Is a Roth 401k Better than a Traditional 401k?
Another great one from the Small Investor!
We’ve all heard the conventional wisdom. If you have an old, stodgy traditional IRA you should convert to a snazzy new Roth IRA. There is now even a new Roth 401k. Sure, you’ll need to pay all of the taxes since the money was initially invested tax-deferred and the conversion requires that the taxes be paid immediately. For an account of $100,000 this could mean a tax bill of $20,000 or more. But it will be worth it in the long-term, right?
Well, maybe. It is true in general that if you are investing for a long time before retirement, the mathematics show that a Roth IRA , where after-tax funds grow tax-free, will do better than investing in a traditional IRA where funds are not taxed until withdrawn from the account at retirement. This is true even if you invest the tax savings (the money that would have gone to taxes)…
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