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Braze is correct. Let's do some math.

1. Put $3000 per year in a 401(k) w/o match; earn 10% per year for 30 years. Terminal or future value will be @fv(3000,.1,20) or $171,825. Further let's assume that your tax bracket when you withdraw is 33% (combined federal & state; thus the after tax value would be $114,550.

2. Put 2000 (.67 * 3000) in a roth earning 10% for 20 years. @fv(2000,.1,20) = $114,550. There is no tax effect here because all withdrawals from the roth are tax free after age 59 1/2.

However, if your tax bracket drops in retirement from 33.3% to 26.5% then the after tax value of the 401(k) grows to $126,290; approx. $12,000 greater than the roth.

It all has to do with your tax bracket during contribution years being different than your tax bracket during withdrawal years.


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