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Another Look at the Roth 401(k)

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Last week, I wrote a little about the new Roth 401(k) that passed into legislation last year and copanies started offering this year. I cited an article by Jeff Brown from the Philadelphia Inquirer, but I didn’t check his math.

I should have checked because an important point Jeff makes does not hold true, as many people helpfully pointed out in their comments. Jeff says, “Generally, it’s best to take any possible tax savings as soon as possible, since that gives you more money to invest – and more time for investments to compound.”

This does not compute. Whether the tax is deducted at the beginning or end of the investment period, the end result is the same, since investment gains are not taxed. However, this assumes that either $x is invested in the Traditional 401(k) or $x minus tax is invested in the Roth 401(k). That’s not always the two options that people consider. There are several assumptions in the calculation, so any one’s situation may vary greatly from the plain calculation.

Updated July 16, 2010 and originally published February 6, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 1 comment… read it below or add one }

avatar Eric

An important consideration for me is that the taxes I’ll pay in the future is an unknown – though I tend to believe it will be higher rather than lower.

I want to avoid paying marginal tax rates that have been jacked up to fund our ever expanding federal government.

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