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CPAScott wrote:
> For the contributions that your employer is NOT
> matching, the Roth should take precedent. [over the
> 401k] Although it's funded with after-tax dollars, it
> will grow tax free -- and, in the long run, your total
>tax burden will be less with this account than with
the 401(k).

I'm not a CPA, but I beg to disagree. Assuming your tax rate is the same now as it will be in retirement, you will get the same after-tax results in a 401k and Roth IRA; they will both compound tax-free. Lets take an example.

Flora Wunkay contributes $1000 to her 401k. She doesn't pay any tax, and lets say that she earns tax-free growth of 12% per year. After 6 years her money has doubled to $2000 and she retires and takes it out. She pays 28% tax, so she is left with $1440.

Ira Rothman has $1000 for retirement savings. He is in the 28% tax bracket, so $280 goes to uncle Sam and $720 goes into a Roth IRA. After 6 years at 12% compounded growth, his money has doubled to $1440. He retires and takes that money out.

So you see both these folks started with the same, and ended with the same amounts of money. It's true that the Ira Rothman paid less tax dollars, but the percentage is all that counts, and since he paid the same percentage tax as Flora, they both came out the same.

The Roth IRA is only advantageous if you will be in a _higher_ tax bracket when you retire. If you will be in a lower tax bracket in retirement, then 401k and regular IRAs give the most back. Of course there are lots of other logistical issues where the retirement account types differ, so you can't just compare the numbers.

-Tom
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