Premium said:
Stasco said:
Premium said:
Dwjdvm said:
I've had someone tell me this before, but I don't fully understand. My thought process is if I was going to put $500 in after tax, wouldn't it grow the same as $500 pre tax? Is it that most of the time it's decided on percentage so they are comparing $500 pre tax to $400 after tax?
Yeah, say you have $500 pretax dollars to work with - or $400 post-tax dollars.
Say that extra $100 gets to make you money for 30 years - say 7% for 30 years. Well, that turns into an EXTRA $700+. So even if you're taxed at a higher rate that $700 will easily cushion you against the higher rate.
Try running the actual math. If your marginal tax rate is the same now as it will be when you retire, then the two options are equivalent. So the relevant question is, when will your marginal tax rate be lower? Now or when you retire.
Or did you really think that countless professional investment advisors were just too dumb to realize the Roth method is a ripoff?
Then why would anyone use a 1031 Exchange? Isn't that the same concept? What I'm saying is, I'd rather pay taxes later.
Stasco is exactly right. The growth on the money you didn't pay in taxes is negated by having to pay taxes on all of your gains. The math is pretty simple.
Using your example:
Assume the $100 grew into $700 after 30 years.
That means the other $400 would grow into $2800 over the same time period.
If you invest $400 in a Roth account, in 30 years you have $2800 and owe no taxes.
If you invest $500 in a pretax account, in 30 years you have $3500, but owe taxes.
If your marginal rate at retirement is the same as when the money went in (20%), you owe $700 in taxes and take home $2800.
If your marginal rates are the same, you end up with exactly the same take home. The tricky part is predicting what your marginal rate in retirement would actually be.