believe YOUR taxes are higher NOW.....or you think they will be higher LATER. Assuming the same investments and same rate of return between the two......the tax rate is the only thing that is going to make one worth more than the other.

No one can predict the future. Whats the Govt gonna do......are you gonna have more income now vs later, how is it gonna be taxed in the future, etc etc etc. No one can answer these questions TODAY. Therefore no one can honestly know for sure what is the better bet 20 years down the road.

Which is why I always suggest people invest in both. This is provided you are at least taking full advantage of employer match. Whatever you do.....first and foremost get the maximum match that your employer provides.

I think the consensus for most of us is that with current spending programs proposed and interest rates being at all time lows, that both taxes and interest rates are likely going up. Roth looks good taxed now (lower) instead of later (higher).
As far as “no one can predict the future. What’s the Govt going to do” is concerned, they have an enormous spending bill being proposed and have signaled increases in taxes (corp and cap gains tax increase numbers already proposed).
With little resistance standing in the way, I think it’s safe to say taxes will be increased. We already also know that taxes will be increased to households over 400k.

 

[Richard]

Course, the other side of the coin is, does the company match a ROTH contribution? Mine does not, and to get the match, requires a 401K contribution.

I can't say this is 100% true across the board (though I'd expect it to be) .... even if someone gets a matching contribution by their company.... it will likely still be taxable during the distribution phase, even if the person is doing a "Roth" 401K.

So you are doing a Roth 401K and put $100 in, you get (let's say) a $100 match.
Remember that a Roth contribution is by definition and after tax contribution. So when you get this $100 match....have you paid the taxes on that $100? Nope. Did the COMPANY pay the tax FOR you? Most likely not.

Therefore you would be building an account value with two "internal" buckets of money. One would be your Roth contribution balance (later in life we'll call it $40,000) and you would also have another bucket of money in there "Company Match" and given the values given above, it too would be valued at $40,000.

When you go into distribution phase, you will be mistaken if you look at your account value ($80,000) as a tax free Roth account. You only have $40,000 that would be tax free to you (after meeting all the criteria) and the matching portion would always be taxable, just like a traditional (pretax) contribution.

Side benefit of this would be:

1. You're getting the match and anytime you're getting a match it's a good thing, taxable or not.
2. If you retire early and use the rule of age 55 then, as I understand, you'd have access to the taxable match dollars without penalty even though the Roth portion might still be under penalty until age 59 1/2. So you might have some liquidity that you didn't know you had.

Of course, "consult with your tax advisor before making any moves like this and anything I say isn't to be considered investment nor advice" blah blah blah...

 

[MossRoad]

....

Of course, "consult with your tax advisor before making any moves like this and anything I say isn't to be considered investment nor advice" blah blah blah...