bots2019
Recycles dryer sheets
- Joined
- May 16, 2007
- Messages
- 128
Currently I'm trying to determine whether to participate in a Roth 401 or 401k with my wife's employer. From what I understand conventional wisdom is that you should consider whether your future tax rate will be higher or lower than your present tax rate (if they're equal then the two options are equivalent).
However, I ran a few figures and it appears that the Roth option may be preferable (even if the current and future tax rates are equal)... Here's the scenario:
Current federal rate: 33%
Assumed future rate: 33%
Assumed investment return: 8%
timeframe - 20 years
Investment amount for both options = $1,000 (to keep it simple)
Gross required income = $1,493 ($1,493 x .67 = $1,000)
Option 1 - pay tax on $1,493 and invest remaining $1,000 in Roth
Option 2 - contribute $1,000 to 401k, pay tax on remaining $493 and invest after tax amount of $330 in after-tax accounts
After 20 years at 8% return:
Option 1 - Roth balance of $4,661 = tax free
Option 2 - 401k balance of $4,661, pay 33% tax=$3,123, after tax investment of $330 is now worth $1,296, pay gains taxes of 20% on $966 gain => total after tax value of $4,419
So... it appears that if my tax rate remains the same then the Roth may be a better option. I've ignored any dividends in the after-tax account, but those would have a pretty minor impact...
Am I missing something here? This seems to defy conventional wisdom
However, I ran a few figures and it appears that the Roth option may be preferable (even if the current and future tax rates are equal)... Here's the scenario:
Current federal rate: 33%
Assumed future rate: 33%
Assumed investment return: 8%
timeframe - 20 years
Investment amount for both options = $1,000 (to keep it simple)
Gross required income = $1,493 ($1,493 x .67 = $1,000)
Option 1 - pay tax on $1,493 and invest remaining $1,000 in Roth
Option 2 - contribute $1,000 to 401k, pay tax on remaining $493 and invest after tax amount of $330 in after-tax accounts
After 20 years at 8% return:
Option 1 - Roth balance of $4,661 = tax free
Option 2 - 401k balance of $4,661, pay 33% tax=$3,123, after tax investment of $330 is now worth $1,296, pay gains taxes of 20% on $966 gain => total after tax value of $4,419
So... it appears that if my tax rate remains the same then the Roth may be a better option. I've ignored any dividends in the after-tax account, but those would have a pretty minor impact...
Am I missing something here? This seems to defy conventional wisdom