Message Font: Serif | Sans-Serif
No. of Recommendations: 0

You are correct that if you remain in the same tax bracket, the net amount of dollars you will have left at the end of the day will be identical if you contribute to a pre-tax 401(k) or a post-tax Roth. It will work no matter what percentage you use.

Matter-of-fact, everything you say is true. A Roth is better than a 401(k) if you expect your tax bracket to be higher at retirement, and a 401(k) is better if you expect your tax bracket to be lower at retirement.

I look at it this way, though. When you are in your late 20s or early 30s, you have not maximized your earnings potential. You might be in the 28% tax bracket now, but assuming you are promoted, get a better job, earn more income from investments, etc., its natural to think your tax bracket will INCREASE with age.

At retirement, well, who knows. I think that I'd probably want to continue to live at 63 by the same means and standard I was at when I was 62 -- hopefully, in a higher bracket than when I was 30. So, for me, the Roth is a better vehicle. Maximize it first, then the 401(k). (Of course, the 401(k) is first when getting matching dollars).

The situation I mention might not be applicable for everyone, though, and it is possible that someone's tax bracket will decrease. As you point out, if it is the same, it makes no difference which vehicle you use.

So, now with your added commentary, we have a more complete understanding of what the original poster should do. Final answer? It depends . . .

Thanks for your thoughts.

Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
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.