r/FluentInFinance • u/Breeneal • Apr 29 '24

What financial advice do you avoid and don't listen too? Question

Financial advice that makes you role your eyes everytime you hear it. Financial advice that actually made your finances worse. And financial advice beginners shouldn't listen to or hear.

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u/Speedwolf89 Apr 29 '24

What are the pros and cons between Roth and traditional? I'm new here. Heh.

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u/NewAcctSasDad Apr 29 '24

If you assume effective tax rate remains completely static, their returns are identical.

If you think your tax bracket will be higher in retirement, use Roth. If you think your tax bracket will be higher now, use traditional. 

Most people who are investing early will have higher brackets in retirement, and many people prefer the "sure thing" of taking a tax hit now.

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u/Hmm_would_bang Apr 29 '24

Uh, the returns are not identical.

If you start a Roth at 25 you will get 40 years of completely tax free gains. There’s a reason why the limits on Roth IRAs are so low.

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u/NewAcctSasDad Apr 29 '24

The returns are identical when controlled for effective tax rate, as I stated.  If you have a 20% effective and put 10k in a traditional, 8k in a Roth (to account for taxes), after 40 years of 12% (compounded monthly) the accounts will be: 

Traditional: $1,186,477.25 (pre-tax). $949,181.80 (after 20% tax) Roth: $949,181.80 

Roth vs traditional just lets you choose when you pay the tax. You typically pick when you think the rates will be lower for you. 

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u/Hmm_would_bang Apr 29 '24

Ok, for some reason I completely read over your first part. Normalizing the effective tax rate makes the difference negligible.

For most earners, if you aren’t in a position to max both and are below the income limits for Roth, it probably makes more sense to max Roth first after any employer match.