Roth 401k vs Traditional 401k
Posted April 14, 2011on:
Many companies now offer employees the option to contribute to a Roth or traditional 401k. For a long while, I have advised my clients to go for the traditional 401k; they are all high-income earners and the tax deductions can be substantial. Besides, what’s not to like about taking money out of the clutches of the IRS?
The other day I googled “US tax rate history.” I was shocked to learn that out of the last 100 years, there were 48 years when the top rate was above 70%. There was even a period when the top rate was 94%! For heaven’s sake, that’s not taxation, that’s deprivation!
At this rate, I wonder why nobody thought of a “simplified” 1040 Form like this:
1. How much did you earn last year? _______
2. Send it in.
Joke aside, this gives me a new perspective on Roth vs. traditional 401k: our current top rate of 35% is relatively low, and a future rate of 40%, 50%, even 60% is not unthinkable. It is much preferable to pay your tax now and get Uncle Sam off your back once and for all.
Besides, since both types of 401k plans have the same contribution limit, but the Roth 401k holds after-tax money, effectively you can contribute more.
On both accounts, Roth is clearly preferable to traditional. What do you think?
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