• blady_blah@lemmy.world
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    1 year ago

    Um… that’s not quite right. Here’s the thing, if you earn $100k and invest it in pre-tax (401k) or post-tax (Roth), and you pay the same tax rate throughout, then with both investment strategies you will end up with EXACTLY the same amount of money. The only benefit of a Roth is if you assume you have a higher tax rate in the future when you want to pull it out. If your tax rate is the same both now and in the future, then Roth and 401k are equivalent investment vehicles. If you don’t believe me, do the math yourself.

    Slightly more detail. The reason this is true is that return on your investment and the tax are both percentages of your base investment and the math doesn’t care which order you multiply one versus the other. So let’s say you make a 500% return on your investment and the tax rate is 30%

    $100k * (0.7 tax rate) * (5 ROI) = $350k Tax first Roth

    $100k * (5 ROI) * (0.7 tax rate) = $350k Tax after 401k

    So the take-aways are:

    401k wins if you have company matching. ALWAYS invest at least up to company matching because that’s free money.

    Roth wins if your tax rate in the future is higher than now. (this is not necessarily a good bet because your tax rate will probably be lower once you’re retired.)

    • Zink@programming.dev
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      1 year ago

      You are totally right.

      One possible consideration though, is if you are maxing out your tax sheltered investment accounts (say your 401k, HSA, IRA, college funds, etc) you can effectively put more money into a Roth IRA. That’s just because you’re paying taxes with regular money outside the IRA limit and THEN investing up to that limit. But with a traditional IRA, you can invest up to the IRA limit today, but the future taxes will be paid with money that went into the IRA.

      Though if you are to that point if maxing everything out, you’ll probably be fine either way.

      • TAG@lemmy.world
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        1 year ago

        Also, from what I have read, there are income limits to contribute to a ROTH IRA. So, you would have to be making a moderate income but still have plenty left over to invest (so very low cost of living).

        IRAs (ROTH or regular) are meant for people who don’t have an employer sponsored retirement plan.

    • bane_killgrind@lemmy.ml
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      1 year ago

      The only situation that your tax burden would go up for the everyone is if you transitioned from active income to passive income sources. IE working a trade then opening your own construction business.