401k contributions: pre/post tax and roth.

[Badger]

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You will also want to consider what your tax situation will look like now vs. when you're 60. That may be difficult, or even impossible, to do, but right now straight out of college it's likely that you're in a lower tax bracket than you will be. This would be another pro to investing post tax dollars, as you'd pay more taxes on this money in a higher tax bracket. Who can say what the tax system will be in 2050 though.


[/ QUOTE ] This is where I am a little ignorant. If I am retired drawing money from my 401k/IRA isn't that money taxed at a lower rate because it is investment income as opposed to earned income (other than the actual contributions)?

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If it's a Roth IRA (and I'd assume Roth 401k, but don't quote me) everything you've amassed is completely tax free at age 59.5.

Qualified distributions from a traditional 401k after age 59.5 will be taxed at your ordinary income tax rate.

So picture a world where tax laws are the exact same 40 years from now and you want to retire. We'll talk tax deferred vs Roth. Not 401 vs IRA.

Scenario A- you're in the 28% tax bracket and you've saved just enough to live on. In 2007 dollars your distributions are less than they are now and therefore you're in a lower tax bracket. If you went the Roth route you paid higher taxes on this money because it was already taxed at 28% when it could now be taxed at 15%.

Scenario B- You've worked hard and saved millions and are ready to retire rich. Your distributions are now much more than your income in 2007 was (in 2007 dollars). If you went the Roth route, congratulations instead of paying the 35% tax bracket you saved all this money at the 28% tax bracket.

What scenario do you envision? Revisit this and plan accordingly in 5 years, and in 10, etc. etc. It sure can't hurt to have a mix of both since tax brackets could be different when you're retired. Also 401ks have stricter minimum distributions, so you could be forced to take money out when you don't want to to avoid penalties.

This is my understanding of things. I could be way off base here. Hopefully others will confirm or call me an idiot.