We couldn’t find a tax savings in pre-tax contributions in Episode I: Tax Savings, What’s That?
We couldn’t find the tax savings in our income in Episode II: Tax Savings, It’s In the Paycheck?
I think we might have found it in the classic debate of Traditional 401k versus Roth 401k. You’ll remember in Episode I that our $10,000 grows to $80,000 at 7% over 30 years. When taxes come into play at our 25% tax bracket the $80,000 quickly becomes $60,000.
Roth 401k
The key difference of the Roth 401k is that money goes in after-tax so that growth is tax-deferred and the withdrawals are tax-free. We start with our $10,000 then pay our taxes before we can contribute to the Roth 401k. This puts $7,500 into our retirement account. Using the Rule of 72, again, we know that it will double every 10 years. It doubles once to $15,000, twice to $30,000 and third times a charm, to $60,000.
$60,000, either way we look at it we end up with the same amount. Where’s the tax savings there? Oh your remember that we a good boys and there’s some extra money not accounted for from Episode I. I guess you’ll have to wait for the season finale to get that explained.
To Be Continued…
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