First, Star, apologies in advance for the novel. The force of verbosity is strong in this one….
I’m not sure what you’re getting at when you say you see “a 401k as having a tax on principal and otherwise tax-free gains…” and I don’t fully understand your characterization of my position either. Also, your example is coming up with results which are non-meaningful because your initial $100 in each investment is on different bases – pre and post-tax. To run that example fairly, you should start with $100 with pre-tax money for each option.
However, let me explain my perspective on this issue using the helpful three account set-up you use. First, I think it’s important to separate Principal (savings) from Earnings (returns earned over time). Different savings options have different advantages, as follows:
401(k) – Tax Deferral on both Principal and Earnings.
Roth – Tax avoidance – on Earnings only.
Taxable Savings – No benefits, deferral or avoidance.
Of these options, only one offers a tax benefit on the PRINCIPAL you invest – the 401(k). The Roth offers far superior tax benefits on EARNINGS --- but not on Principal – which will make up and match the tax deferral benefits enjoyed by the 401(k) on both Principal and Earnings. Taxable, of course, offers bupkuss.
So…when I am computing my savings rate --- e.g. how much savings I have accumulated and invested in a given period --- I prefer to recognize the benefit of the 401(k)’s tax deferral up-front, because it accrues to the actual Principal I have saved, whereas a Roth’s benefits come from the tax treatment of its Earnings. Netting out the PV of taxes from my 401(k) contribution, rather than using the nominal tax liability, reflects the fact that the 401(k) is a better investment than a fully taxable account. This is partially because the earnings grow tax deferred, but it is ALSO because the present value of the tax liability on the Principal is smaller than if I paid it today. If I had a Roth (which I don’t) I would likely take into account its badassity by assuming a higher ROI in the spreadsheets I use to project investment performance. That would seem to me to be the proper way to reflect the advantages of tax free compounding on the Earnings. But, as I don’t have a Roth, I haven’t really considered the question from every angle and am open to changing my mind about that.
I hope you understand where I’m coming from now. If you’re comfortable with what you’re doing then keep doing it. It’s just a savings rate after all, and my way adds more complexity (and yes, rank speculation about withdrawal dates, tax rates, rates of return etc.) that it is perfectly reasonable not to want to deal with for a variety of reasons. But I do think my way is theoretically sound and not grounded in my ignorance of qualified plans and Roth IRAs, as you stated in one of your earlier comments. FWIW, I worked for a couple years in the retirement plans department of Wells Fargo (Note: Not that anyone on this board ever would, but NEVER invest in Wells Fargo retirement products) handling individual accounts and small business retirement plans. This was back a while back --- SAR/SEPs had just been phased out – but I don’t think the rules have changed that much based on my occasional spin through Pub 590.
Out of curiosity, it seems like you project a lower tax rate in retirement than today. Given that, have you considered foregoing a Roth investment in favor of all tax deferred accounts? If so, why did you elect to stay with the Roth despite the higher tax liability today? Feel free to reply via message, or point me to another thread if it's already been discussed on this board as this is off topic.