I'm posting this separate from my last post because it is a completely different set of ideas.
While I benefit greatly from the 401k system, both personally(I max it out) and professionally(I work in investment management), I can see the benefit of switching the employee contributions to a Roth style system. The employer side should stay pre-tax, that is the incentive for the employer to do it. A Roth contribution doesn't benefit your employer, it only benefits you.
If we were starting from scratch, as opposed to editing an old entrenched tax system, we wouldn't include many of the things that are already in place. The USA(Universal Savings accounts) that have been proposed in the past make a lot of sense. Something that works like a Roth without the penalties and complex rules is much more simplified than what we have now. Why do we have a dozen different retirement plans, each with their own rules, and sometimes very very complicated conflicting rules?
Example: A Roth IRA has a 5 year limit before you can withdrawal earnings, and Roth 401ks also have a 5 year limit before you can withdrawal earnings. If you put $1 in a Roth IRA that starts your 5 year clock. If you put $18k/yr for 40 years into a Roth 401k, and then roll it into a brand new Roth IRA(never had one before) your 5 year clock has to restart. How does that make sense? It doesn't, but that is because adding the Roth IRA and the Roth 401k were two separate edits to the tax code and no one considered how they interact.
Many of us benefit from the 401k now, but if we were creating a new tax system from scratch would we include it? History lesson, 401ks were never expected to be main stream, and that is why their name is so odd. SEPs, SIMPLEs, Roth IRA, IRAs, Pensions, all have simple easy to remember names. 401ks are named after the section of the tax code, describing rules for profit sharing plans, that was used to create the plans. Section 401 - k.
Pre-tax contributions help you more and more the more income you have. They do benefit the upper middle class and the rich more than the lower middle class and the poor. If you are in the 10 or 15% bracket then a Roth is probably better. Once you get into the 33% bracket that is a harder argument. Pre-tax contributions also let you move your AGI which impacts a whole host of other things, effectively allowing people to manipulate the tax system to their own benefit. Example: I highly doubt that when they put the income limits for student loan deductibility in the 60k range they thought, "We don't want single people making 80k a year to benefit from this, UNLESS they are also contributing 18k/yr to their 401k and $3400/yr to their HSA. Then they most certainly can deduct student loan interest."
My point: while I benefit greatly from the current system, if I was creating a system from scratch this wouldn't be it. I don't know if the current proposals in Congress are a step in the right direction, because they haven't revealed them. These are just my thoughts on a better system.
Extra thoughts: If you are maxing out your retirement account and you have a long time horizon, then Roth contributions are normally better "regardless" of income. The reason is that 18k in a Roth is effectively more money saved than 18k in a Trad. Comparing 10k in Roth to 13.3k in Trad turns into a fair mathematical comparison, and if your tax rate stays the same throughout life you will get similar answers, but if your tax rate falls at retirement the trad will look better and vice versa. However, if the accounts are maxed out the math gets complicated. 18k in a Roth VS 18k in a Trad+$5940 in taxable. Over the long term that taxable account drags down the overall after-tax performance. In 5 years it probably won't make a big difference. Over 40 years it's a different story and it makes the Roth look better even in extremes, like 33% bracket now and 15% in retirement. (This is just the math comparing Trad VS Roth. It doesn't take into account how pre-tax contributions affect AGI... which is another example of how complex our tax code is.)
The reason I bring that up, switching to USAs(a Roth w/o early w/d penalties) could help most Mustachians. Yes, we would lose our short term tax brakes, but we could benefit in the long term, and if the USAs don't have early withdrawal penalties then that removes the tax problems when retiring before 59 1/2. No more need for complex Roth conversion ladders.
