Spend 'Til the End by Laurence J. Kotlikoff

Author:Laurence J. Kotlikoff
Language: eng
Format: epub
Publisher: Simon & Schuster
Published: 2008-06-12T04:00:00+00:00

What Do We Mean by an Equivalent Roth Contribution?

As you know, contributing to a regular 401(k) comes with an immediate tax break. Contributing to a Roth 401(k) comes with a future tax break. To make the two contributions comparable, we simply tried different Roth contribution rates until we found one that produced the same living-standard reduction before age fifty-one as arises from contributing 6 percent to the regular 401(k).

Since the short-run living-standard changes are set up to be the same for both types of contributions, the way to compare them is by examining their long-run living-standard impacts.* Here’s the interesting conclusion that emerges for all three sets of households: generally speaking, contributing to the regular 401(k) beats contributing to the Roth 401(k), but not by much. There are some exceptions. Take, for example, thirty-year-old singles earning $250K. Whichever way they contribute, they suffer a 2 percent short-term living-standard cut. But after age fifty-one, their living standard is 21.3 percent higher if they go traditional 401(k), but only 15.8 percent if they go Roth.

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