ladydoughgirl, it would all depend on if you getting matching contributions. i’d still contribute to 401k as normal with half of the pay raise if you are getting matching contributions. use the other half to pay down credit card debt. you want to have a big picture even though you are $20k in debt. if you haven’t funded an emergency fund, then i would either go 1/3of raise into each (i.e. e-fund, cc debt, and 401k), or you could do half of raise into e-fund until fully funded, and half towards cc debt. after e-fund funded transfer that towards your 401k. focus on the bigger financial picture rather than just saving or just paying off debt. You need to do both, which you are.

He is assuming that you have little or no deductions to your income. While I may be in the 25% tax bracket I really paid under 5% last year. Once I’m older a lot of the deductions I enjoy now would not be available to me so I would be paying the full tax rate on any money I receive.

I always assumed that maximising your contributions meant putting in as much as legally allowed. In the UK, that would be difficult to do as you can essentially contribute your entire earning to similar schemes.

Roth IRA – Earn 5K, pay 20% tax, contribute 4K. 10 years of 10% growth. 4 * (1.10 ^ 10) = 10374.97

401K – Earn 5k. 10 Years of 10% growth. 5K * (1.10 ^ 10) = 12968.71. Pay 20% Tax = 10374.97

The numbers match up exactly. Multiplication is commutative. You can apply the 20% tax before contribution or after withdrawal. The order does not matter.

Also, an investor’s average rate of return is not 10%. It’s closer to 8%, with 6% being a safer bet after inflation. The total market may have an average of 10% growth, but the market is not the same as the average investor and the average investor can’t expect to track the entire stock market entirely.

the tax rate in retirement has nothing to do with an unmatched 401K being better. yes the money goes in pre-tax but you’re going to pay taxes on that money and any interest gains when you take it out. With a roth you’ll pay taxes upfront on contributions but all the interest you made for 40 years is tax free.

ladydough: my advice is if you’re able to get the matching employer donation to your 401k, assuming their is one, to do that. And then use the extra money from the raise to pay down your credit card debt. Just make sure you try out one of those 0% balance transfer offers.

A simple example. If you had $100 to invest, would you rather I take $30 (30%) today, leaving you with $70 to invest, or would you rather I take 30% when you’re done investing? If over the lifetime of the investment it appreciated 300%, in the first scenario you’re left with $210. In the second scenario you’re left with $270!

Roth IRAs do have their advantages, but they revolve around the belief that you’ll be in a higher tax bracket when you retire than when you’re working. This may be the case early on in one’s career, but very likely not the case later.

Good article, but I have two criticisms. First, I want to know which company Joe works for. I would love to get a 6% raise (or 5%, or 4%) for each year I work. The last year Joe works he gets a $17,466 pay raise.

Where I work, the pay raise is based on dollars, not percentages. That is because I have a pool of dollars to give out, not a pool of percentages. I may give someone who earns $100K a 3% pay raise for being an average worker which amounts to $3,000. I may give another person a 6% pay raise for (you guessed it) $3,000 since they are paid $50,000.

Second, you need to take into account inflation, which is running 3% ~ 4% on average (if you believe the government … but that is a story unto itself).

Still, it is a good article and its advice is one that I have been following since Joe’s age.