Originally Posted by
Tummy
This is correct. It's extremely important that people understand this fundamental concept, and it's obvious that many in this thread don't understand this.
If you expect to be in a lower tax bracket in retirement (almost everyone flying for a legacy will be), then the traditional 401k makes more sense.
For someone who is presently in the 35% tax bracket and expects to be in the 12% tax bracket in retirement ($77,400 + $24,000 = $101,400 per year in the 12% tax bracket).
Non Roth
100,000 x 10 = 1M x .88 = $880,000
Roth
100,000 x .65 x 10 = $650,000
Read my post #42. Your math is correct but your fundamental concept is completely wrong. You're looking at someone investing 65k per year vs someone investing 100k per year. The reality is people put the exact same amount in (the max) regardless of whether it's traditional or Roth.
Here's the real math:
18k/yr = $1500/month. That done over 25 years at an 8% rate of return nets 1.43 million.
It's going to be 1.43 million no matter whether it's in a roth or traditional, since you're maxing it out either way. Either way you would have paid in 18k/yr X 25 years, or $450,000.
Now the real comparison:
If you went the traditional route that whole 1.43 mil would be taxable. Assuming a 25% tax bracket, the tax bill on that would be 357k.
If you go the Roth route, you would have paid taxes on the 450k up front, which at a 40% rate = $180k. The other 1 million bucks growth is all tax free.
Again, paying a higher rate up front on a smaller amount is better in the long term than paying a smaller rate on a much larger sum later. Naturally as you get closer to retirement the scales start to tip the other way just because there isn't as much time for the tax free growth of the Roth to take effect.