1) 401k match is free money. Too good to pass up.
2) Roth IRA is an incredible deal, more so if your current tax rate is low.
I think the next two are debatable. Depends on your tax rate, expectations, quality of 401k choices, life expectancy, etc.
A couple more 401k benefits
- Protected from lawsuits in the vast majority of cases.
- Can be tapped early using a distribution plan called 72t after IRA conversion. Free of penalty, still taxable.
One of my goals in retirement savings was tax diversification. Start with regular income from dividends, interest, possibly pension or Social Security. Supplement that with withdrawals based on my annual tax situation. Certainly use up the 0% tax bracket, and most likely the 15% bracket as well.
I have three buckets of wealth that has not yet been taxed; embedded capital gains, 401k, regular IRA. It would be nice to convert that to after-tax dollars while paying as little tax as possible.
Your Math skills are apparently SERIOUSLY deficient!
Pretend your tax rate today is 10%, and that 50 years from now it will be 50%....
Imagine the long-term return on stocks is 10%
Now do the Math on the difference between paying 10% "up front" on $100 a month for the next 50 years and paying NO taxes on the money when you pull it out, and paying ZERO taxes on 4% of your income today (or on 8% of it, if they "match"!) and then paying 50% tax on what you withdraw fifty years from now!
My suspicion is that Math has never been one of your "strong subjects", LOL!
I normally hear the following retirement advice:
- Invest into 401k as much as your employer matches (if employer provides)
- Invest into Roth IRA up to the cap (if you eligible)
- Invest remaining money into 401 up to the current limit
- Invest any remaining money into a regular investment account
Assumptions:
- I have no idea what tax bracket I will be when I retire
- I have no idea what government taxes will be like when I retire either
- I will invest 4% my employer matches into 401k either way (this is no brainer)
So let's throw the above factors away and consider why I would want to max out 401k rather then invest it into regular investment account:
Benefits of 401k:
- I can invest the money using pre-tax dollars and not pay taxes on it now
- I will reduce my tax bracket thus paying less taxes overall
- I will let my pre-tax dollars to compound which will ultimately net a higher nest egg rather than if I let after tax dollars compound/grow (I read about this online, but don't see the logic)
Disadvantages of 401k:
- Money is dead weight; can't withdraw for next 35 years unless willing to pay penalties
- Only have as many options to invest in as your employer provides
Regular investment account benefits and disadvantages are simple so I won't list them.
My question is: why is investing money into 401k with pre-tax dollars is necessarily a benefit? My concerns are the following:
- I will pay taxes on that money eventually. I have no idea what my tax rate will be 35 years from now: why in the world would I think paying taxes on it later is a good idea?
- How is compounding effect on pre-tax dollars any different from compounding effect on post-tax dollars? I will still have to pay FULL taxes on the entire amount at my current rate in my 401k when I withdraw the money and in my individual account I will only pay tax on capital gains.
