We’ll assume that the entire balance from both accounts is withdrawn at once in retirement and that no taxes are paid on the taxable account until the money is withdrawn. By Matt Bell | Regardless, keep in mind that it’s not all or nothing. Then we’ll talk about the limitations of any general rule. John Grobe, Federal Career Experts . Very thorough analysis. As The Wall Street Journal reported recently, … I think the 5k from the traditional IRA fund really should be treated as the “last” 5k in the context of traditional vs Roth because if you had used a Roth you would only have 15k of taxable income rather than 20k with the other 5k coming from your Roth. Thanks for the explanation. The credit card offers that appear on this site are from credit card companies from which doughroller.net receives compensation. The Roth vs Traditional IRA Calculator assumes you won't make any withdrawals from your Roth IRA for at least 5-years and none before age 59-1/2. This calculator provides a side-by-side comparison of traditional and Roth contributions to help you assess whether Roth TSP might be right for you. Some employers won't match Roth 401(k) contributions even though they match traditional 401(k) contributions. Sorry. Assuming a marginal tax rate of 25%, how much do we need to earn pre-tax to generate $17,500 in after-tax dollars? If you do the calculation without the capital gains tax, it’s a wash. Individual retirement accounts (IRAs) are tax-advantaged vehicles designed for long-term savings and investment—to build a … Anyone 18 or over with earned income can contribute to a Traditional IRA. With a traditional account, investors get a tax deduction for their contributions but then owe tax when they withdraw from the account in retirement. For those whose income prevents them from either deducting a traditional IRA contribution or making contributions to a Roth IRA, the Backdoor strategy is ideal. I just did a quick calculation in my head.). This may involve a lot of calculations and predictions, and perhaps one may feel like they require a combination of traditional TSP vs. roth TSP to feel like they’ve maximized their potential. Initial investment: $10,000 Account grows to: $40,000 ($10,000 x 4) Taxes paid on withdraw: $10,000 (25% of $40,000) After-tax balance: $30,000, Initial investment: $7,500 ($10,000 less 25% in taxes paid) Account grows to: $30,000 ($7,500 x 4) Taxes paid on withdraw: $4,500 (($30,000 – $7,500 (initial investment)) x 20%) After-tax balance: $25,500. Now, a LOT more variables can skew the math slightly in either direction, and most of them have to do with the concept of marginal and effective tax rates. With a Roth, there are no deductions for contributions, but then there are no taxes due when the money is withdrawn down the road. Note: 401k contribution limits can change every year. Obviously what tax rates do in the future is a question no one has an answer too, but does my reasoning seem logical? As you can tell from the numbers, we are assuming a marginal tax rate of 25%. I read the traditional vs roth wiki and had decided on contributing to a Roth 401K. You contribute pre-tax … Now let’s envision another 30-year-old with the same goal but who decides to use a Roth 401(k). Thanks for mentioning it here! Particularly for those who are many years away from retirement, this question is almost impossible to answer with any degree of confidence. Therefore doesn’t the Roth investment, which grows tax free, always come out ahead assuming both investment had the same rate of return? When I retire my salary goes to zero, so when I take out my 401k $40,000, the first ~$10k is taxed at 10% ($1k), next $18k at 12%($2.2k), next $12k at 25% ($3k). Perhaps Rob will provide an article expounding on the ins and outs of this strategy. 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