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Home » 401K, Personal Finance Planning, Retirement Planning, Roth 401K

Choosing Between a Traditional 401K and a Roth 401K, Part II: How will my Choice Effect Early Retirement?

Last updated by on January 1, 2016

In a recent post, The Complete Guide to Choosing Between a Traditional 401K and a Roth 401K, we discussed all of the factors that you should consider when choosing the percentage breakdown between the two retirement vehicles. Since then, many have asked me what my personal strategy is. At this time, I have decided to go with 100% in a traditional. Please do your homework before choosing either way.

Reasons why I’m contributing to a traditional 401K vs. a Roth 401K:

  1. Roth vs Traditional 401kMy long-term goal is to retire at an early age, prior to when I would be eligible to start receiving distributions from my 401K (at age 59 and 1/2).
  2. Unless you’re a pro athlete, investment banker, doctor, or lawyer (you get the idea) it’s very hard to retire early unless you are investing a decent amount outside of your retirement accounts and starting at a very early age. Saving on taxes now allows me to start saving more earlier than I normally would.
  3. Every dollar contributed to a traditional 401K is a dollar taken off the top of your taxable income. For instance, if I earned $40,000 this year and I contributed $15,000 to my 401K, my taxable income would be $25,000 ($40,000 – $25,000). Not only would I be taxed on less income, but I could be pushed into a lower tax bracket, and taxed at a lower tax rate on that income.
  4. I will be disciplined enough to invest my tax savings in non-tax-sheltered mutual funds to be applied towards an early retirement.
  5. So long as circumstance allows, I will be maxing out my 401K contributions, which will result in a nest egg larger than I could ever blow in retirement. In other words, I’m not too worried about my tax bracket in retirement.

The Debate: Roth vs. Traditional

So, a colleague at work and I were debating which strategy was better. His personal strategy is to put 100% of his contributions into a Roth 401K so that he will be taxed less in retirement. His strategy works great if your plan includes working until you are 60 years old, putting more of your after-tax income towards long-term investments, don’t have the discipline to invest your extra tax savings, or you are simply not contributing quite as much towards retirement altogether.

I enjoy financial debate because it allows you to see different perspectives and consider alternatives to your current strategies. Really, there was no winner in this debate because our two strategies were completely different and based more on life philosophy than anything else. However, I wanted to take it to the next level and run some numbers to see what kind of financial shape each of the two paths would take you on.

Traditional 401K vs. Roth 401K, Which Results in More Savings?

First, we’ll need to make some arbitrary assumptions for the sake of a fair comparison:

  1. The average annualized rate of return for U.S. stocks was 13.4% from 1926 to 2000. The worst average annual rate of return for U.S. stocks in any 65 consecutive year period has been 8.5%. For this comparison, let’s take the average between the two, and assume both my colleague and I are able to get a 10.95% return on our investments every year in both our retirement and non-retirement investments.
  2. We stay employed at the same company, who kindly matches 50% of our total 401K contributions.
  3. We are both 23.
  4. Our salaries are $40,000 this year.
  5. Our annual salaries, and the IRS’s annual 401K contribution limits and tax bracket income limits all increase at a rate of 5% per year over our career.
  6. I will contribute the amount that I save in taxes each year (over what he is taxed) to a non-sheltered early retirement account.
  7. Additionally, we both contribute 5% of our salaries towards early retirement.
  8. The magic amount for retiring early and living off of our interest until we can begin withdrawing retirement distributions (at age 59 and 1/2) is $1 million in non-tax sheltered money. Once we hit this amount, our salary drops to $0 the following year.
  9. We also stop contibuting to our non-sheltered accounts in the year following retirement and convert our investments to municipal bonds that return 5% per year, and live off the interest.

Here are the results:

To view the results through a Google Docs spreadsheet:

Trad 401K vs. Roth 401K (Google Docs)


  1. I am able to hit the magic retirement amount (column E vs. column H) by age 48, a full 9 years before he does. The extra amount that I was able to invest made a huge difference in allowing my non-retirement savings to grow.
  2. We both have a ridiculous amount of retirement income (over $15,000,000) as a result of the power of compound returns because we saved early, saved much, and saved often. Neither of us will be hurting for cash in retirement. Compound returns are you best friend; save early, save much, and save often and you won’t have to worry about your tax bracket in retirement.
  3. My total retirement amount ends up being about 10% less, despite stopping contributions a hefty 9 years earlier. Saving early allows you to save less later on. Compound returns again? Yes.
  4. My colleague will have much more tax free income in retirement ($11,547,351). Tax free savings have got to be enjoyable.
  5. Either way you cut it, when you have financial discipline, save early, and save often, you win.

Which strategy are you implementing?

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I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Michael says:

    G.E. – it’s great to see this math played out! While I’ve maxed out my traditional 401k; I hadn’t considered the best strategy for early retirement, much less considered the concept of putting $ saved through tax savings into a non-sheltered early retirement fund.

    Between the two options, the early retirement route is personally more attractive to me. My strategy’s a bit different due to an entrepreneurial startup I hope will exceed my salary in within the next 2-3 yrs. If it doesn’t work out I’ll probably adopt a strategy similar to yours. Thanks for sharing your insight!

  • G.E. Miller says:

    Michael – the early retirement strategy makes a lot of sense for those who are contributing significant funds to their 401K to the point where their quality of life will not be effected based on the tax bracket they fall in.

  • JK says:

    You might check your math… Every way I look at it your buddy is beating you mercilessly! Taxes DO matter! None for him, vs 20, 30, 40%+ for you? Let me think…
    I am also a 20-something earner/investor, and I think that you may want to take a fresh look at the Roth option. I have absolutely nothing to sell, I just hope that the next generation of wage earners is more responsible than the previous. I have some thought-provoking stories and ideas for you to read if you are interested. Drop me an email and I will pass them along.

    To Your Wealth,

    John K.

  • Michael says:

    JK, would you mind being more specific about the correction(s) necessary in the math? Yes, G.E.’s strategy incurs more taxes, there’s no debate about that. The benefit G.E. is shooting for is retiring 9 years earlier. Yes, he retires with less money, but in either scenario he retires with far more than enough to be comfortable.

    If your ultimate goal is having as much $ as possible at the moment of your death then there are better strategies out there. If you’d prefer to have access to your $ for more than the last few years of your life, G.E.’s approach makes a lot of sense. Do you disagree?


  • JK says:

    There are many problems with the illustrations/assumptions made on that spreadsheet. Here are the big ones: At age 48, traditional 401k is worth $4,434,526, and Roth 401k is worth $2,956,351, if you take a 30% tax hit on the traditional 401k, it might be worth $3.1 million, while the Roth is still worth $2,956,351, and then the Roth Account Holder has the $1.4 mil in the taxed account, which after 30% is about $980,000, for a total of $3.9 million. Also, he argues that that he will get an annualized 10.95% return on his savings, which may be true, but those gains are taxed annually, taking a 30% bite out of the growth, leaving you with maybe an 7.6% return, but probably lower.

    Another problem is with the starting point of the argument. He states that you can’t retire until your non-qualified money reaches $1 million. Not true. You can retire at age 20 and take distributions from your Roth/Traditional 401k at any age by taking a 72t distribution. More on that here:,,id=103045,00.html

    If you want a good calculator, see this one to compare Roth v. Traditional 401k:

    This is my opinion, based on what I think I know. Note: all of MY assumptions may not be correct, just as I believe some of Mr. Miller’s are flawed.

    But you have it figured out in your head, Michael. You say in your previous post that GE will pay more taxes. If they both make and invest about the same, and one pays more taxes, who will win?

    To take the access to cash argument further, why invest any money in a 401k, Roth or Trad? Why not put it all in investments that allow you to have ready access to it without penalty or oversight by the IRS? Something to consider… I have started putting just the matched amount in my retirement plan, which I’m still not convinced is my best bet.

    I am relatively new to the workforce, and the first year I was eligible, I maxed out my Roth 401k. I have since taken a new job that only offers a SIMPLE, but I am convinced that there are better places to put my money. I have started investing in real estate. I am working on flipping a repo right now. My out of pocket will be about 10-15K, and I already have an offer that will put my profit around 20K, giving me a return of 133-200 percent, in less than 4 months! Can your 401k do that???

    Keep up the good discussion!


  • G.E. Miller says:

    JK –

    I appreciate the dialogue – to have dissenting opinions on finance topics was one of my goals when I started this site.

    Your first point of debate is based on an incorrect understanding of what a traditional 401K is. The misinformation is that you believe gains on a 401K are taxed annually. This is simply not the case. Traditional 401K’s are tax sheltered accounts and are only taxed only upon distribution, withdrawal, or conversions to a Roth IRA. Also, I fully acknowledge that you would have more cash at retirement going with the Roth, but that is not my goal. My goal is to retire early, and I’m willing to sacrifice the extra money in my later years for that privilege.

    In response to your second point, you can certainly retire early and access your cash, however, you cannot do this without penalty, so I would not recommend it to anyone. There is a 10% early withdrawal penalty in addition to regular income tax, as is visible under #1 of the link you provided. Essentially, you might as well put the money into a non retirement account so that you avoid the penalty.

    As to flipping real estate, I’m glad you were able to make a profit, consider yourself very lucky. There are a lot of people out there who have lost a whole lot of money trying to flip properties. I think there needs to be a balance between retirement and non-retirement investment strategies in anyone’s portfolio. Flipping real estate is one way to do it, but it wouldn’t be my recommendation in this market.

  • JK says:

    I feel that I have a better than average understanding of 401k plans, as I instituted one at my previous employer. I am well aware that they are tax-deferred. The tax savings that you invest in a non-qualified plan however, are not tax favored, which will diminish your returns. This will lower your returns and delay your retirement if you insist on having $1 million in your liquid cash account at retirement. What if you could have more money AND retire early? Stick with your buddy’s plan, research the 72t(no penalty for early withdrawal) rule referenced in the link above(hint: read beyond #1), and get the best of both worlds. No tax later on a big number is better than a little tax now on a relatively small number. You’ve done the math, so I don’t have anything to prove to you. It is in black and white right in front of you. You may just need to look at them differently, and with a full understanding of the relevant Internal Revenue Code.

    Good luck!


  • Michael says:

    JK, GE, thanks for the continued discussion. Very interesting. This 72t calculator assists with some of the math –

    Nice to know this option exists. I’ve learned something new with every comment.

  • Phil says:

    An annual return on your 401K of 11 percent annually is unrealistic in the present business climate. Try it with 7 percent for a more realisitic number. A much smaller difference between the two.
    All of you assume the tax rate will stay the same. It won’t. Given the current deficit, try recalculating with a 45 or 55 percent tax rate when you retire. The Roth 401K is cheap insurance against future tax increases that have to come.

  • John W says:

    Interesting thought process. It’s a topic I’ve been thinking about for some time, and I like to see how others approach it.

    Not to burst your bubble, and I’m aware that I’m joining the conversation fairly late, but it appears that you’re ignoring several major issues:
    1) At the ripe old age of 49, you’re replacing your (then current) salary of about $140k with about $50k from your $1 million in muni bonds. Whoops?
    2) It is tempting to use high numbers for the rate of return. You reference a document that gives an average rate of return for a period that is significantly longer than the time period you end up using. As a result, you ignore the larger fluctuations that occur during your period. The Social Security Advisory Board suggests ( using a 7% rate of return for stocks, and 3% for bonds, rather than your 11% and 5%, respectively. Of course, that 3% reduces the money you earn on your $1M from $50k to $30k…
    3) You’ve ignored inflation. If you assume 2.5% annual inflation, which is a little low, historically speaking, your $50k is really only worth about $27k in today’s money. Now, supposedly you could be living on that much, given that you’re starting out by living on about $23k, except that, by age 49, you’re living on about $76k (or $41k in today’s money), after subtracting the retirement money and the extra 5%. Of course, given actual muni returns, it’s quite a bit less.
    4) You know that your investment (“non-tax sheltered acount”) will be taxed, right? At the least, I’d expect that you’d have some dividends that would be taxed; you’d more probably be buying and selling stocks (or your mutual fund manager would do it for you), subjecting yourself to taxes on short- or long-term gains. You’d be better to chop 15-20% off your expected gains in your investment account.
    5) You suggest that you are willing to give up some cheddar in your later years for a little more freedom now. Assume that taxes on the traditional 401(k) are only 20%. Your friend will have $150k more _per year_ at age 60 than you will, assuming that you both spend only 4% of your retirement account per year. That’s $60k per year, inflation adjusted; she’d make 150% more than you make now, every year from age 60 on.
    6) Finally, although you’ll have had 8 or 9 more years of retirement, you’ll have spent them eating ramen noodles and watching cable, not sitting on the beach and drinking mai tais, given the paucity of money you’ll garner from the million dollars (again, thank inflation). Your friend, on the other hand, will have continued her increased earning power, owing to those nice 5% raises you’ve given her, and will have earned $880k outside of the retirement and investment savings. She could take a few nice vacations on the $425k she earned more than you over those 9 years.

  • bubb says:

    You return assumption #1 is way high. The average annual return is not what investments over that time period actually compound at. Using this figure to determine your compounding into the futre will greatly overestimate your results. Although average annual return you cite is 13.4%, money invested during that time period only compounded at the geometric average, which was probably around 10% (just guessing here, but it will definitely be lower). Citing the average annual reutrn is a frequently used tactic by the investment industry and its talking heads to encourage investment in mutual funds, 401k, etc that they make a ton of money on.

  • RN2013 says:

    So how has this turned out for you?
    5 years on should put you at $250K.
    Did you make it?


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