@CLB: I’ve actually heard of it the opposite: let’s say the max of your 401k each year was the same as the max of the Roth IRA (it isn’t, but just go with me). Let’s say you can only put $5,000 into each.

So you put $5,000 into the Roth IRA and $5,000 into the traditional 401k. You’ve technically put the same amount of money in, but really the Roth IRA has more money in it. How is that possible? Because the $5,000 in the 401k hasn’t had taxes come out of it yet. So even if your tax rate was 15%, that $5,000 is now worth only $4,250.

Now in your example of $750 vs $1,000 is a different situation. In fact you’ve given me inspiration for a post. I’ll post it up tomorrow.

I agree that it would be unlikely for the government to retroactively take away the benefit, so I think you and your wife are being very wise!

I believe that under the Roth system, your income is taxed at your regular rate when you contribute, but then grow tax free, meaning that if you contribute $20k that balloons to $1 million by the time you are eligible to take distributions you have $1 million free and clear, having only paid your standard income tax rate on the initial $20k when you put it in.

I could see the gov’t taking away this benefit in the future, but rather than sticking it to the funds already in the accounts just saying that you can no longer contribute in that manner and letting the issue work itself out. At least, that’s what my wife and I are banking on with both Roth IRA’s and Roth 401(k)’s!

I actually max out my 401k and my husband does the same, because it’s the only way to get our income low enough to allow us to make a Roth contribution. We’re right near the limit.

As for taxation of contributions, you are right. In a traditional IRA, any contributions that were not taxed on the way in are taxed on the way out. (So if you have a non-deductible traditional IRA, the contributions are not taxable.) However, in a Roth IRA, only the earnings are taxed upon withdrawal.

@PT Money: My understanding of a traditional 401k is that you pay taxes on everything including contributions. Otherwise you would be completely skipping out on paying taxes on the money — something the government isn’t too fond of.

For example imagine you had a 401k that you funded with $15,000 in one year and nothing else again. When you go to retire the fund is only worth $14,000. You withdraw the funds for income. if you didn’t pay taxes on the money itself, but the earnings, then you wouldn’t pay any taxes.

Instead I think it works where you would pay taxes on the $14,000 when you withdraw it whether or not it had earnings or losses with it.

I could be wrong…?

@Liz: You’re absolutely correct. In fact I meant to mention the lower income requirements for married folks and the lower amount you can put in.

So yes, after you max out your Roth options then a traditional 401k is not a bad option especially with the larger amount of money you can set aside. Thanks for mentioning these two.

I guess personally I missed the married income requirements because I don’t know many people who make $100k, not to mention a dual-income family that makes $160k.