re: roth 401k vs regular 401k

quote:

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For what it's worth, seeing how frustrations are rising, I don't recommend this either.

While it sounds like a great idea on the surface, the truth is, people do traditional now to *save* money on taxes so they can get a larger paycheck for spending, not so they can save more.

I wrote a script for it if you want to use it:

Advisor: "Mr. & Mrs. Client, I'd like you to up your 401k contributions to the max so we can save $8,000 in taxes per year. Then we'll take that money and invest it too. It'll be great for your future, but it's going to cost you $16,000 extra per year. What do you think?"

Mr. & Mrs. Client: "Hell no."

/scene

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I'm not sure if you meant to reply to me, or were just seconding my statement, but this exactly what occurs in the real world.

Client's ask me if they should make their election as a Traditional or a Roth, and we .look at the specifics of their situation. Many of them are not maxing out anyway, which is the ONLY case where this question occurs. If someone can part with $10,000 for their 401k election, because expenses exhaust the rest of their income, the ability to invest the "savings" is moot. They are not going to say:

"Well, since I chose the Traditional election (the standard option), I can take that $2,000 I saved (but never saw, because it's not actual cashflow, just a reduction on taxable income, and thus ultimately taxes owed), and invest that money in a taxable account."

Just like they don't say:

"Well, since I chose the Roth election, I better only contribute $8,000 to my 401k, so I can set aside that other $2,000 for the current tax liability of that contribution."

Nope, they just make their election and go about living their life.

Of course for people who have exhausted their 401k election we look for the next best option. That is what contribution planning is, maximizing the utility (After Tax value, Liquidity, creditor protection, etc.) of the next incremental dollar, or "most bang for your buck."

Because I can't stop myself, I did all the math you are requesting and then some Mr. "I don't know how marginal tax brackets (or math) works". I will include it later, because I'm not here "telling people how they should do it", I am showing them, and they can make their own decisions, based on their situation.