Contribute 401k vs taxable accounts. And roth vs traditional - Early ...

Ok so max out the 401k is the consensus. Are there any good calculators or articles to help work out what bracket I could expect to be in when I retire. That is such a hard thing to figure out for me

The best calculator I have seen is Esplanner. It's not free, but it covers the most. It will calculate your federal and state taxes each from now until your estimated date of death. It will also calculate SS payouts, RMDs, and much, much more.

You should max out your 401k as others have suggested. The 1% management fee in the funds is not the most important consideration. Most Americans will only stay in their current job for 5 years. Therefore the average American will only pay excessive 401k fees or have to cope with limited investment options for a few years after which (once separated from the company) he will roll it into an IRA to live for decades.

Tax-deferred accounts, including 401Ks, have benefits beyond the company match even if your marginal tax rate is not lower in retirement, although it will be for most people. The right way to think of a 401k is that you could make the contribution now and pay the tax immediately. Or you could contribute to the 401k both your own ultimate money plus the taxes that you will eventually pay to the govt. In exchange for agreeing to manage the govt's money your own money will grow forever tax-free. If your tax rate in retirement is the same as while working (not very likely, but possible) you will end up paying the govt its original tax plus the gains and income your management has achieved for that money. You will get to keep your own contribution and all it has earned forever.

Here's an example:

current bracket: 25%
401k contribution: $8,000
portion of contribution that belongs to govt: $2,000

you invest and at retirement that $8,000 has grown to $16,000
retirement tax bracket: 25%
you draw out all of the money:
tax due: $4,000
portion that is not taxed: $12,000

Of course, if your tax rate is lower, you would do even better since you would get to keep some of the govt's gains. Plus you might have moved out of an income tax state into a no-income tax state or abroad. In that case you would never pay the state anything.

How much of a benefit that is depends on how long the 401k lives including its life as an IRA after your separation from the company and possibly as a Roth IRA. The tax-deferred money might live as long as you, but it could live as long as your wife or your children.

The reason you should contribute to the 401k now despite the temporary disadvantages, is that the 401k lets you contribute a lot more per year than an IRA or any other vehicle, unless you are self-employed.

For those who can afford to save for retirement, the 401k is by far the best deal available now.

Source: http://www.early-retirement.org/forums/f28/contribute-401k-vs-taxable-accounts-and-roth-vs-traditional-65341.html

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