ROTH vs Reg 401k, I don’t think it matters here’s why

Roth vs reg 401k probably doesn’t matter too much as long as you invest the tax savings if going the traditional route.

Investing $23,000 in a ROTH costs about $30,000 because you need to pay $7,000 in income tax to the IRS (assume 30% tax rate) since the $23k is post tax. If you invest $23,000 in a traditional 401k, that saves you $7,000 in tax which you can then invest in a taxable brokerage or better yet in a backdoor ROTH IRA. The $7,000 extra investment in should cover the tax bill on the traditional 401k balances when the time comes to take your money out in retirement.

So basically which ever one you choose, make sure you’re investing the same after tax money and don’t be fooled into thinking $23,000 invested in an after tax ROTH is the same as $23,000 invested in a pre tax traditional 401k.

ROTH is prob easier for most people since it saves the step of having to separately invest the annual tax savings from a traditional 401k.

 

Good point, Steve.

Another thing to consider is your (not you specifically, just in general) tax bracket now vs. retirement. For me, I expect to have lower income in retirement years, which will put me in a lower tax bracket than I am currently in. For me, 401k is the better option simply because I won't be paying as high of a tax % in retirement.

Now if a person expects to have higher income in retirement compared to their working years, it may very well make sense to go more into roth IRAs and take the tax penalty now.

I contribute to both. It kind of sucks that the roth IRA max contribution is about 1/3 of what can be contributed in a 401k.

 

it absolutely does matter. there are numerous differences between the two. so many differences that it’s not even fair to compare them to each other.

 

Nope, doesn’t matter at all as long as you separately invest the tax savings if going the traditional 401k route.

 

i’m glad you’re not a financial advisor.

 

Ok thanks for letting me know

 

you’re welcome.

 

I am not an expert in this, and every situation is different. In general, I much prefer the Roth and think that it does matter. IMO if you're in a fairly low overall tax bracket I think the Roth is much better. When younger, and lower income I strongly recommend Roth. As you get older and make more $$ you will reach a point where you can't contribute to a Roth except through a 401K. Get it in there while you can.
In a 401k situation (many 401k's now offer Roth option) $30k off your income when in a 24 or 32% tax bracket is very different than if you are in a 12% tax bracket. In the 12% I would be going Roth, 24-32% I would stay traditional.
Withdrawing from the Roth will not trigger tax on SS but I believe withdrawals from a traditional 401k/IRA can depending on the amounts. Your income levels also greatly affect how much you pay for Medicare, so having your taxable income as low as possible when you retire is a good thing.

 

no capital gains tax in a roth either. like i said before, there are so many major differences between the two.

 

Roth is subject to the whims of future sessions of Congress. And for that reason, I am out.

 

Naw Bro, you need to pay $$ to watch this show, just like at the movies . . .

 

so if I put $5000 in a Roth IRA today and it averages 10% return for the next 25 years, it would then be worth $54,000+.

If I am in the 20% tax bracket, that means I would pay $1,000 in tax and end up with an effective tax rate of 1.85% on that income.

It it only averaged a 6% return, I would still have an effective tax rate of less than 5%

 

It could be stopped or changed going forward, but I'll bet nothing already done will be altered. Grandfathering is still a thing.

 

I don't trust the DC swamp creatures. So when I can lock in my tax savings, I'm going to do so.


Per the CBO, the annual deficit will increase from 5.6% of GDP today to 8.5% in twenty years.

 

You’re right to not trust DC swamp! But I don’t see how you think you have locked in your tax savings with a traditional IRA or 401k? Nobody knows how things will be in 25 years, the middle class could be paying 50% income tax to pay for all of the social services that are being provided today. We just don’t know. I’d rather pay the taxes now and not have to worry about what they will be down the road.

 

The tax advantage is locked in when you file your 1040 for the current year, the year in which you opted for the salary deferral (401k) or contribution (IRA). Those are today's pre-tax dollars going into the plans.

 

Just like a regular 401k, then? Future tax rates could be way higher. Or lower, no one really knows.

 

But putting $5k into a ROtH means you paid $1,000 in taxes (approximately). So the regular 401k investment would have been $6,000 under the premise of the OP. The extra $1,000 compounded over time would likely pay the income taxes making the two investments somewhat equivalent.