Traditional vs Roth 401k: The Optimal Strategy
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- čas přidán 7. 08. 2024
- Choosing between traditional and Roth 401k contributions is difficult. It forces us to make a guess about our taxes years or even decades from now. In this video, we'll discuss some of the factors that can affect this decision. And then, I'll share one strategy that may make the decision much easier.
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Timestamps
0:00 - Traditional vs Roth 401K
2:13 - Traditional way of thinking
4:53 - New Retirement
6:29 - The strategy
9:38 - Tax brackets drop
10:21 End results
11:16 - CFP's
11:41 - Financial Freedom
#roth401k #retirement #robberger
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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
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I did traditional contributions until my last 5 years before retiring where I did Roth contributions only. Now retired and I'm stuck doing conversions each year to avoid high RMDs later on. Unfortunately, doing these conversions is going to raise my IRMAA. If I had it to do over again, I would've done Roth only from the beginning.
Rob, I really like you videos with your direct, no nonsense, practical style. Then I read you are a fellow Tiller user - now I'm your #1 fan! Thx for quality content.
Much like the "lump sum vs dca" argument, traditional vs Roth will always be hotly debated. One simple approach to aid your decision process is to consider that contributions come off the top of your income pile, thus the highest tax bracket, while withdrawals start filling your income pile from the ground up, filling first the standard deduction space, then the lowest tax brackets. You can make withdrawals from Roth after that to cover the rest of your expenses. At the end of the day, you want both buckets to have some money in them, but how they're split is always going to be based on your best guess. Just like picking your stock/bond allocation and hoping it's good enough, you have to hope your traditional/Roth split ends up being good enough as well.
i dont think theres any debate about lump vs dca. lump is proven better.
The fact you think theres a debate tells me you think DCA is better lol
@@cryengine_x Yes I know lump outperforms a majority of the time. There are incessant debates about it, even on bogleheads forums. Maybe I picked a bad example. How about the "US only vs global portfolio", or the "all stocks and no bonds vs some bonds" topics. Things that require a decision based on your best guess about the future, rather than my prior example which does have mathematical support for a certain decision.
@@andrewsmith8222 lol yeah true. and dca does have its scenarios where it outperforms
Yeah people forget that it is not one or the other.
Enjoyed watching this Rob!
Excellent video Rob, thanks!
It drives me nuts that so many people recommend traditional all the time without considering age or career growth prospects. A 23 year old in their first real job is probably missing a huge opportunity by not doing Roth. Then later on they realize they have a huge tax bomb to defuse and start contributing to Roth in the highest tax bracket.
One can never go wrong by doing ROTH, regardless of how high their current salary. There is NO CHANCE taxes will be lower in the future. Look at the ever growing federal debts. Interest payment alone is in >$1Trillion.
There is also the benefit of passing on generational wealth and no RMD. Assuming the same tax bracket at retirement the cash in hand or year assuming 70-100% replacement is close enough that the other benefits are worth the added taxes. What sucks is the new 10 year rule on non spouse inherited IRA. If the worst happens, I didn't want the young kiddos to have to manage that much money before 30 yo. We know how most of us were in our 20s.
Also, one can do a little of both.
Your negative assessment of tax implications for Roth vs traditional is oversimplified, and does not apply to my family or beneficiaries. For me, I am living off a legacy pension and my children are very high income earners. They will be inheriting my IRAs, as I will likely have no need to spend them down. If they inherit a traditional IRA from me, they will likely pay 35% tax or more on the inherited funds. If they inherit a Roth IRA from me, they will pay 0% to draw down the funds. The tax implications are huge, not moot as you suggest. A Roth is almost a no brainer for anyone with modest income but a substantial IRA with balance over $500k who will be whacked with taxes from RMDs, or those who may not spend their IRA to zero.
Anyone here heard of roth conversions 😅
@@Austin-fc5gsare you doing Roth conversions on a 401k? My employer does not offer that. Conversions are typically performed on traditional, or rollover upon retirement. If you review Rob Berger’s video intro, this topic is about 401k or Roth contributions, not conversions.
When I look at Roth vs Trad, I use marginal rate for the tax cost of Roth because I forgo a tax savings at that rate by making Roth contributions. Trad distributions in retirement, I use an estimated effective rate because that’s what you’ll pay on the distribution. Meaning some of the distribution is taxed at 10%, some 12%, some 22%, 24% etc.
With that large of an age gap the widows penalty definitely needs to be a major part of the tax discussion
For those nearing or in retirement, it is best to also look at your projected RMDs, what happens if there is a change in tax filing from 2 to 1 person (higher future taxes) and your legacy goals especially due to the elimination of the stretch IRA for heirs other than spouses.
Nice analysis, Mr. B! Along the lines of Roth conversions you mention, I'd also look at the changes in income and tax rates when older spouse retires. If marital income drops when older spouse retires and moves them into a lower tax bracket, that may be an opportunity for the still-working spouse to increase Roth contributions.
Not sure if you could do an entire video on this but might be nice to illustrate (i.e. actually do the math) that the net result (i.e. what you get to keep) between pre-tax retirement accounts ("traditional" or "regular" IRA, 401k, 403b) and post-tax ("Roth") retirement accounts is the same assuming tax rates are unchanged (admittedly, a big assumption). I see a lot of misunderstanding of this in comments on retirement accounts. Usually, it's a statement like "But you get to have so much more money to grow in a pre-tax account compared to a Roth, so the pre-tax is superior!"
I think the guidance can be simplified by focusing on costs versus income. If your costs are going to be higher in retirement do a Roth. Otherwise do a regular. This keeps the focus on the right number IMO. still challenging to figure out but the question becomes: will my standard of living be higher than it is now or will kids, etc make life later less expensive.
Build up Traditional. Retire early. Postpone Social Security. Pull living expenses from Traditional, try to stay in low bracket and do some Roth conversions before age 70 when SS starts.
Yes, this is my exact strategy, except I have a legacy pension so my traditional IRAs are not being used for living expenses. I am hitting Roth conversions fairly hard to beat the anticipated 2026 tax increases.
Do both if you can.
This
That
You make me feel little comfortable with my Traditional. Im putting money into it because my current situation (small business) it does helps me on every income tax yr.
But all those videos saying roth roth roth and it made me kinda confusing if im doing right.
Thanks Rob!
Even when going Roth, matching contributions from employer are still pre-tax so you tend to have a bit of each.
The SECURE 2.0 Act changed this in December 2022, making it possible for employers to make matching contributions to employees' Roth 401(k)s. Depends on what the employer chooses.
My employer’s contributions are pre-tax, so I’ll be doing this method anyway. I’ll be just enough to use the money in the lowest bracket before taking from the Roth.
@@beng32112correct
Super-helpful video. My situation/approach is like this, and I'm curious what folks think... For most of my working career, "Roth 401k" wasn't a thing. So all the 401k $ went in as traditional. When Roth 401k became available, I switched contributions going forward to take advantage of that. We converted our traditional IRA's to Roth way back in 2011/12, something like that, whenever that was when we had the opportunity to spread the tax liability over several years. Point being, since my "future tax rate crystal ball" doesn't work very well, my intent was to diversify my tax mix as well as the portfolios. Now there's a taxable pile, a tax-deferred pile, and a tax-free (Roth) pile. Not all equal, but I think this will give me some flexibility down the road. Thoughts?
When I look at Roth vs Trad, I use marginal rate for the tax cost of Roth because I forgo a tax savings at that rate by making Roth contributions. Trad distributions in retirement, I use an estimated effective rate because that’s what you’ll pay on the distribution. Meaning some of the distribution is taxed at 10%, some 12%, some 22%, 24% etc.
If you are slightly over a bracket it can make sense to pay enough in Trad to get to the lower bracket then do the remainder in Roth.
Though I think it is more efficient to do Trad. Conversion is a hassle, and I plan to adjust my contributions over time. Currently I do 80% Trad. 20% Roth. 24% federal tax bracket.
Affordable Care Act/Obamacare is a huge factor if your under 65. Also you better stop doing Roth conversions by age 63 because IRMAA has a 2 year look back.
I agree that ROTH conversion 63 and later can impact IRMMA. However, it can make sense to continue conversations if the lifetime taxes (e.g. avoiding RMDs, lowering MAGI in future since ROTH distributions are excluded) are lowered.
Perfect timing for my Rob. Just opened one.
An aspect that isn't mentioned is that at the first decision point (original contribution to a T or R) the AMOUNT being taxed is much smaller (one hopes) than the AMOUNT being taxed will be at the time of either distribution from the T, or conversion from the T to the R.
If you assume the the same amount is invested in the retirement account whether it's a T or an R, the nest egg at the time of withdrawal/conversion will be the same size in either account. At that point, it's obvious that being in a non-taxable Roth is always better than being in a taxable Traditional retirement account (unless you are in the odd situation of being in a zero tax bracket). It's only if one actually invests MORE using a T retirement account, or perhaps a T account plus a taxable brokerage account, that the T account can be better.
This of course isn't exactly the same as deciding what to do NOW if you already have your money in a T account.
For me, the decision was made without all that much analysis. Putting my original retirement savings all in a Roth eliminated the need for all those later decisions. I was simply already in my best possible position.
11:17
If you retire early and use ACA healthcare insurance, then the loss of subsidy figures into your tax calculation. After 2025 the subsidy cliff at 4 times the FPL may come back - so your might lose the subsidy completely rather than just pay 8.5% on incremental income.
Good call. The ACA subsidy is seldom discussed in these conversations but an important consideration for early retirees.
Thanks for this. This is very relevant to me at 51. Considering switching my contributions going forward to Roth 401k (I started a Roth IRA just last year and am maxing that already.)
I only realized recently that having all of my retirement in tax deferred accounts might be a problem due to potential inheritance. If i'm having to take RMD from an inherited traditional IRA, if I'm retired at that time, then I'm wondering if conversions of my own 401k to Roth might not be good because of being put into too high of an income bracket.
So I could potentially get stuck with RMDs for several decades (first inherited then my own) on top of capital gains taxes in brokerage and also social security and never have that low tax period to convert. 😅
My 401K is like 80% pre-tax with my contributions and employer match. I'm doing Roth contributions now and will continue to do Roth for the forseeable future to balance out the account over time.
Doing the same.
Ditto
In the specific case described in the video, it sounds like the recommendation is to continue to contribute to Trad 401k vs Roth 401k to lower marginal tax rate. Then at 55, do conversions from Trad 401k to Roth IRA when the tax impact is low because effective tax rate is very low. Will he need to then wait 5 years after the conversion to the IRA for any distribtions in order to comply with the 5 year rule on conversions? Does the ProRate rule kick since this was done via a rollover to IRA first? Also, the Secure Act 2.0 will now remove the RMD requirement for Roth 401k. So he will now not be subject to the RMD just as the Roth IRA was/is. Does this factor into Roth 401k now vs Trad 401k now -->Roth IRA @ 55?
The rule on waiting 5 years after a conversation no longer applies after age 59 1/2.
Retire at 55, spend all ira money first before taking ss or spending brokerage. Not sure why people recommend doing conversion and spending Ira’s first. Maybe someone here can explain…..
I plan to keep renting until my career is concluded to maintain flexibility, but I do want to save enough in a Roth to buy a house after I retire, as that could be a very large withdrawal.
I’d like to see a discussion about leveraging a highly volatility ETF to increase the $ moved to Roth conversions without increasing taxes. During the year, I wait for a market pullback in SOXX ETF in my rollover IRA, then quickly initiate a conversion. Since SOXX bounces around about 10% each month, this seems to result in about 10% more funds moved to Roth with no increase in taxes, compared to converting non-volatile bonds or settlement money. Isn’t this strategy a no-brainer for people who hold some more volatile growth funds?
You don't need to contribute 100% in one or the other with most if any 401k plan that offers a roth option. Given an uncertain future you can do 50% traditional and 50% Roth 401k.
This is what I do! There is always the risk that the rules for roth withdrawals or tax brackets may change, so I go 50/50
Thank you for bringing up this video. I appreciate you for the time being spent to educate us financially. The problem with inflation coming down if people will continue to spend and consume no matter what. Instead of cutting out spending to help decrease inflation, they will just complain about prices while continuing to spending. I'm worried that rising inflation will cause my 401k in my retirement funds to lose value, But with the help of Harriet Cohen I hit 75k this week from my investment of 11k, I am truly grateful for all the knowledge and nuggets you have given me over the past few months.
Hello Rob , question, if ones collecting s s disability, what is better , a trad or roth ira to continue to invest for retirement, taking into account the roi and dividend income gains ?
Please answer for a 63 okd fella !
You need earned income to contribute to either trad or Roth IRA.
i had both traditional and roth401k. i retired at 55 in 2021. for about 11 yrs before retirement i used a roth401k. mathematically , it would have been better to stick with traditional and then just do conversions in retirement. HOWEVER, i don't regret going roth401k in addition to backdoor roths. Loss aversion comes into play and having to pay large taxes may dissuade some people from doing the conversions( retired i still paid 55k last yr due to the conversions)
i have been doing roth conversions since 2022. first yr up to 12%, 2nd yr up to 22% and plan on 22% again and possibly more. i have a large taxable account to pay roth conversion taxes out of as well as live on. the main issue taxwise for me is trigerring the NIIT as it is easy to go over MAGI of 250k when you convert 200k or so. close to 3 yrs of retirement, my roth assets are now larger than my tax deferred assets. i will cut back on my conversions by 63 due to irmaa lookback.
My current strategy for the past 6 years have been maxing out traditional 401k and HSA to reduce my MAGI and then max out Roth IRA every year.
If i do Roth 401k , i will not be able to max out contribution to Roth IRA , perhaps no contribution at all due to income limits.
So in my case , total contribution for Roth 401k is just $23,000 but if i do traditional 401k , my total contribution will be $30,000 ($23,000 for 401k + $7,000 for Roth IRA)
Do you think the latter look better for investment?
from a high level i understand the lower tax bracket when you are 55.....but....where is your income going to come from when you are 55 and before you can withdraw from your retirement accounts? Does the person have 5 years worth of money saved up in after tax accounts or are they going to live on rice/beans for 5 years? It sounded like the person asking the question is 100% in before tax 401k which is where we were...90% of our retirement assets were in pre tax 401k (we only had Roth IRAs) so when our companies offered Roth 401ks we switched over even though we are in our theoretical 'High income earning years'.
We plan on having a similar income in retirement from various sources so our theoretical tax rates would be similar now and when we retire.
Thats also why i switched to Roth 401K. I want to retire in 3 years at 53. i need 6 years' worth of money to draw from.
@@music-jj2pl A potential reason to wait until the year you turn 55 before retiring is that you may begin taking distributions from your current job's 401(k) without the 10% penalty. This is sometimes called the "Rule of 55." Depending on when your birthday falls and the date you originally planned to retire, you might only need to wait a little over a year longer to retire, to have access to penalty free distributions from pre-tax 401(k) contributions.
There are 3 ways one can withdraw from a retirement account before age 59.5 without incurring the 10% early withdrawal penalty:
1. "Rule of 55"
2. Roth contributions
3. IRS 72t rule
I retired at 50; am 54 now. I lived off savings and Roth contribution withdrawals from age 50 to 54. Starting next year, I'll use the 72t rule to withdraw from age 54 to 59.5.
@@johnbankston72 I believe you can withdraw Roth IRA contributions but not earnings before age 59 1/2 without paying a penalty. You must also wait 5 years after creating the account to make withdrawals without penalty, which could require you wait beyond age 59 1/2. I’m not sure about Roth 401(k) contributions.
@@readyplayer2I’m correct. I said “Roth contributions”. Roth contributions can be retired at anytime. Google it.
With child tax credits and similar it has been better for us to do Roth. I wish I had maxed out our Roths more frequently. In some years with the tax credits we had a 5-7% effective tax rate. Our effective rate right now is about 13% and marginal is 22% until Trump tax cuts expire and we still contribute mostly to Roth. We currently max out our personal Roth IRAs and my wife has a 403b Roth we contribute additionally to and I contribute to a pretax 457b at work. When the Trump tax cuts expire in 2026 then the child tax credits will revert to half and we go back to the standard deduction rates before the Trump tax cuts expire and when the kids are adults we'll look into pre-tax options, but we'll still put some in Roth.
I'll just have to do the math on the reverted rates and our marginal will be 24% instead of 22% and doing napkin math effective tax will be 16-18%. We just have a lot of financial stuff happening around that time (one kid will be ineligible for child tax credits). We'll possibly move to the next bracket because personal exemptions will be based on 2017 tax year ($1,050 before Trump tax cuts) and like I said earlier the standard deduction will be about half as will the child tax credits so it will move us in Higher tax brackets.
Like others have said when you're young and not paying much taxes do as much Roth as you can.
Great video. My strategy is fleeing my high income tax state (Oregon) to a no income tax state (Texas), so focused on traditional.
Even if your tax bracket is the same now and in retirement, Roth is still better. Who pays the governments portion of the admin fees from your 401k? You pay the 50-75 basis points on the governments 20% portion of your traditional 401k for the life of your portfolio. No one talks about this. They are not equal.
important to understand this entire debate only applies to YOUR contributions and investment growth. Any employer match AND that investment growth, will be taxed regardless. So this is not as consequential as he lays out. It has no effect on probably ~half your 401k portfolio
Would an employer match for a Roth 401k make the earnings taxable? Or is only the employer match taxable?
@@dmulvany only the employer match would be taxable in your scenario.
@@michaelalberts4699 and the earnings on that match
@@michaelalberts4699, that’s what I had thought. Looks like what @cryengine_x wrote was incorrect: “Any employer match and that investment growth, will be taxed regardless.” The investment growth in a Roth 401k from a employer match would *not* be taxed.
Age is such a major factor. With a Roth you get all the growth tax free, and the more time = more growth. If you can get money into a Roth in your 20's the payoff can be large.
The growth is actually tax-free either way, but with Traditional, annual withdrawals will be taxed as ordinary income at the account holder's applicable tax rate in the years in which withdrawals are made. With Traditional, the contributions were pre-tax, so the tax breaks were given on the front end, so to speak.
You'll need to look up some videos to explain to you why what you said is not correct. The growth doesn't care about whether the initial investment got taxed or not. The equation is much more complex than "the growth is tax free".
Good overview, but if I can complain just a little ... why doesn't anybody ever compare Traditional vs. Roth using potential net contributions ... AND compare tax liability today to tax liability in retirement.
Most people who contribute to a retirement plan do not max out their annual contribution limits.
If someone currently in the 15% tax bracket is contributing $4,000 to a Roth each year, I'd compare an annual $4,000 Roth contribution to a $4,600 Traditional contribution (equal contributions net of taxes).
THEN, I'd compare what they'd each be worth years later in retirement ... in after tax net amounts.
You still have to guess what your tax rate will be, but wouldn't that give a more accurate forecast?
Hello Rob, hope you’re doing well. Could you do a video on what people call the “modern 3-fund portfolio” and your take on it? It consists of SCHD, VOO/VTI, and QQQ. This portfolio is popular on Reddit and some financial influencers promote this portfolio on CZcams.
Do NOT convert your 401K to Roth 401K. Simply change your contribution to after tax if allowed. Your employer will continue to pay any match to the pretax account.
My way of thinking is that people don't withdraw from a traditional IRA as much as they do from Roth, because they don't want to pay more taxes. Thus, traditional IRA balance lasts longer. For example, a retiree can withdraw 50k at once from Roth IRA and he would not pay taxes, however he will not withdraw such an amount at once from traditional IRA because he doesn't want to pay much taxes. So, having a traditional IRA makes him more frugal.
The taxes will be paid at some point, either you or your heirs.
Don't forget about RMDs at 73 or 75. Forced to take out then and pay huge amount of taxes if account grows large. Feel best to have money in all 3 accounts. Traditional, Roth, and Brokerage
Wouldn’t they at least withdraw the standard deduction from traditional?
In years where there are a lot of itemized deductions that exceed the standard deduction, or when one turns 65 and qualifies for the additional deduction for seniors, more of the withdrawals from tax deferred accounts (TDAs) could indeed escape taxation.
I personally feel I’d be less likely to spend anything from my Roth IRAs but I’d have a lot of incentive to spend down my TDAs by converting them into a Roth IRA. It will be especially important to control one’s income to avoid exceeding IRMAA thresholds. In 2024 alone, the first threshold is $103,000, which could certainly be a damper on Roth conversions.
What most fail to account for is what are they doing with the tax savings from pretax? Are they increasing their pretax retirement by the tax savings? Are they using the tax savings to pay off high interest debt or additional principal for their mortgage? Are they putting it in a private Roth or taxable brokerage? If you aren't using that tax savings productively right now you really aren't getting the full benefit.
Seems to me that the ever-increasing RMD age (it was 70 and a half when I retired, now it's 75 for my age cohort) makes Roth conversions LESS attractive, because I'll be dead that much sooner, I have no beneficiaries; so I don't have to sweat the new inherited account-withdral rules. Or, am I missing something, here??
Traditional is always better than Roth. Why? Because when you go traditional, the pre tax savings are always against the highest portion of your income which carries the high tax bracket taxation. If you do Roth, you will ALWAYS pay the highest tax possible in advance on that amount compared to if you had put it in traditional. And since it has already been taxed at the highest bracket then you have no control over the taxation at withdrawal because it was already paid. When you delay taxation until withdrawal, you earn years of interest on the tax savings as well as control the taxation via controlling your withdrawal strategy for the year. And retirement income levels are almost ALWAYS less, therefore you WILL take less of a tax hit by default.
Traditional is not always better than Roth. If it was, Roth would never be used, and non-existent. If I convert to Roth from age 64 to 70, after retirement and prior to taking SS, my IRAs are taxed at a far lower rate than they would be when I begin drawing SS and taking RMDs. Another advantage for Roth is, my beneficiaries are in highly elevated tax brackets. I have a pension and will never cash out my IRAs. When my beneficiaries inherit my IRAs, they will be forced to pay 30-40% tax on an inherited IRA vs 0% on inherited Roth. I am paying about 15 to 20% tax to perform conversions. See the difference? There are plenty of people of working age in lower income brackets that could benefit from Roth. To suggest there are none is inaccurate.
the issue is RMDs which can push you into a higher bracket.
@@Random-ld6wgjust so
Earlier in my career we weren't earning much. We also had child tax credits. Educator tax deductions, etc. Our effective tax rate was 4-6% and we put what we could into Roth. We'll both be getting decent pensions and social security. There's no way we'll be in that range. When I die my wife will be in the single bracket so she'll likely be paying more since she'll still have my pension. Since the social security provisional income brackets haven't been adjusted since the early 80s more seniors are having to also have 15% or more of their social security taxable. All of this could be made worse when RMDs.
This can be mitigated by Roth accounts. So it really depends on how large your pre-tax retirement amount and earnings are among other things.
The biggest question people should ask themselves when doing pre-tax retirement is what are they doing with the tax savings? Are they increasing their contributions by the tax savings? If they maxed out their pretax then what are they doing with the tax savings? Are they putting the tax savings in a taxable brokerage? Paying off high interest debt? Putting the tax savings towards their mortgage balance or are they wasting the tax savings on streaming services, overpriced coffee?
I’ve always been baffled by tax optimization being the focal point here.
I want to save as much for retirement as possible. $7k saved in both Traditional or Roth accounts, are not equivalent. The $7k in Traditional is not really $7k - and yes I may pay lower taxes from being in a lower rate in retirement, but I’ll have less money to spend overall AND RMD’s.
If available, Roth 401ks and IRAs are just tough to beat…I’m much less interested in tax breaks now.
My 2¢
If putting your money in a Roth instead of a Traditional bumps you into a higher tax bracket and you end up paying tax instead of getting a refund, it means you have less $ to put in savings. If your amount in Traditional is low enough you may not pay any taxes on withdrawals. "Lots of factors" as Rob says
i once read a blog, gocurrycracker is the name. guy seemed like a financial genius on another level from the rest of us. anyway he was adamant pre tax contributions to a traditional 401k are almost always better. and he had a bunch of math to prove it. i remember one of his key points being, roth401k dollars are effectively taxed first, before any other dollars you make are taxed. And that was very bad.
even if i didnt understand the analysis, the conclusion stuck with me
I don’t really understand the benefit of doing anything traditional. I’d rather pay now and not worry about taxes later.
Did you watch the video? Literally disregards this entire video
@@Paul-ip6gbthe only situation where it makes sense is if you’re making something like 200k+ throughout your working life, and then you retire early and do roth conversions at a lower tax bracket.
So basically 90% of people are better off with roth. Fin.
🤘🏻
I wish they had a ROTH 401k when I was younger, but it's far superior at any age. A personal brokerage account is actually lower tax than a traditional 401K upon withdrawal. Cap gains tax is only on the gain, but 401K withdraw tax is on the gain and principle. Trad 401K is a scam in my book but do get the match.
You already paid tax on the principal when you made the money to put into the brokerage account.
Also the other benefit with trad is you have more money to start growing. Example. $100 gets to grow in a trad be $80 gets to grow in a Roth. I agree Roth is better at younger ages but late into your career closer to retirement I believe trad is better
@@WigglyCoop007 Unless there's a difference in tax rates between dates of contribution and withdrawal (admittedly, a big assumption), the net end result (i.e. what you get to keep after taxes are paid) is the same for pre-tax ("traditional") vs. post-tax ("Roth") retirement accounts if you do the math. The "...more money to start growing." means there's more money to get taxed at ordinary income rates when withdrawals are taken from "traditional" pre-tax retirement accounts.
a well run, low fee 401k is not a scam - it's a big opportunity. Even if they only offer traditional and you somehow end up in the same tax bracket as you started, you can have decades where tax drag is eliminated.
When you fully invest in Roth, you’re saving more money than an IRA.
@rob_berger Not either or but Both = front door for Traditional 401k + back door for Roth 401k !