With a Roth 401k contribution, you pay taxes on it NOW and then never ever EVER again!
That’s gotta be the best deal in town, right?
As Lee Corso would say “Not so fast!”
If your tax bracket is the same, then it does NOT matter if you pay taxes now or later.
Some 3rd-grade arithmetic proves it:
Pay taxes now (Roth 401k contribution)
Pre-tax amount: $100
20% taxes paid: -$20
Total invested: $80
Investment doubles: $160
Pay taxes later (Pre-tax 401k contribution)
Pre-tax investment: $100
Investment doubles: $200
20% taxes paid: -$40
After-tax total: $160
As you can see, it doesn’t matter if you give Uncle Sam his cut now or later. If he gets 20%, you’ll end up with the same amount.
HOWEVER, most of our Financial Zen Masters are in their highest earning years right now.
When they/you are living from passive income from your savings, your taxable income will be much lower than it is today.
Therefore, you’ll likely be in a lower tax bracket then, which means you want to pay your taxes then, NOT today while you’re earning all that cheddah!
