One of the most important decisions you need to make is whether to put your retirement money into a Roth or a Traditional 401k. The decision is a personal one depending on your view on taxes. On the traditional 401k, you get a tax break now, but pay regular in tax rates when you withdrawal. On the Roth 401k, you don’t get a tax break now, but pay no tax when you withdrawal. Take a look at the comparison table below.
I’d personally rather pay the $25 now per $100 invested (Roth) than pay $400 later per $100 invested (Traditional).
The Roth has another advantage, no Required Minimum Distributions (RMD) in your lifetime. On the traditional 401k, you have to start taking RMD’s at 70 1/2. The government wants that tax revenue. In english, this means under the Roth, I never have to take any distributions in my lifetime. I can pass all of the money in the Roth to my kids tax free to them and they don’t pay taxes when they pull from my Roth. It is a huge consideration if you want to keep wealth in your family and not give it to the government. I know I do.
I have been putting money into the Roth since my company starting matching on the Roth in 2016 and will continue to do so. I stopped putting money into the traditional 401k altogether.
What is the ‘Rule Of 72’
The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72:
Formula: Years required to double investment = 72 ÷ compound annual interest rate
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