I am reading about the differences between Roth and traditional 401k. The big deciding factor seems to be relative tax % between now and retirement. An example from this article:

Imagine Sally and Sam max out their 401(k)s one year by each contributing $19,500. While Sally places her $19,500 contribution into a Roth 401(k), Sam places his $19,500 into a traditional 401(k). After 30 years, let’s assume both of their accounts have tripled in value to $58,500. Unfortunately, Sam still has to pay income taxes. Assuming that pays 30% in taxes, he will be left with only $40,950 to spend in retirement.


All of the examples have the same structures. They include guesses about future tax level "Assuming that pays 30% in taxes". Can we do better than guess?

What things might contribute to Sam's retirement income? Let's say he withdrawals 4% a year of his starting $58,500. That would be $2,340 a year. That would not land him in the 30% income bracket. He'd probably pay no taxes on that. So when people compute retirement income what other things qualify? If all you plan to live off of is your 401k, can't you already compute your income at retirement? (Assuming no changes to the tax code). What am I missing here?

3 Answers 3


What am I missing here?

The example is for one year: two people each accumulating $19500 for 30 years is $1,170,000. If it earned 3.73% (the rate at which money triples in 30 years) the whole time, they'd have just under $2.1 million.

4% of that is $83,650/year, which puts you in the 24% bracket.

While employed, their combined earnings are $19500/15% x 2 = $260,000. That puts them in the... 24% bracket.

Remember, Uncle Same is going to get their cut of your income at some point.

Roths and "traditionals" (both 401k and IRA) give you the choice of when to pay those taxes: Roths are good for when you are in a low bracket now, and expect to be in a high bracket in retirement, and vice versa for traditional vehicles.

If you expect to be in the same bracket now and in retirement, then it's a wash which you choose.

  • 4% of that is $83,650/year, which puts you in the 24% bracket. It puts you in the 24% marginal bracket (actually, I think it'd be 22% federal for a single filer). Your effective tax rate would be roughly 13.7%. Remember that the money you are saving into your 401(k) during your earning years comes "off the top" i.e. it reduces your marginal income. But when you pull all the dollars out at retirement, you should think of each of the $83,650 dollars as being the same, tax-wise. This is all assuming the $83,650 is your only source of income. Feb 2, 2021 at 17:37

RE: All of the examples have the same structures. They include guesses about future tax level "Assuming that pays 30% in taxes". Can we do better than guess?

I mean, if you think you know what Congress is going to pass next year, the year after that, 5, 10, 20, 40 years into the future in today's political environment, then you can plan accordingly. If you're really good, I imagine there is market for this information.

That said, I feel like a decent amount of hedging here is the best idea -- some goes into Roth accounts and some into tax-deferred accounts. A big thing missing from your example of the last paragraph is social security. If the person has had enough income to put that much into tax-deferred accounts, then he's paid a bunch into social security and isn't likely to just ignore that, so that will bump up where they are in the brackets as well (though per the law today, each SS dollar may only count as 50 cents of income -- again, if you can predict how that law will be constant for 40 years, then you plan around it).

In short, it isn't likely to get a whole lot less complicated, so giving yourself choices in the future seems like a good idea to me.


What's missing in that analysis is that the money Sally puts into the Roth is taxed. If she's a fairly high earner (which is likely if she's putting that much into a retirement fund), the government could be getting anywhere from 24-37% of that $19,500 ($4680-7215). Now suppose Sam takes those dollars he doesn't give to the government, invests them in ordinary index funds, and doesn't do much trading. (So he doesn't get hit with capital gains tax &c.) Then we need to figure the growth of both IRA and non-IRA money.

As for what might contribute to Sam's retirement income, almost anything. Suppose he decides he likes what he's doing, and decides not to retire? He could have turned a hobby into a profit-making business. Maybe he acquired some rental property, or wrote a few books or apps that are still selling.

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