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.