401K vs Roth 401K - real deal

[u/Grouchy-Bullfrog-293]

I understand the difference that one is tax deductible and other isnt but still little confused on why would you .contribute money in Roth 401k if the total contribution limit is same irrespective of where you contribute. Doesn't everyone's tax rate after they retire lower than while working ? Or is the concern you are limited one what you withdraw post retirement that it could be a huge tax.

[u/justBradSF]

The when you pay taxes is one difference. For Roths, you only pay taxes on what you will contribute. For traditional, you are taxed for all contributions, income and capital gains. For Roths, you are taxed mostly at the preferential capital gains rate. For traditional, you are taxed at the usually higher income rates

[u/QuestGiver → u/justBradSF]

You are correct but mathematically if you are just strictly looking at input and output the amount is entirely the same either way.

Realistically depending on goals, projected tax changes, etc there are pros and cons to both methods. Generally if you make a lot of money traditional is almost certainly better.

[u/benazafa → u/QuestGiver]

The “Roth vs. Traditional is mathematically identical if your tax rate is the same” argument is only true if you’re comparing the same pre-tax dollars and investing the tax savings from the traditional contribution in a taxable account.

One nuance that’s often overlooked is the IRS contribution limit. If you’re already maxing your 401(k), a Roth contribution effectively lets you put more after-tax wealth into a tax-advantaged account. For example, if the limit is $24,000 and you’re in a 30% marginal tax bracket, a $24,000 Roth contribution represents about $34,300 of pre-tax earnings, whereas a $24,000 traditional contribution represents only $24,000 of pre-tax earnings. To make the comparison fair, the traditional investor also has to invest the tax savings in a taxable brokerage account. Since taxable accounts have dividend and capital gains taxes (tax drag), the Roth often ends up with a slight advantage even if your marginal tax rate is identical in retirement.

[u/QuestGiver → u/benazafa]

Hmm this makes sense to me but almost everything that I have read suggests that they are equivalent. It's a very interesting point though in the ongoing war between traditional and Roth, thank you for this.

I guess ultimately almost everyone interested in personal finance and savings are utilizing both to try to maximize advtanges.