Originally Posted by
BoilerUP
I had the same question recently, and it was basically explained to me like this:
You shelter $18.5k from tax liability today via 401k, and it grows (for round numbers) to $200k...and you'll pay tax on the entire $200k as you make distributions from the account.
If you pay tax on the same $18.5k today and invest it via Roth 401k, and it grows to $200k...all you'll ever pay tax on is the initial $18.5k.
In "dumb pilot/round numbers" speak...35% of $18.5k is a LOT less than 25% of $200k.
Just for fun, here's some more specific numbers. If you invest your max 18.5k @ $1541/month for 20 years at a growth rate of 8%, you'll end up with just shy of $910,000. Of that total you'll have put in $370,000, the other $540,000 is growth. If it's all in a traditional you'll have saved around $150,000 in taxes on the 370k, give or take, but you'll end up owing taxes on the whole 910k as you draw it down. Or you pay that tax bill up front and get 910k tax free.
Another way to look at it is that you're effectively investing more with your ROTH than with a traditional, assuming you're putting in the max 18.5k either way. With a traditional, when you factor in taxes, you're really only investing ~12k for yourself in the future. 18.5k put into a ROTH is as if you were investing ~24k into a traditional since the whole 18.5k is yours for the future.