nyrfan28 wrote:MartyConlonOnTheRun wrote:wapith wrote:
But you don't deduct 401k contributions like you would mortgage interest... the money is pulled from your take-home pay, reducing your taxable income. In your example, you take the standard deduction either way, but with the traditional 401k your tax bill is lower now because your taxable income is less. Right??? Or am I off-base here? You have me questioning things I thought I knew.
Yeah I am not getting this at all. Your pre-tax 401k lowers your taxable income, it is not an itemized deduction. The mortgage deduction is an itemized deduction that is getting crushed by the new standard deduction. I think you have it backwards, Chile.
Also, it is an overstatement to most people in their 20s should be doing strictly roth. It depends on 1.) current income 2.) future retirement withdrawals 3.) spending habits 4.) future tax laws 5.) future salaries. It's really a crapshoot. For example, I'm hoping to retire early and have low spending rates when I retire, thus a low taxable income and lower than i have now.
the best non-roth argument i've heard for people in their 20s is the time value of the money in hand. if you can figure out how much you save in taxes by going the traditional route and diligently invest that saved money, it'll spend 40 years compounding interest and you could come out ahead compared to investing a smaller sum in a roth and withdrawing it tax-free in 40 years.
but yeah, generally speaking for 20somethings, you'll retire with a higher current income than you have now, tax rates will likely be higher and most people don't have that financial discipline and foresight, so the roth route makes sense for most 20-year-olds.
My mistake, I did have it wrong/backwards. Disclaimer, I am not a tax expert but try to take advantage as much as I can to retire early.
However I still think roth is the way to go if you are young. I did a quick calculation on numbers being mentioned...
Current Age: 25 (nothing previously in savings)
Retirement Age: 65
Savings per year: 10,000
Rate of Return: 7%
When you hit retirement age, you will have approximately 2,000,000 in your 401k. If you withdraw 4%, that is 80,000 per year. The 2,000,000 amount does not include social security (who knows what will happen there), IRA contributions and other sources of income. You could be looking at 100,000 per year in income. This amount also doesn't include a company 401k match either (which should be traditional).
There are unknown costs of healthcare and cost of living. Today's current tax situation is VERY favorable. The US will need to raise tax rates or cut spending.
I am definitely trying to keep every single penny I can get when on a fixed income and there are unknown costs 40 years from now. With traditional IRA/401k distribution amounts, you are looking at 20%+ in tax rates with unknown costs on the above example.
If you are a currently a high income earner but plan on skimping in retirement then you probably want to consider traditional. If you are making modest income now but saving a good rate, I would still roll with roth.
