Roth 401K and Roth IRA

[Rahul Sunkavalli]

Working full time while attempting to invest. If my goals are to leverage RE for financial freedom, should I still max out retirement accounts? 1. Roth 401k vs 401k? 2. Open a Roth IRA as well? Trying to figure out of I should max those options out along with saving to invest in real estate. Thoughts and advice is kuch appreciated. Thanks, Rahul

[Brian Eastman]

@Harrison Sharp

Actually, @Michael Plaks knows exactly what he is talking about, and did couch his original statement as a generality dependent on specific details, and not a universal principal.

If you are in the 35% tax bracket today and make a $10,000 Roth contribution, it costs you $3,500 in taxes. If you grow the Roth IRA to $100,000 you made $90,000 of tax free money. Last I checked, 25% of $100,000 is $25,000, which is what you would pay distributing from a tax-deferred IRA. Yes, the rate is higher today in your example, but the net tax amount paid in the Roth scenario is considerably less than in the tax-deferred scenario.

(This is an oversimplified example, BTW, as a true comparison would not be with just one lump sum starting amount, and would need to account for investing the taxes not paid in the tax-deferred scenario to get a true apples-to-apples look.  For someone with a significant amount of time the Roth side of the equation will win big, however, which is the necessary takeaway here.)

Separately, most folks on BP are not aiming to be in a lower tax bracket when they retire.  The retirement industry standard line is exactly what you have said, but accepting the logic that your retirement years will be in a lower tax bracket means you are planning to fail.  If you have succeeded, then you will continue to be in a high tax bracket well beyond the point at which you stop working a job.