This is assuming that tax rates stay where they are currently. The reason for this is that we have to look at our effective tax rate and not just our tax bracket.

Example: Just starting out at 24.5 years old. Mr. Roth & Mr. K both make $80,000/yr. Both are single and do not itemize, and both reture at 59.5 years old (in 35 years). Assume wages, contirbution limits & tax brackets go up with inflation.

Mr. Roth puts 10% ($8000) of his salary in the 401K, and $4000 in Roth IRAs each year. After taxes and retirement savings, he has $46,880 to live on. If he saves this $12000/yr for 35 years, and gets an 11% return, he’ll have $4,099,074.66 upon retirement

Mr. K puts 16.5% ($13200) of his salary in the 401K, and ditches the Roth. After taxes and retirement savings, he has $46,980 to live on ($100 more than Mr. Roth). If he saves this $13,200/yr for 35 years, and gets an 11% return, he’ll have $4,508,982.12 upon retirement.

“But wait”, you’ll say, “Mr. Roth gets some tax free money!”

By jove, he does. But does it make up for the missing $400K+?

Suppose both withdraw 4% in their first year of retirement, indexing for inflation thereafter.

Mr. Roth withdraws $163,962.99 each year. If he draws proportionately from 401K and Roth, then $109,308.66 (2/3) of this is taxable. He will pay $18,267.02 in FIT on this amount, leaving him with $145,695.06 to live on.

Mr. K withdraws $180,359.28 each year. All of it is taxable, so he pays much more in taxes: $27,274.60. This leaves him with $153,084.69 to live on.

Hmm. Even when taxes are considered, Mr. K comes out better. I have run these numbers with higher and lower incomes, and it comes out the same. Contibuting to a deductible IRA would have the same impact as the 401K.

Of course, changes in the tax law could change the outcome of this analysis. So putting some money in a Roth might be a decent hedge. And the availability of Roth contributions prior to retirement age might be desirable. However, I don’t believe you can use 72(t) to get money out of a Roth early.

I wrote an article about this subject a couple months ago.

http://daseducation.wordpress.com/2007/08/28/a-primer-on-retirement-saving-part-3-of-5/

That being said, I choose to fund a Roth because I plan on have alot of portfolio and passive income from other vehicles in retirement along with wmployment income because I know I will never stop working!!!

It’s always nice to see the changes of a blogger over the years! Thanks for sharing.