What's the sense of contributing to your 401(k)....?

Question

if both state and fed taxes are going up anyway? It's like putting water in a tub with quite a few holes in it... the only one that make sense is the roth ira, where there are no tax deductions when taken out at the appropriate time.

Answer 1

It's true-- with the debt going up, the Fed will have to raise taxes eventually. Plus, if you're putting money away now to pay taxes on it later, that reduces the amount you'll get for yourself when you take it out. The only time it makes sense is if you're in a high tax bracket now (making tons of money) and you expect to make a lot less when you retire.

The ROTH has the benefit of paying your taxes up front, then earning its income tax free. That's like extra savings, since at retirement, every dine in the account comes to you. If you expect your tax rate to be the same or higher when you retire compared to what it is now, ROTH is the way to go.

Answer 2

You should max the 401k now, then contribute to the ROTH, especially if you get employer match. With the cap on IRA contributions at 5 and 6k annually, you couldn't possibly save enough to support a, hopefully, 30 yr retirement unless Warren Buffet personally manages your investments. The 401k gives you tax deferred growth. You should be in a lower tax bracket at retirement, then you are in your 30's and 40's, so when you do finally pay tax on those funds....it's less.

Answer 3

In addition to the employer match, the maximum contribution to a 401k is a lot bigger than what you can put into a Roth IRA. In addition, if you make over $160,000 a year you cannot contribute to a Roth IRA, but you could still contribute to a 401k.

So a 401k is still a good option for some people.

Answer 4

With a 401K or traditional IRA, you do get the benefit of compounding your investment pre-tax for as long as it's in, and with many 401k's there's an employer match up to a certain amount. Agree though that a Roth IRA has advantages.

Answer 5

Why not do both if you can afford to? Your 401(k) contributions are all pre-tax so that means the pay from your job will at least not suffer as large of a tax reduction.

The money going into your 401(k) is at least earning compound interest (assuming if its in something safe like money markets) or could be growing at an even better rate if its invested into stocks that are performing well. Letting that money grow is better than Uncle Sam taking his cut and it just sitting in your checking account doing nothing.