Roth 401K

You get the best of both worlds IMO, and I would do it in a heartbeat.

Keep in mind however that you don't get the same liquidity as you would in a personal Roth (nothing stops you from opening your own Roth though).

And that employer matching receives tax deferred treatment as if it were a regular 401k

I lot of people say that, but I don't buy that.

Unless I'm off on my math, there is NO reasonable circumstance where it is advantagatous to put into a tax deferred plan if you are more than 10 years from retirement/pulling from that account. You will pass the tax hit, and then you have completely tax free growth.

And the longer after that tipping point mark you can let that money sit, the rapidly more powerful the Roth becomes.

Another way of thinking about it:

Let's say you are putting 10k a year, with 25 years to go to retirement.

Assuming tax rates stay the same, at your 39%, that comes out to 97500 more in taxes over the period if you put it in a Roth over a traditional IRA. 97,500 and you are done tax wise.

Assuming the standard growth of the stock market, and subtracting average inflation to normalize these numbers, you have 581,500 in your account.

Pulling from that for a term of 25 years, and factoring in both withdrawals and a highly conservative bond centric approach, you are looking at an additional 394,996 in earnings, for a total tax payout of 146,474 in 2012 dollars.

And dear Lord, do you really take in the difference if you don't go 100% bonds for the entirety of your retirement.

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Unless I'm off on my math

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You are, sorry.

It's true that increased time should lead to increased dollar returns, but that doesn't matter. The rate matters, and the rate is the same on both ends.

Suppose you are in the 25% tax bracket and you have $1000 to contribute today. If you contribute to a Roth, you only get to put in $750, whereas if you contribute to the regular 401 you can put in the full $1000 - that's $750 plus $250.

However long you have the account before you pull it out, you are earning whatever return you get - call it "r". So in a regular 401 your finally tally is (750+250) times r = 1000r, but if you'd used a Roth instead you'd have 750r.

If you are still in the same bracket, now you get to pay 25% tax in the regular withdrawal. What's 25% of 1000r? 250r. So you're right back to square one.

Notice this is true no matter how many years are involved. The only variable here is whether you pay the same tax rate.

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foshizzle

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Another quality post

I think you're best to split it between Roth and tax deferred acct.

I do 401k up to the match, and then max an independent Roth.

No need to go all in on one.