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I'm in my mid-twenties and have about $30K put away already because I've maxed out my contributions over my first three years with a "real" job out of school. Good news for my future, bad news for my stock of drinking stories over the last couple years.

In talking with my friends, we were kicking around ONLY contributing to our 401k plans with POST-TAX contributions. Our thought is that we're likely to be in a higher tax bracket in the future, and that paying the taxes now is better than paying them on gains in the future at a higher %.

Does this logic make any sense, or are we deluding ourselves??

Thanks in advance.
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PS: Sorry about the stupid fixed widths. Misread the TD box below.
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First of all congratulate yourself for saving anything in your mid-twenties.

I don't think it is possible to put post-tax money into a 401K. I could be wrong. But your pre- vs. post- tax question is very valid for IRAs and other types of retirement plans (including 401K).

No hard and fast rules here -- and my info is incomplete.

"No-brainer": if you are eligible for 401K with matching, invest so that you get the most "free" (matching) money for your buck. For example, I once worked for CSC and they would match up to 3%, so I put in 3% of salary.

Arguments pro invest the money pre-tax (traditional IRA): you pay no taxes now, and earnings are tax-deferred. I like this approach, for the fatalistic reasons that I haven't yet paid taxes, the government is going to get its taxes some day, and no one can really tell what tax rates are going to be in 30 years, so it's a fool's errand to try and guess!!!

Arguments against investing pre-tax: you have to pay tax when you take out the money (Traditional IRA). There is a very good chance you will be in a higher bracket then, especially if you are "forced" to take withdrawls (this can happen).

Argument pro Roth IRA: You put in the money post-tax. You can raid the IRA (after 5 years) and get your original money out. At retirement, all the proceeds are tax free.

Argument for regular (taxable) investment account: pay your taxes up front. If you invest for capital gains (as opposed to interest/dividend), and hold for 5+ years, your maximum tax rate is 18%.

Complicated choices -- perhaps check with a financial planner.

Pedorrero, muddying the waters of truth since 1961.
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I believe most of the thinking on the advantages of the ROTH is anticipating a lower tax rate when you are retired and not drawing an income.

Ak, known to have been wrong, once or twice, in the hills north of Fairbanks.
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I believe most of the thinking on the advantages of the ROTH is anticipating a lower tax rate when you are retired and not drawing an income.

Actually, no.

If one anticipates having a higher tax rate in retirement, the Roth IRA would be advantageous: pay the taxes when one's tax rate is lower so one can then access the Roth IRA money in retirement without paying any more taxes. (This is also true if one anticipates making a substantial one-time withdrawal for a major purchase: a Roth IRA withdrawal wouldn't kick you into a higher marginal tax rate, unlike withdrawals from pre-tax plans.)

If one anticipates having a lower tax rate in retirement, a pre-tax 401(k), 403(b) or similar, and deductible contributions to a Traditional IRA would be better--delay taxes until one would be paying at a lower rate.

If one anticipates having substantially the same tax rate in retirement as one currently has, then it doesn't matter so much if one is going to go pre-tax/taxable-at-withdrawal (401(k), 403(b), Traditional IRA preferably made with deductible contributions, etc.), or after-tax/tax-free-at-withdrawal (Roth IRA, and the anticipated Roth 401(k) and Roth 403(b)); either way will work, and either way would most likely be preferable to after-tax contributions to an account that would then have its gains taxed at ordinary income tax rates. If one is contributing one's maximum legally allowed amount, the Roth IRA has some advantage over deductible contributions to a Traditional IRA in that $3,000 contributed to a Roth IRA would be more valuable than $3,000 as a deductible contribution to a traditional IRA because of all money coming out of a Traditional IRA funded with deductible contributions would be taxed as ordinary income whereas if one follows the rules for removing money for a Roth IRA one can have all the money coming out of the Roth IRA tax free, the tradeoff is having had to pay taxes for money before it was available to go into the Roth IRA.

There may be other issues that might come up (qualifications for contributing to the various accounts, estate planning, protection from creditors, ability to automate contributions to such accounts, investment options and investment expenses, etc.), so one's current tax rate vs. retirement tax rate aren't the only factors one might consider.
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I don't think it is possible to put post-tax money into a 401K. I could be wrong.

I know this is well after the original discussion but...if your 401(k) plan allows it, you can put in post-tax money. The US government allows for this type of contribution...so it is purely a matter of whether or not your company/plan allows it.

ACME
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