Both the Roth 401k or Trad 401k get funded with the $30.5k. Let's say you make $100k a year.

With Traditional you fund $30.5k into your T401k account. Your tax base for the year is $100k less $30.5k = 69.5k taxes assuming (20%) = $13.9k leaving you with tax home disposable income of $55.6k. You pay takes on the $30.5k when you withdraw it in retirement.

With the Roth you still can fund $30.5k into your R401k. YOu tax base would be be at $100k. You would pay $20k in taxes and your take home disposable income would be $100k less $30.5k less $20k or $49.5k.

The difference of $6.1k in disposable income is the higher taxes you pay (example 20% of the $30.5k).

My personal view is if your incremental tax bracket is in the 30% (32, 35, or 37%) I would do the Traditional and save the taxes now. If you are under that I think the Roth is better.

Just be sure to understand that there are 2 very different parts of the calculations.

One is the income tax rate, today vs the future. This is what 99.99% of discussions talk about. While valid, it is very short sighted to only consider this in isolation.

The second and more important part is how the entire picture comes together in retirement. Your taxes are not just on traditional account withdrawals. You will have social security, possibly a pension, possibly capital gains on selling your home, medicare, some income from regular investment accounts, required minimum withdrawals from traditional accounts, perhaps some inherited ira/401k accounts.

Being just $1 over a limit can cost you tens of thousands of dollars in IRMA.

Inflation is never properly accounted for in tax rates or government programs, so you will be taxed significantly on inflation.

The probability is very low that your overall tax picture in retirement is less than while working. You will never be sorry for maxing out ROTH accounts. Take full advantage of employer contributions, max your ROTH, then contribute to traditional 401k/IRA as you can afford.

Also important to take into account the additional growth on the deferred taxes in regular 401(k) contributions. Again, depending on horizon that can be significant.

Can't just generalize any of this, have to decide what assumptions you want to base decision on and model it out.

quote:

Originally posted by Georgeair:
Also important to take into account the additional growth on the deferred taxes in regular 401(k) contributions.

The max contribution limit of a 401k/IRA is the same regardless of Roth or Traditional.

So if you're maxing it out, then there's no additional amount of any deferred taxes being contributed or growing in a Traditional. It's the same amount of money as a Roth.

If you were to be investing the amount of taxes paid instead of paying them currently, that amount would also be growing over the duration of the account. I worded that..... poorly.

Mathematically it doesn't matter if you 1) pay taxes now and invest less, or 2) invest more now but pay taxes later.

Both get you the exact same number of spendable (after tax) dollars in the future.

This presumes the same tax rate today compared to the future. Which is a guess, a presumption, a gamble. If your future tax rate is less, your 401k is a better choice*. If your future tax rate is higher, your ROTH is a better choice.

Tax rates frequently are not less in retirement for individuals. That is reality today. Who thinks tax rates are going down in the future?

* There are many additional taxes and costs in retirement that are directly affected by 401k/IRA taxable withdrawals. ROTH does not trigger these. So the picture is bigger than simply tax rate today vs future.

quote:

Originally posted by Fly-Sig:
Who thinks tax rates are going down in the future?

Admittedly, I haven't read through replies in this thread, but just came across an article about Roth 401k's and thought it might be helpful to someone.

https://www.fidelity.com/learn...ra-as-emergency-fund

quote:

Originally posted by 6guns:
Admittedly, I haven't read through replies in this thread, but just came across an article about Roth 401k's and thought it might be helpful to someone.

https://www.fidelity.com/learn...ra-as-emergency-fund

Note that this article is about Roth IRAs, not Roth 401(k)s. Two separate and distinct types of retirement accounts.

They share the Roth concept of post-tax investing, but IRAs and 401(k)s have different rules and limits.

^^^ I can see that now, but I guess my brain wanted to see Roth 401k.

Sorry, ignore.