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I suspect the reason for IRA vs 401k is entirely regulatory. For any values I try in a spreadsheet, paying the taxes up front results in larger post-tax amounts

I suspect the reason for IRA vs 401k is entirely regulatory. For any values I try in a spreadsheet, paying the taxes up front results in larger post-tax amounts later (as long as the initial income tax rate is greater than capital gains rate). Can anyone find another reason? Edit: yes, I'm entirely ignoring predictions of tax rates rising in the future since that's not interesting mathmatically

Spooky23 8y ago
The upfront deduction and credits help people invest. When I was a kid, it was about 25% of my investment. Ignoring the tax rates is dangerous with the abuses of these programs, it’s going to happen.
rfinney 8y ago
Contributory IRA and regular 401K are basically the same thing: deferred taxes, required distributions. Roth IRA is different: no required distributions, no tax. (or a least they promise no taxes). You might want a Roth IRA because of ... #1 Higher tax rates in future. #2 You're not going to spend all your money, Roth IRA can provide tax free distributions for your heirs over their lifetimes. An inherited contributory IRA or regular 401K is taxed at distrubtion and distribution is accelerated (up to 5 years).
jldugger 8y ago
I'm assuming you're talking about Roth versus non-Roth. Mathematically, you're right, they are equivalent if your tax brackets don't change. It's pretty obvious once you get the correct formulas. The are reasons to prefer Roth: higher contribution limits -- paying the tax liability up front lets you save more for later. You can also pull out contributions to the IRA tax + penalty free, and pull out earnings for limited purposes (medical, downpayment on a first home). And you're not required to withdraw which can save you down the line.
Thorrez 8y ago
By saying "IRA vs 401k" I think you're misspeaking. There's a Roth IRA, and a traditional IRA. There's a Roth 401k and a traditional 401k. I think you're trying to make a Roth vs traditional distinction, not an IRA vs 401k distinction. You're right that the article confuses various things. But you're wrong in your analysis. Capital gains rate has nothing to do with this. Whether it's Roth or traditional, and whether it's 401k or IRA, you never pay capital gains rate, you always pay income tax rate. You're also wrong in saying paying up front is better in terms of tax rate. In terms of tax rates, Roth vs traditional both have the same rate (assuming you have the same tax rate now as in retirement) (and IRA vs 401k also both have the same rate, regardless of tax rates now vs retirement). Roth does have several advantages though. It has a higher effective legal contribution limit. It also allows a higher density of value per dollar, which is useful in a fund like the Medallion fund that is limited to $10B.

Spooky23 8y ago

The upfront deduction and credits help people invest. When I was a kid, it was about 25% of my investment. Ignoring the tax rates is dangerous with the abuses of these programs, it’s going to happen.

rfinney 8y ago

Contributory IRA and regular 401K are basically the same thing: deferred taxes, required distributions. Roth IRA is different: no required distributions, no tax. (or a least they promise no taxes). You might want a Roth IRA because of ... #1 Higher tax rates in future. #2 You're not going to spend all your money, Roth IRA can provide tax free distributions for your heirs over their lifetimes. An inherited contributory IRA or regular 401K is taxed at distrubtion and distribution is accelerated (up to 5 years).

jldugger 8y ago

I'm assuming you're talking about Roth versus non-Roth. Mathematically, you're right, they are equivalent if your tax brackets don't change. It's pretty obvious once you get the correct formulas. The are reasons to prefer Roth: higher contribution limits -- paying the tax liability up front lets you save more for later. You can also pull out contributions to the IRA tax + penalty free, and pull out earnings for limited purposes (medical, downpayment on a first home). And you're not required to withdraw which can save you down the line.

Thorrez 8y ago

By saying "IRA vs 401k" I think you're misspeaking. There's a Roth IRA, and a traditional IRA. There's a Roth 401k and a traditional 401k. I think you're trying to make a Roth vs traditional distinction, not an IRA vs 401k distinction. You're right that the article confuses various things. But you're wrong in your analysis. Capital gains rate has nothing to do with this. Whether it's Roth or traditional, and whether it's 401k or IRA, you never pay capital gains rate, you always pay income tax rate. You're also wrong in saying paying up front is better in terms of tax rate. In terms of tax rates, Roth vs traditional both have the same rate (assuming you have the same tax rate now as in retirement) (and IRA vs 401k also both have the same rate, regardless of tax rates now vs retirement). Roth does have several advantages though. It has a higher effective legal contribution limit. It also allows a higher density of value per dollar, which is useful in a fund like the Medallion fund that is limited to $10B.