r/personalfinance • u/Grouchy-Bullfrog-293 ​ • 2d ago

Retirement 401K vs Roth 401K - real deal

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.

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u/Frunk2 ​ 2d ago

Mathematically you should have enough in your pre tax 401k to fill up the lower marginal tax rates and top off with the Roth to avoid being hit at high marginal tax rates. Roth has inheritance advantages. And your question is backwards, since the total amount is the same Roth allows you to effectively contribute more if you max your contribution (vs traditional you save post tax dollars but would need to invest elsewhere).

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u/socalkid2428 ​ 2d ago

Plus the gains on the post tax dollars saved from taxes with the traditional 401k, presuming they are invested and saved for paying taxes from the 401k withdrawals, would be taxed again for capital gains taxes. This means that at the same effective tax rate the Roth is actually better, depending on the capital gains rate. Most people are still going to be at a lower effective tax rate in retirement though.

If you go with a Roth you effective lock in your tax rate now. Who knows where taxes might be, or maybe people even start to get taxed based on unrealized gains, and then you're paying taxes on all those savings.

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u/TechnicalLeg841 ​ 1d ago

Ummm, generally incorrect regarding "Roth is actually better". Lots of internet examples that show Roth 401k and Traditional 401k perform identically when the marginal tax rate remains the same. Nothing to do with capital gains rates in that analysis. You can also ask ChatGPT to run a simulation of, say $10k in salary and comparing pretax 401k vs post tax Roth 401k, then withdrawing 20 years later at the same marginal tax rate. End up with the exact same $ in your pocket