Nawhite,
I've never been able to understand this argument, that money withdrawn from a 401(k) is taxed at your average rate. For every extra dollar that you contribute to the 401(k) now, and withdraw in retirement, that dollar is getting taxed at your marginal rate. What am I missing?
I'll use my example again. Before I calculated my taxes as:
1785 (10% on the first 17,850) +
8197.50 (15% on the money between 17,850 and 72500) +
3825 (25% on the money between 72,500 and 87800, which is 100k- the standard deduction of 12200)
-------
$13,807.50
If I contribute 10k to my 401k then instead of 25% on money between 72,500 and 87800 (15,300) its 25% on money between 72,500 and 77,800 (5,300). This lowers the taxes I pay by 3825 - 1325 = $2500.
So that 10k gets taxed at 25% (just proved it again by coming from a different direction)
Now, when I retire, lets say 100% of my income comes from my 401k. If I pull out 100k of my 401k in a year, then my income is 100k again and I'll get taxed $13,800 or 13.8%. I will not get taxed 25%.
So money in isn't taxed at 25% and money out gets taxed at 13.8%.
Note, since I'm planning on retiring on more like $40k/year instead of 100k, I'd be looking at closer to an 8% rate instead of a 13.8% rate. Makes the 401k/traditional IRA pretty awesome.