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The contribution limit for a 401k is $18,000 regardless of whether that account is a Roth 401k or a traditional 401k.

Since a Roth 401k is taxed at the time of contribution, this means that $18,000 invested in a Roth 401k is worth considerably more than 18,000 invested in a traditional 401k since the contribution is after the tax burden on that money.

Am I missing something? It seems too good to be true.

If a person:

  1. Has access to a Roth 401k option trough their employer and

    1. Has the means to contribute 18k to that account

Would there ever be a reason to select the traditional 401k option? I understand that you may want to bet on your effective tax rate being lower in retirement but that doesn't counteract the fact that the Roth 401k option is equivalent to being able to contribute more money in a tax advantaged account.

To explain what I mean by Roth 401k's letting you contribute more:

If you contribute 18k to a Trad 401k that money's actual value to the investor is essentially 18k * effective tax rate. If the investors tax rate is 33% then 18k in a traditional is worth $12k "to them" and the government will eventually collect 33% of the account's value.

If you contribute 18k to a Roth, it has already been taxed so the value to the investor is the full $18k. At 33% tax, it would be equivalent to having contributed $18k*1/(1-.33) = 27k to a traditional 401k.

This also makes me believe that if an employer contributes x% to your 401k, them contributing that percent to a Roth 401k is worth more since it's post-tax money.

Look forward to hearing people's thoughts or being told I'm dumb because I missed something obvious. Thanks!

EDIT - Really happy this spurred so much discussion. Looks like it's caused some disagreements too though. To clarify, my intent was not to argue the difference between the two accounts and I fully understand the arguments about tax rate now vs. in retirement influencing decision making. Maybe I should clarify that I'm only 25 so my thought was that regardless of difference in tax rate, 40 years of tax free growth will be more valuable. Per my understanding, and per some of those who responded affirmatively to my question, 18k in a Roth is "equivalent" to 27k in a traditional 401k because the money has already been taxed. Even if my tax rate is lower in retirement, 40 years of tax free growth is a huge advantage. I guess to rephrase the intention of my question: If I'm 25, have the disposable income, have already covered other savings goals, and want to maximize my income retirement, is there any reason not to put the full 18k in a Roth?



Submitted August 14, 2017 at 02:26PM by Junglejim1020 http://ift.tt/2vykFT2

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