Roth vs. Traditional
Episode 583 released yesterday and in it I mentioned that assuming tax rates are the same going in and going out, you will have the exact same net worth regardless of whether you contribute to a Roth or a Traditional account (IRA, 401k, etc.).
Here’s the step-by-step example:
Contribution:
You want to take $5,000 of your income and contribute it to a retirement account.
Traditional: This income is not taxed, so you get to contribute the full $5,000 which invests and compounds.
Roth: The income is taxed in the current year and let’s say you’re squarely in the 22% bracket, so you pay $1,100 in tax on that $5k and you therefore invest $3,900
Total Tax Paid on Contribution: Traditional = $0. Roth = $1,100
Bala