Johnny makes $100,000 a year. He has decided to put $6,667 in to his 401K each year. This would mean Johnny saves 6.67% for retirement.
Johnny’s friend, Deborah doesn’t have a 401k plan at her work. Deborah also makes $100,000 a year. Deborah decides she will put money in to a Roth IRA to build up her retirement nest egg. She throws $5,000 in to her Roth. Deborah is saving 5% of her income for retirement.
Now on to the discussion…
Johnny’s $6,667 pre-tax contribution is the EXACT same as Deborah’s $5,000 post tax contribution (assuming they both are in 25% tax bracket). But would we say Johnny is investing 6.67% and Deborah only 5%?
This is something I never thought about before, but today I woke up and was like “WHOA!!!”. Have you ever considered calculating the PRE TAX percentage of your POST TAX contribution?