Submitted by Icy-Faithlessness466 t3_yhza9b in personalfinance
rnelsonee t1_iugi2i1 wrote
>If you’re a fan of tax free growth — why don’t most people do the 401k match, Roth IRA, and then Roth 401k? I
It's very common here to suggest 401k to the match, then IRA, then back to 401k. Note there's no capital gains taxes on pretax 401k's or IRA's, either (what I would call growth taxes).
>Would that be a good plan?
At your tax bracket, no - I'd do pretax. Remember that while you pay taxes on earnings with pretax, that's offset by the fact that you can afford to save more pretax dollars. Say you pay 24% on every dollar of pretax 401k in retirement. If you earn $1,000 now, it grows say 10× (8% for 30 years, e.g.) to $10,000 and you're left with $7,600 after taxes. It's the same amount you'd have if you earned $1,000, paid $240 in taxes, and put the $760 into a Roth. While the $2,400 in taxes with pretax is higher than $240 with Roth, that $240 you would have forfeited up front (with Roth) grew into that $2,400. So if your marginal tax rate now is the same as the rate you get taxed on these dollars, there's no advantage to Roth (or Trad).
But the key here is paying 24% on every one of those dollars in retirement. In order to do that, you'd need $109,000 (single) or $218,000 (joint) of other taxable income in retirement… where is that money coming from? Outside a huge pension or several million dollars saved up in other accounts, you won't get taxed 24% on all your 401k withdrawals. So do pretax when you're in those higher brackets now.
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