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re: Company doesn't offer any retirement benefits, what to do?
Posted on 8/21/13 at 2:04 pm to Volvagia
Posted on 8/21/13 at 2:04 pm to Volvagia
quote:
I was arguing that there was no benefit to putting more money aside now because pre tax dollars ramps up compound interest.
quote:
Given the same tax rate, pre tax dollar investments and post tax dollar investments are the same
10% pre tax will ramp up compound interest faster than 10% of post tax income, would it not?
So the tax benefits on Roth savings would have to be equal or greater than the benefit of 30+ years of that advantage (I'm assuming the OP is about a young person starting their career).
I don't doubt that tax rates will probably be higher in the future even if people are in a lower tax bracket when they retire....and there's always the possibility that your income can grow beyond the limits allowed for Roth contributions in the future. That said, I maximize my traditional 401K to the point my company matches, and contribute the annual maximum to my Roth IRA to take advantage of both opportunities.
If you don't have the ability to diversify your tax liability by doing both, I just don't see an obvious advantage in prioritizing Roth contributions. I'm not saying you are wrong. I've been debating this myself lately.
This post was edited on 8/21/13 at 2:21 pm
1
Posted on 8/21/13 at 2:32 pm to dewster
10% return over 30 years results in a compound interest growth factor of 17.449.
This is a constant regardless of amount of starting principal. For every dollar you put in now will result in 17.449 dollars 30 years from now.
Assuming a same tax rate of 15% (allowing you to keep 85% of your money):
(.85*1000)= 850 post tax dollars in Roth
850*17.449=14,831.65 growth from initial investment.
-------
Depositing 1000 dollars on pre tax account:
1000*17.449=17,449 in your account at the end of 30 years.
But now you have to pay taxes to withdraw:
17,449*.85=14,831.65
You see, pretax and post tax doesn't matter for compound interest. Only time invested boosts that.
So the choice of which to use is SOLELY determined by current and anticipated tax rates.
And again, as both have the same max contributions, it is almost always better to max contribute to a Roth than a IRA due to post tax dollars being "worth" more, especially in a borderline case.
If you do not max contribute, your main concerns are tax rates then and now.
This is a constant regardless of amount of starting principal. For every dollar you put in now will result in 17.449 dollars 30 years from now.
Assuming a same tax rate of 15% (allowing you to keep 85% of your money):
(.85*1000)= 850 post tax dollars in Roth
850*17.449=14,831.65 growth from initial investment.
-------
Depositing 1000 dollars on pre tax account:
1000*17.449=17,449 in your account at the end of 30 years.
But now you have to pay taxes to withdraw:
17,449*.85=14,831.65
You see, pretax and post tax doesn't matter for compound interest. Only time invested boosts that.
So the choice of which to use is SOLELY determined by current and anticipated tax rates.
And again, as both have the same max contributions, it is almost always better to max contribute to a Roth than a IRA due to post tax dollars being "worth" more, especially in a borderline case.
If you do not max contribute, your main concerns are tax rates then and now.
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