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Not sure why people don't like this comment. It's correct. Whether you pay taxes on your income and then invest it, or invest it and then pay taxes when you t

Not sure why people don't like this comment. It's correct. Whether you pay taxes on your income and then invest it, or invest it and then pay taxes when you take it all out the result is the same (assuming your tax bracket doesn't change.) If you expect to be in a lower tax bracket when you take the money out, then invest pre-tax money. If you expect it to be in a higher tax bracket, invest money after you pay taxes on it. Obviously this is a very simple way of looking at it. But I think it's a good way to get a general understanding of the different options. Post-tax investments can be good if you need to pull out a big lump of money while retired.

derekp7 5y ago
From my understanding, this is not correct. 401K contributions reduce your marginal tax rate. So if you make 100k and contribute 15k, you save about 24% in taxes. Then when you withdraw 100k a year during retirement, you pay only 18% in taxes. On top of that, since you are only feeling a 11k reduction in your paycheck per year, but investing 15k, you end up with that much higher growth overall starting with a higher base. The only time expected retirement withdraw rate (treated as income at that time) matters is when choosing between Roth and traditional 401k / IRAs. In that case, with Roth you are contributing a lower amount initially (11k reduction in pay = 11k invested, instead of 15k invested), however the interest grows tax free. So if you are investing enough that the interest gives you a huge amount of money during retirement such that your annual retirement income (using 4% rule) gives you much higher pay, you would be better with Roth. But in no case are you better without any tax advantaged account.
- creatornator 5y ago
  I think this is what they were saying--pre-tax refers to traditional, post-tax to roth. Only traditional ira/401k reduces the marginal tax rate. So the decision to go for traditional or roth depends on how you expect your tax bracket to change.
toomuchtodo 5y ago
https://www.gocurrycracker.com/roth-sucks/ https://www.gocurrycracker.com/roth-sucks/
88913527 5y ago
Whether it's pre-tax or post-tax, it's an ERISA account, which means it's mostly judgment proof. You could invest in a standard brokerage account with post-tax money and you wouldn't get the ERISA protection. Also, retirement accounts allow you to specify to specify a beneficiary, which usurps the (long) probate process or any wills (making for a quick asset transfer). Death and judgments are certainly corner cases, but nonetheless add some intangible benefits.
compsciphd 5y ago
with a traditional IRA/401k you save today at the marginal rate (both state/federal) vs a Roth where you pay taxes at the marginal rate on them. In retirement, a traditional IRA/401k you only pay taxes at the amortized rate (for all your income) through all the brackets at the Federal level (and have more of an option to live in a tax free state than you did as a worker, to save even more). i.e. I'd argue that most people will be paying lower taxes in retirement (even without moving to a low/no tax state) even if their post retirement income is greater than their pre retirement income and tax brackets haven't changed.

derekp7 5y ago

From my understanding, this is not correct. 401K contributions reduce your marginal tax rate. So if you make 100k and contribute 15k, you save about 24% in taxes. Then when you withdraw 100k a year during retirement, you pay only 18% in taxes. On top of that, since you are only feeling a 11k reduction in your paycheck per year, but investing 15k, you end up with that much higher growth overall starting with a higher base. The only time expected retirement withdraw rate (treated as income at that time) matters is when choosing between Roth and traditional 401k / IRAs. In that case, with Roth you are contributing a lower amount initially (11k reduction in pay = 11k invested, instead of 15k invested), however the interest grows tax free. So if you are investing enough that the interest gives you a huge amount of money during retirement such that your annual retirement income (using 4% rule) gives you much higher pay, you would be better with Roth. But in no case are you better without any tax advantaged account.

creatornator 5y ago
I think this is what they were saying--pre-tax refers to traditional, post-tax to roth. Only traditional ira/401k reduces the marginal tax rate. So the decision to go for traditional or roth depends on how you expect your tax bracket to change.

toomuchtodo 5y ago

https://www.gocurrycracker.com/roth-sucks/ https://www.gocurrycracker.com/roth-sucks/

88913527 5y ago

Whether it's pre-tax or post-tax, it's an ERISA account, which means it's mostly judgment proof. You could invest in a standard brokerage account with post-tax money and you wouldn't get the ERISA protection. Also, retirement accounts allow you to specify to specify a beneficiary, which usurps the (long) probate process or any wills (making for a quick asset transfer). Death and judgments are certainly corner cases, but nonetheless add some intangible benefits.

compsciphd 5y ago

with a traditional IRA/401k you save today at the marginal rate (both state/federal) vs a Roth where you pay taxes at the marginal rate on them. In retirement, a traditional IRA/401k you only pay taxes at the amortized rate (for all your income) through all the brackets at the Federal level (and have more of an option to live in a tax free state than you did as a worker, to save even more). i.e. I'd argue that most people will be paying lower taxes in retirement (even without moving to a low/no tax state) even if their post retirement income is greater than their pre retirement income and tax brackets haven't changed.