Because marginal tax brackets

[jnm2.0t]

Is why I don't contribute to a Roth... well I put a little in once, a few hundred bucks, but that's it. I always see the old rule of thumb being used of contributing to a companies match in a 401(k), then maxing out a Roth, then going back to the 401(k) with leftover funds. I have been guilty of that thinking in the past but it can really hurt people in higher marginal tax brackets, in particular if you have a high income rate state.

Example... for every $1 i put into a 401(k) I avoid 25% marginal federal taxes and 9.30% CA taxes, for 34.3% in tax savings today. Using today's tax brackets and some *rough* calculations as an example for federal tax assuming a nice $100k annual fully taxable retirement withdrawal you would pay total income taxes = $12,185. That's 12.185%, versus 25% today. On the CA piece it comes to $4,032 or just 4%, versus 9.3% today. Lets call it a combined 16% effective rate. That tax savings could even be enough to buy a second house in a 0% income tax state, claim it as your primary residence, and avoid the whole CA tax system altogether on that money.

[AutobahnTDI]

Fed tax (married file) alone on $100k is close to $17k. Where are you coming up with 12.185%?

This is also a pretty big assumption:

Using today's tax brackets...

[jnm2.0t]

Fed tax (married file) alone on $100k is close to $17k. Where are you coming up with 12.185%?

$100,000
- $11,900 standard deduction
- $7,600 exemptions
= $80,500 taxable

$0 to $17400 @ 10% = $1740
$17401 to $70,700 @ 15% = $7994.85
$70,701 to $80,500 @ 25% = $2,449.75
Total = $12,184.60

You are also directly comparing marginal and effective rates.

Yes and that is precisely the point... you today pay everything at your marginal tax bracket but in retirement everything progresses through the marginals.

This is also a pretty big assumption:

The tax rates would have to double to make the calculations about break even. Its a fairly safe bet you won't lose out.

You could say that you could avoid that last bracket, the $10k or so at 25% and that's fair, but I also think that most people, with no mortgage and kids out of the house, could well just stop withdrawing and live off the $90k-ish. Point is that the concept of maxing out the Roth at the expense of a 401(k) may not be the wisest decision for people in the 25% bracket.

[TT for me]

The advantage of Roth isn't the rate savings. It's the fact you're saving more money. You're effectively saving more money with Roth because it's after tax money. You can put $17k into a traditional IRA a year. When you withdraw it, you have to pay tax, so you end up with less than $17k. You contribute after tax money into Roth. You're not taxed when you get the money out.

[jnm2.0t]

The advantage of Roth isn't the rate savings. It's the fact you're saving more money. You're effectively saving more money with Roth because it's after tax money. You can put $17k into a traditional IRA a year. When you withdraw it, you have to pay tax, so you end up with less than $17k. You contribute after tax money into Roth. You're not taxed when you get the money out.

Not really. If the applicable tax rates were exactly the same today and in the future, say a flat tax and no deductions/exemptions, the end result of how much money you have would be exactly the same between the IRA/401(k) and Roth routes.

But the tax rates aren't the same, as this thread is about. Everything that goes into the IRA/401(k) avoids the marginal rate, the top end of what you pay. Everything you take out first gets bypassed by tax altogether because of the deductions and exemptions, and then goes through the progression of rates. You may eventually get to the same marginal rate, but what you paid in sum is far lower than had you paid the tax today and used a Roth instead.