This article from Fidelity mentions that the longer you have before retirement, the more likely it is that you should choose a Roth 401(k) over a traditional 401(k). This point is mentioned independently from the point about being in a lower tax bracket at retirement.

So why is time left before retirement a good reason to consider Roth? I'm thinking it has something to do with the exponential growth without having to pay taxes later, but I can't quite figure out how to do the math.

  • 8
    I think they're wrong. All that matters is tax rate now versus tax rate in retirement. Time is irrelevant.
    – Craig W
    Commented Oct 24, 2014 at 16:43
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    @CraigW if the tax rates are the same then the two accounts are the same, but if the tax rates are different the two accounts are not identical.
    – Matthew
    Commented Oct 24, 2014 at 17:19
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    @Matthew Yes, that's what I meant by "tax rate now versus tax rate in retirement".
    – Craig W
    Commented Oct 24, 2014 at 17:20
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    @Matthew I think it's important to be clear that you compare your marginal tax rate now vs. effective tax rate in retirement. It's not the same rate at both times.
    – Alex B
    Commented Oct 24, 2014 at 18:26
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    The math they use is wrong. They put $5,000 into a traditional account, then they put $5,000 after-tax money into a Roth, effectively investing an additional $1,945 into the Roth. The article is based on incorrect math.
    – David Rice
    Commented Oct 24, 2014 at 19:32

8 Answers 8


This is the infographic from the Fidelity. It exemplifies what's wrong with the financial industry, and the sad state of innumeracy that we are in.

enter image description here

To be clear, Fidelity treats the 401(k) correctly, although the assumption that the withdrawals are all at a marginal 28% is a poor one. The Roth side, they assume the $5000 goes in at a zero tax rate. This is nonsense, as Elaine can't deposit $5000, she has to pay tax first, no? She'd deposit $3600, and would have the identical $27,404 at withdrawal time.

And this is pure nonsense -

"Let’s look at the numbers another way. Tom takes the $1,400 he saved in taxes from his $5,000 pretax contributions, and invests that money in a taxable brokerage account. That could boost his total at age 75 to $35,445."

The $1400 saved is in his 401(k) already, there's no extra $1400. $5000 went in pretax.

Let me go one more step, and explain what I think Joe meant in his comment below - tax table first -

enter image description here

At retirement, say a couple has exactly $168,850 of income. With the $20K in standard deduction and exemptions, they are right at the top of the 25% bracket. And have a federal tax bill of $28,925. Overall, an effective rate of 17%.

Of course this is a blend from 0%-25%, and I maintain that if some money could have gone in post tax while in the 10%/15% brackets, that would be great, but in the end, if it all skims off at 25%, and comes out at an effective 17%, that's not too bad.

The article is incorrect. Misleading. And offends any of us that have any respect for numbers. And the fact that the article claim that "87% found this helpful" just makes me... sad.

I've said it elsewhere, and will repeat, there are not just two points in time. The ability to convert Traditional 401(k) to Roth 401(k), and if in IRAs, not just convert, but also recharacterize, opens up other possibilities. It's worth a bit of attention and ongoing paperwork to minimize your lifetime tax bill.

Time makes no difference. There is no "crossover point" as with other financial decisions. For this illustration, the results are identical regardless of time.

By the way, in today's dollars, it would take $4M pretax to produce an annual withdrawal of $160K. This number is about top 2-3%. The 90%ers need not worry about saving their way to a higher tax bracket.

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    The 90%ers need not worry about saving their way to a higher tax bracket. <-- I wish this was more obvious to the world. The dogma of "roth is the best always! don't pay more taxes in retirement!" makes the government so much money.
    – enderland
    Commented Oct 25, 2014 at 17:13
  • That is a good summary of my point plus more. I would note that the same thing I didn't do is missing here: you probably have ~$12k of social security income per year which is subject to tax, between 50% and 85% of it anyway. That alters the final result some - instead of 17% it's probably more like 20% - but still a significant savings.
    – Joe
    Commented Oct 25, 2014 at 17:48
  • @Joe - yes, sir. That phantom rate (46.25%, anyone?) that occurs due to Social Security taxation is a tough one. It happens early on, for a couple, at $60K of IRA withdrawal, they are already past the SS taxation. See my brilliant article rothmania.net/the-phantom-couples-tax-rate-zone Commented Oct 25, 2014 at 23:31

They're wrong, and it's easy to show that if you pay the same % in taxes then you end up the same either way.

If you have an initial investment of 10k, an effective tax rate of 25%, and gains of 10% a year, here are the numbers:

You invest 10k into a traditional. After 50 years, you have $1,173,908. After paying taxes, you end up with $880,431.

You invest 10k into a Roth. After paying the taxes, your initial investment is $7500. After 50 years, you have $880,431 - the same you have with the traditional.

The advantage from the Roth comes from two things - the assumption that taxes are lower now for you than they will be in the future (a good bet, given that taxes are relatively low in the US) and the ability to have a mix of taxable and non-taxable income to draw from in retirement to lower your effective tax rate (draw down the taxable up to a certain tax bracket then use your non-taxable above that).

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    the assumption that taxes are lower now for you than they will be in the future <-- this should be more appropriately "assumption that the average tax rate on your taxable income in retirement is lower than your current marginal rate". If you are in the 25% federal tax bracket, it is highly unlikely the entirety of your withdrawals will be taxed at 25%, which means the traditional choice is better.
    – enderland
    Commented Oct 25, 2014 at 17:07
  • That's why I said effective tax rate, not tax bracket.
    – David Rice
    Commented Oct 27, 2014 at 14:20

Actually the Fidelity hypothetical example (with same marginal tax rates) is super misleading.

They are putting the money saved up front from the traditional 401k in to at taxable account. Why? If you put the actual money used for the Roth that would be saved into traditional 401k they look the same no matter the timeline (with a hypothetical unchanging tax rate).

Check this out.

  • I contribute $6944 to a Traditional 401k (To make it the equivalent of the money earned to make a $5000 roth contribution w/ tax $6944 * (1-.28) ≈ $5000 )
  • My Traditional 401k value is $52,859.50 over 30 years (with their example 7% annual interest)
  • My final after tax money is $38060 (Wow! just like Fidelity's Roth after tax value except for round error differences!)

So there are only two things to consider when choosing traditional vs roth.

  • Your best guess at your tax rate now vs later
  • If you can max out your 401k contribution to the limit a $17,500 Roth contribution is going to have an advantage because you can't make a $24,300 traditional 401k equivalent contribution.
  • Sure, but 401k is not the only tax advantaged plan. HSA and IRAs allow further contributions depending on your income, and if you are married, you can also do an IRA for your spouse with the same benefit. Commented Oct 24, 2014 at 23:04
  • @NathanL I assume you are talking about my point of maxing out the 401k contribution. An HSA or IRA for further contributions is irrelevant, your contribution to those would be irrespective of choosing Roth or Traditional.
    – jbtule
    Commented Oct 27, 2014 at 18:15
  • If your income doesn't exceed the maximum allowed, a couple can contribute an additional $11k to their IRAs after their 401k is maxed out, more if they are older. My comment was that just above $17,500 is probably not annual savings amount where the Roth becomes advantageous for most people. Commented Oct 27, 2014 at 18:28
  • @NathanL The numbers are illustrative for reasons to choose between Roth and Traditional 401(k) if you max out an IRA it doesn't change those numbers when we are talking about the 401(k) portion of your retirement contributions.
    – jbtule
    Commented Oct 27, 2014 at 20:22
  • Yeah, fine, and the article mentions 401k specifically, so I know why you chose that number. I just wouldn't want someone to read your post and think when they've maxed their 401k at work that they should immediately consider using a Roth if they haven't also maxed out their IRA options. Commented Oct 27, 2014 at 21:44

There is no advantage to using one type of account or the other if you are in the same tax bracket at retirement that you are in during your working years. However, for tax planning reasons, it is good to have some money in both a Roth and a traditional IRA plan.

JoeTaxpayer has often advocated a good rule of thumb to use a Roth when your tax bracket is 15% or lower, and use a traditional account when in the 25% bracket or above. The reason for this rule of thumb is that you are less likely to be in the higher tax bracket when you are living off retirement savings unless you put away an awful lot of money between now and then.

If you are making enough money to be paying a 25% marginal rate on some of the money you would be putting away for retirement, then by all means, put all of that money in a traditional 401k. If after contributing that portion of your savings taxed at the higher rate, you still have money to put away for retirement, put the rest in a Roth and pay the 15% taxes on it.

When you are younger, it is likely that you are making less than you will a few years hence, and it is also likely that a larger portion of your income will be paying tax deductible interest on a mortgage. If those are true for you, then by all means, use the Roth. That was true of me when I was single and just getting started.

When you do finally retire, it is possible that the tax brackets will be increased to match inflation, and if so, then there is no benefit to having tax free money at retirement vs. paying taxes on deferred accounts, but there is also usually more flexibility in when to spend money. You may find that you have a year where you have to spend a lot, so it is good to be able to pull money out without it increasing your marginal rate for that year, and other years where you spend relatively smaller amounts, and you can withdraw taxable money and pay a lower rate on that money. No one knows what the tax code will look like in 40 years, but having some money in each type of account will give you flexibility to minimize your tax bill at retirement.

  • One example of how the tax code could change to punish Roth accounts: We move to a national sales tax or VAT. The money would have been taxed once as income, and taxed again later through consumption. Of course it's possible to have a VAT instituted in addition to an income tax (heaven forbid) in which case there is no disadvantage for the Roth. Commented Oct 24, 2014 at 19:32
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    You're misusing effective rate here. Roth/IRA decision is based entirely on your marginal rate now, and your effective rate at retirement - your effective rate now is irrelevant, as you're saving the taxes at your marginal rate (unless your bracket decreases as a result of your savings, in which case it's a hybrid of the two marginal rates, but still higher than your effective rate).
    – Joe
    Commented Oct 24, 2014 at 20:15
  • I'm also unsure of how "tax brackets will be increased to match inflation" is relevant. Sure, the tax bracket numbers will rise some, but the percentages won't (or will change for some other reason), and hopefully your investment strategy will match the rise of inflation. That said, I agree fully with the rest of what you say.
    – Joe
    Commented Oct 24, 2014 at 20:16
  • @Joe: "Roth/IRA decision is based entirely on your marginal rate now, and your effective rate at retirement" You repeat that but it is not true. For both now and retirement, the consideration is the same -- it is the effective rate of the contributed/withdrawn portion of the income if it were taxed. It is not true that you only look at the marginal rate when you contribute, because the deduction can lower you to a lower bracket, so the contribution is split between two brackets.
    – user102008
    Commented Oct 25, 2014 at 0:48
  • @Joe: And it is not true that you only look at the effective rate when you withdraw; people in retirement often have other taxable income, so the taxable income that would come from a withdrawal do not necessarily include the lowest brackets, only the brackets above whatever other taxable income there is. The point you're trying to make is that contributions tend to be a very small fraction of the income, while withdrawals tend to be a much bigger fraction of the income. But saying it's entirely the marginal rate at contribution and effectively rate at withdrawal is incorrect.
    – user102008
    Commented Oct 25, 2014 at 0:49

The reason the article recommends a Roth 401k for those who have a long time until retirement is based on your salary, marginal tax rates, and effective tax rates and some assumptions.

  1. Your salary will typically increase over the duration of your career.
  2. Based on the previous point, the further you are from retirement, the lower your marginal tax rate (in general).
  3. Roth IRA contributions are essentially taxed at your marginal tax rate vs 401k which when withdrawn are essentially taxed at your effective tax rate in retirement.

You want to contribute to Roth IRAs when your marginal tax rate now is better than your effective tax rate at the time of withdrawal. That is most likely to be true when your salary is smaller (for you) and your salary is most likely to be smaller (compared to your future salaries) when you have more years until retirement.

The article is presenting a rule of thumb. It won't hold true for everyone in every situation.


While the other answers are good, I wanted to expand a little on why I feel a ROTH is a bad way to go unless you are young.

First, let's pretend you have a 25% tax rate. And your investments will go up 5% per year for 10 years. You contribute 6% of income for one year. You can do a traditional or a roth 401k/IRA. Here's the math:

Traditional: 6% of income invested. Grows at 5% for 10 years. Taxed at 25% on withdrawl.

= (Income * 6%) * (1.05 ^ 10) * (100% - 25%)

= (Income * 6%) * 1.63 * .75

= 7.33% of your original income - but this is after taxes

ROTH: Taxes taken out of income. Then 6% of that goes into the fund(s). Still grows at 5% for 10 years. Not taxed at withdrawl.

= (Income * (100% - 25%) * 6%) * (1.05 ^ 10)

= (Income * 75% * 6%) * 1.63

= 7.33% of your original income - again this is after taxes.

Look familiar? They are the same. It's the simple transitive property of mathematics.

So why do a traditional vs. a ROTH? The reason is that your tax bracket changes. This changes because your income changes.

Say when you retire you plan to have your home or vehicle paid for. You expect to be able to live on $50,000 per year. This means when you make MORE than $50,000 you should do a traditional plan and when you make less than this you should do a ROTH plan.

Example: You make $100,000 and your upper bracket is now 30%. You save 30% by doing a traditional and then pay back 10, 20, and 30% as you withdraw a salary of $50,000. Traditional = better.

Example: You make $30,000 annually. Your upper bracket is 20%. You pay 20% on a roth. Then you withdraw funds to get to $50,000 anually and never pay the higher bracket. Roth = better.

ROTH advocates typically bring up tax rates. Of course they will go up they insist. So you always should do a ROTH. Not so fast. Taxes have gone down in recent years (No one please start a political debate with me. Some went up, some went down, but overall, federal income rates dropped). Even if taxes rose 5%, a traditional will still be better than a ROTH in many cases.

  • Another factor: If you have both a Roth and traditional, you could adjust your withdrawals at retirement between the two to manipulate your tax bracket (assuming the min distribution requirement makes this possible).
    – JohnFx
    Commented Oct 24, 2014 at 18:59
  • Can you give an example of tax rates rising 5% between deposit and withdrawal that would result in less in a roth account?
    – Matt R
    Commented Oct 24, 2014 at 19:05
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    @MattR It would happen if the difference in your retirement income to ending salary income had a taxable bracket difference of more than 5%. Same as above - If you retire and live on $50,000, but your ending salary was $100,000. Your taxable bracket will be much lower in retirement than it was at the end of your career. If tax rates jump 5% when you retire, then all that matters is that the tax rate difference was more than 5% and the traditional still wins out.
    – Paul
    Commented Oct 24, 2014 at 19:18
  • @JohnFx: and what would be the point of manipulating your marginal tax bracket?
    – user102008
    Commented Oct 25, 2014 at 0:48

Something that's come up in comments and been alluded to in answers, but not explicit as far as I can tell: Even if your marginal tax rate now were equal to your marginal tax rate in retirement, or even lower, a traditional IRA may have advantages. That's because it's your effective tax rate that matters on withdrawls.

(Based on TY 2014, single person, but applies at higher numbers for other arrangements): You pay 0 taxes on the first $6200 of income, and then pay 10% on the next $9075, then 15% on $27825, then 25% on the total amount over that up to $89530, etc. As such, even if your marginal rate is 25% (say you earn $80k), your effective rate is much less: for example, $80k income, you pay taxes on $73800. That ends up being $14,600, for an effective rate in total of 17.9%.

Let's say you had the same salary, $80k, from 20 to 65, and for 45 years saved up 10k a year, plus earned enough returns to pay you out $80k a year in retirement. In a Roth, you pay 25% on all $10k. In a traditional, you save that $2500 a year (because it comes off the top, the amount over $36900), and then pay 17.9% during retirement (your effective tax rate, because it's the amount in total that matters).

So for Roth you had 7500*(returns), while for Traditional the correct amount isn't 10k*(returns)*0.75, but 10k*(returns)*0.821. You make the difference between .75 and .82 back even with the identical income. [Of course, if your $10k would take you down a marginal bracket, then it also has an 'effective' tax rate of something between the two rates.]

Thus, Roth makes sense if you expect your effective tax rate to be higher in retirement than it is now. This is very possible, still, because for people like me with a mortgage, high property taxes, two kids, and student loans, my marginal tax rate is pretty low - even with a reasonably nice salary I still pay 15% on the stuff that's heading into my IRA. (Sadly, my employer has only a traditional 401k, but they also contribute to it without requiring a match so I won't complain too much.) Since I expect my eventual tax rate to be in that 18-20% at a minimum, I'd benefit from a Roth IRA right now.

This matters more for people in the middle brackets - earning high 5 figure salaries as individuals or low 6 figure as a couple - because the big difference is relevant when a large percentage of your income is in the 15% and below brackets. If you're earning $200k, then so much of your income is taxed at 28-33% it doesn't make nearly as much of a difference, and odds are you can play various tricks when you're retiring to avoid having as high of a tax rate.

  • "your effective tax rate, because it's the amount in total that matters" This is not completely true. It's not the effective rate that matters. It's the effective rate of the withdrawal portion of the income. The same thing applies to contribution -- it's the effective rate of the contribution portion of the income. Contribution and withdrawal both "come off the top". Your trying to distinguish them in this way is not correct.
    – user102008
    Commented Oct 25, 2014 at 0:52
  • @Joe - +1 - I think I get your point. Instead of looking at withdrawals at the margin, you are suggesting that savings is at the margin (agreed) but your withdrawals should be viewed in aggregate. See my answer and let me know if I am on the same page as you. Commented Oct 25, 2014 at 5:04
  • @user102008 It's correct, assuming your entire income in your retirement is from your 401k, like it is for many people. Of course if you've got significant non-retirement income your effective tax rate is higher, but not very many people in the bracket I'm talking about will have significant non-IRA/401k income other than Social Security. (I probably should factor social security into this, though, which would mostly or entirely wipe out the zero-tax portion. It makes the numbers slightly less favorable, but still favorable.)
    – Joe
    Commented Oct 25, 2014 at 17:44

All the answers that show the equivalency of 401(k) pre-tax and Roth 401(k) post-tax using equivalent contributions are correct assuming equivalent tax rates upon withdrawal. There is some potential gain if your tax rate upon retirement is higher than your working tax rate, but often people calculate a smaller percentage of their working income for their retirement income, which may offset a higher tax-rate anyway.

In my mind, the primary advantage of a Roth 401(k) is that it effectively allows you to contribute more for retirement if you are currently maxing out your contributions in a regular 401(k) and IRA and want to contribute more. Doing so can be a big advantage when you are young and can benefit from those additional dollars being put into your retirement account early. This is effectively what is illustrated by the Fidelity calculation, and is something to consider if you are of the mind to aggressively save early for retirement.

The reason Roth allows you to contribute more is because traditional IRA contributions are capped. Suppose the cap is $5500. Suppose also you immediately rollover your traditional IRA to a Roth IRA. This is a post-tax contribution, and growth on that is tax-free.

If you maxed out your employer pre-tax 401(k) to $17500 and maxed out your IRA, you have maxed out your retirement contributions to $23000. Suppose two doublings, then the 401(k) has grown to $70000, and the IRA has grown to $22000. However, the withdrawal from the 401(k) is taxed, so assuming 25%, the total is $74500 after tax.

Now, suppose instead you maxed out your employer Roth 401(k) post-tax instead, so you have put in $17500 post tax. And now, also max out your IRA. Now, all of your $23000 grows tax-free. So upon two doublings, you walk away with $92000. This is because you maxed out your contribution post-tax, meaning it was as if you were allowed to contribute $23333 to your pre-tax 401(k).

So if you intend to max out your retirement account contributions, and are looking to contribute even more to retirement accounts, one way is two change over to contributing into the employer Roth 401(k).


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