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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75799  
Subject: Re: Roth or 401(K) Date: 12/31/2000 8:24 AM
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Greetings, ldmccly, and welcome. You wrote:

I am trying to determine if it is better to put an additional dollar beyond the 6% 401(K) match limit into the 401(K) or a Roth IRA.

The factors I am considering are:
1. Tax savings now with 401(K) versus after tax investing with Roth
2. Tax Payments later with 401(K) versus none later with Roth.
3. Commissions on Roth versus none on 401(K)
4. I believe I wlll be in an equivalent (28%) tax bracket in 25 years.
5. Potential better returns with a Roth using a Fool-type strategy

It seems to me like the Roth would be the winner for additional dollars beyond 6% 401(K). Considering the same inflation and investment returns apply to each scenario, the tax savings with 401(K) is about equal to taxes not saved on Roth returns over 20 years. That would seem to leave the taxes that would be paid when 401(K) money is withdrawn, assuming same anount of money is contributed in both types of accounts.

I ran this past a financial planner and he said if I want to retire in 20 years I didn't have enough time to build up a Roth from scratch. My response was "Huh?". Seems to me that $2000 invested grows whether it is in a Roth or 401(K).

Sorry for the long post, but I'd really like to know if I'm missing anything here. It wouldn't be the first time.

You're looking at the correct factors IMHO. Just run the numbers on a tax-equivalent basis. After you have received the maximum possible match from your employer, it's often much better to go with the Roth and even a fully taxable account rather than a 401k plan option. For further details, see my article "When NOT to Use Your 401k Plan" at http://www.fool.com/retirement/retireeport/2000/retireeport001023.htm.

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