No. of Recommendations: 2
AlphaWolf writes,

Say you're 20, working, and can afford to have your pay check go down by $100 for retirement investing. Let's ignore any potential match in your employer's 401(k) (which only strengthens the IRA advantage) and assume a 20% tax rate.

With the Roth, you invest $100 after-tax dollars per pay check.

With the IRA, you invest $120 per pay check, but your pay still only goes down by $100.

So you invest and (hopefully) grow 20% more over 45 or 50 years. Plus there's the time value of money (would you rather pay Uncle Sam today or pay him 45 years from now?).

I think the tax rate difference is only one of several material differences.


It's just an arithmetic problem. If your tax rate remains the same, it doesn't matter if you take out the taxes at the start of the series by investing in a Roth, or at the end of the series by doing a traditional IRA. Your after-tax total is going to be the same. So the answer to the question, "Would you rather pay Uncle Sam today or pay him 45 years from now?" is, "It doesn't matter."

Those of you who remember your 3rd grade arithmetic will recognize this as the "Commutative law of multiplication."

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.