Reply to Reduce Retirement Contribution?

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Reply to "Reduce Retirement Contribution?"

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[quote=Anonymous][quote=Anonymous][quote=Anonymous]if you can manage not to do it, don't.  You'll lose the tax benefit on those $, which is a sure ~25% return on your money.  I would try to squeeze your budget in other ways.  Keep track of every expense (YNAB or mint) and find ways to trim.  Try to keep at least 3 months of an emergency fund.  Good luck, it gets easier. [/quote]

Is this really true?  Maybe someone can explain it to me.  You have to pay full taxes on 401k distributions when you retire, right?  So all you are doing is *hoping* that the tax rate will be lower in retirement than it is now.

I must be missing something, so if someone could fill me in, I would appreciate it.[/quote]

The reason you make much more money by paying the taxes at retirement is that you get compound interest on the deferred tax payment during your working years. Even if your taxes will theoetically be higher at retirement, you'll still probably come out way ahead by having the deferred tax payment. (This is one reason why it seems like people on this board are a bit too high on Roth IRAs, IMO).

(If your point is just that PP was not technically correct in characterizing this as "a sure ~25% return on your money," you are correct. The "return" is not the money you don't pay in taxes, it is the compound interest generated by the delayed tax payment.)[/quote]

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