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If you can afford to make Roth contributions, do it. You don’t get a tax deduction/exclusion but it grows completely tax free. Forever. Even the gains are tax free. Forever.
Supposedly it works out the same way, whether you tax the pre or post tax amount. What is uncertain is the future tax rates
100% do traditional 401k. This means pre tax
1) the older you get, the more you will understand the tax code and the less you will pay in taxes. This is the inevitable result of doing your own taxes every year. And if you ever get a business and a CPA, the conversation changes completely
2) taking all that tax money off the table will lose you millions of dollars in earnings potential over your career. Yes, millions
Chief
Roth is generally good for the first few years of a career and should be used sparingly otherwise. Unless you for some reason would rather spend more money in retirement than while you’re working.
I’ve heard Roth is best if you assume you will be in a higher tax bracket upon retirement. If you pay taxes as you go with a Roth then you don’t have to pay any tax when you make your withdraw
before tax - taxes come out at retirement; the balance you see today is not what you get when you pull $$ out
after tax - taxes come out today; the balance you see today is what you get when you pull $$ out.
before is beneficial if you expect to earn less at retirement (therefore less taxes when you yank out $$)
after is beneficial if you expect to earn more at retirement (therefore avoiding higher taxes)
the big brained play: max both
i didn’t read it thoroughly i was talking about an ira.
Chief
If you're in the 22% tax bracket, you should pay taxes on that money now, meaning put it into Roth 401k. Once you start getting into the 24% bracket, it depends which one will be better buy anything higher than that will be best for you to contribute to traditional. Taxes are the lowest they've been in over a generation, you don't want to miss taking the opportunity to benefit from that
I’m in the 24% now
Chief
They’re different, and I think people will have different takes depending on their forecast of tax rates
Roth 401k uses after-tax dollars, meaning if you expect to pay more taxes later on in life (due to higher income), then a Roth 401k is better because those dollars are currently being taxed at a lower rate.
Pro
No easy answer unfortunately. The difference between them is when taxes are taken out of the investment money - either you owe on the withdrawal (traditional) or before you deposit (Roth) into the 401k.
The biggest unknown is what your taxes will look like in retirement. You probably don’t know what your own income and spending will look like then, let alone how congress may change the rules in either direction. A couple hypothetical scenarios - an across the board increase of the tax brackets by 10%; a reduction to 10% subsidized by the introduction of a national sales tax.
The strongest argument in my mind for each is
1. Invest in the traditional. Get whatever tax savings you can while they still exist because you don’t know how the government will change the tax in the future.
2. Invest in the Roth. After-tax dollars are worth more when you withdraw them as the taxes are already paid. You can model this by making a one time maximum contribution, assuming 40 years of growth at a set interest rate, then withdrawing everything and deducting the resulting tax for the traditional
lot of big brain responses here and i failed to distinguish in my original response, so doing it here in fell swoop:
max pre tax 401k
max post tax roth ira
problem solved. best of both worlds. disregard everyone else above. trussss.