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The assumption being that tax rate in retirement will be higher than present tax rate, so the Roth is better than the 401(k). <P>

Actually, this is not the assumption in either the Roth or the 401(k).

A 401(k) is presumed to be advantageous because income will probably be less in retirement and you have been able to defer paying taxes on both the income and the investment returns to this lower income time period, with a potentially lower marginal tax rate. Many of us are beginning to realize this may not be true. Inflation will likely make desired retirement income higher than income at an earlier age and if we presume no changes in the tax code (a dubious assumption) there is little, if any, advantage to a 401(k) plan from the tax standpoint.

Notice I said desired retirement income, your actual income may vary downward significantly.

As far as I can see, the most significant advantage to a 401(k) plan comes from a company match, if you get one.

The Roth IRA is advantageous because of the promise to not tax the principal or the returns on the principal of the money saved. The principal has already been taxed once, but not taxing the returns can be very significant. Of course, the way the government gets its bite anyway is the sales tax.

If your tax rate stays the same and there is no company match, a 401(k) has no advantage over conventional savings. You can prove this algebraically, or with a few simple examples. In fact, with today's tax structure where capital gains and dividends are taxed a a lower rate than ordinary income a non-matched 401(k) has a disadvantage. It moves both capital gains and dividends into the higher ordinary income bracket.
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