Originally Posted by
Qotsaautopilot
Global,
The you are right about tax rates now and later in your logic. What you are forgetting is that your investments should grow.
So let's assume your tax rate does go down in retirement like you are assuming. Let's say your average tax rate in your earning years is 30% and it goes down to 25% in retirement. Let's say you save $1million during your working years at your 30% tax rate. That $1million grows to $2million by the time you start taking distributions in retirement at your new 25% tax rate. Would you rather pay 30% on your $1million now or 25% on your 2 million later? That is the argument for Roth.
"Tax the seed not the harvest" as another poster said.
You're mixing apples and oranges AND the point you're making is factually incorrect. I'd rather pay taxes based upon what's going to give me the most money to spend, post-tax, when I retire. I don't care if it's the seed or the harvest. I just want the most post-tax dollars.
First, let's address the tax issue. If you're going to be in a lower tax bracket in retirement then when the corresponding contribution is made, you're likely better off avoiding the Roth and taking the deductible contribution (all else being equal).
Two, whenever you talk about growth of an investment, in order to make an apples to apples comparison, you have to compare PRETAX contributions to the corresponding POST-TAX contributions. You can't just make a blanket statement about paying taxes on $1M now or $2M later. That's nonsensical. You have to look at the PRETAX dollar contributions to the POST-TAX distribution dollars that got you to that $1M or $2M or whatever, and you're not doing that in your assumption. How much it grows tax deferred within the 401K (no matter what type) doesn't matter, either.
For example, let's say a pilot can only afford to contribute $10,000 pretax dollars per year to his 401K. He can choose a Roth or deductible contribution. His effective tax rate is 15% now and he plans on it being 15% in retirement (he expects his retirement income to be lower but tax rates to be higher so no net change in the effective tax rate). Which type of 401K contribution will give him the most post-tax dollars in retirement? In the above example, does his annual return affect how much he has in post-tax dollars on the other end if he chooses a deductible contribution vs. a Roth? Does the length of his investment period affect how much he has in post-tax dollars on the other end if he chooses a deductible contribution vs. a Roth? Does it matter if the "seed" or the "harvest" is taxed in this example?
And if you whip out your Excel spreadsheet, in the example above, you'll see none of the variables matter. It's the effective tax rate on each end that matters, not the growth rate as you seem to imply. Not the length of the investment period, either. The guy ends up with the same amount of money, post-tax, no matter what variables you change. The effective tax rate, however, DOES matter.
Your parable doesn't make any sense. Don't talk in parables. Talk in math.