The Magic of Confounded Interest, Part 2

Not too long ago, I posted this article about someone’s trying to convince me that it would be to my advantage to reduce my 401k contributions and increase my Roth IRA contributions by the same amount. Since then, I have put together a handy-dandy online calculator to compare the scenario for me.  You can click the link in that previous sentence or use the link in the sidebar to the right, under the Pages category.

The goal of the calculator was to show that there is really no difference to me. And it does show that. The amount I have at retirement is the same regardless of the mixture. I will pay slightly more in taxes in the one case, but it does not affect my bottom line.  The key is that in having more in the pre-tax 401k, I will have more take-home pay, which means that I can contribute that extra to a Roth.  Feel free to put various scenarios and situations into the calculator and see how much the mixture of 401(k) and Roth matters.

The real problem with reducing my 401k contribution is that I know I will not be as diligent in saving the money for a Roth IRA as I am with the 401k, since the 401k is done automatically by payroll before I ever see the money.

“Behold, I send you out as sheep in the midst of wolves; so be shrewd as serpents and innocent as doves.”
– Matthew 10:16

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This little article thingy was written by Some Guy sometime around 11:55 pm and has been carefully placed in the Finance category.

One Response to “The Magic of Confounded Interest, Part 2”

  1. js Says:

    Very thorough. I did something like this a few years ago on a spreadsheet, trying to figure out whether I should do an IRA or a Roth IRA, and I came to the same conclusion: it all depends on what you think the government is going to do with tax rates and where you’ll fall in that mess when you retire.

    Although your program looks much fancier than my old spreadsheet, I must still pick at it where I can: you probably don’t mean “interest rate”, since the assets will likely do more than just earn interest.

    Also, one factor present in a 401k/Roth comparison that is not present in an IRA/Roth IRA comparison is number of options: with a 401k, you’re limited to whatever funds that 401k plan offers. Maybe that doesn’t matter, because maybe overall you’re not more or less likely to do better with more options. But maybe you are. If that’s something that’s important to you, and – as you’ve shown – the numbers are otherwise the same, that would be enough to induce you to go Roth.

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