I used to do a Roth 401k at my old company, but the post-tax contribution hurt. Then a friend of mine told me that Roth accounts aren't as great as they're made out to be because you're contributing less money (and thus buying fewer shares) each pay period. So when you go to retire, yeah you'll have to pay tax, but you'll have way more shares to cash out.
Any truth to this?
Short version: if you're not making much money right now, favor the Roth. If you're making good money now and getting into some higher marginal tax buckets, favor the pre-tax.
Longer version: Eh, I've been through this a dozen times in this thread, I think. But yes, you'll have less money to invest if you do a Roth. All things held equal, if you have $10000 to spare out of your
gross pay, a pre-tax contribution puts the whole thing in there. If you do it after tax into a Roth plan, how much will you have? Well, it depends what your top marginal rate** happens to be. If you're in the 25% bracket at the top of your income, you'll obviously have $7500. If you're in the 28% bracket, you'll have just $7200. And there are higher brackets you could get into, though these prior brackets are more likely for someone in the middle class.
So you could have $10000 growing and eventually have to pay tax, or $7200/$7500 growing and never pay tax. Here's where the difference comes in. When you pay tax on the $10,000 after growth,
it will not all be taxed at the top marginal rate. It's just like regular earnings: You'll have deductions that reduce your taxable income. Then that income will be taxed at (based on current rates) 10% up to a given amount, then 15% up to a higher amount, then 25% up to yet another higher amount, etc. Your
effective tax rate will be lower than whatever your top applicable marginal rate happens to be. Last year, my effective tax rate was in the teens. My top marginal rate was 28%. Tell me, why on earth would I favor paying 28% to favor a Roth when my effective rate is lower than that? The only reason I would is if I expect my effective rate to go up -- considerably -- during retirement. Do you have that expectation? Mine would have to go up 50%. (Spoiler alert: I do not expect that to happen, though my own outlook is still flexible.)
So ask yourself how much money you're making, how much taxes you're paying, what you expect to earn in the future, what you expect to make in retirement, what you expect taxes to look like in those years, and decide which course of action is right for you. Me? I favor pre-tax contributions before* Roth (but am fortunate enough to be able to do both, since 401K and IRA plans can coexist). You might come away with a different outlook, and your own outlook could change based on your earnings growth.
Edit: *Mis-typed previously, had after, meant before.
**It's best to understand that every last dollar you invest in a retirement account comes off the top of your income. If you invest it pre-tax, you're reducing your taxable income, and that's coming off the top. If you're investing it after tax, you're paying the maximum tax on that dollar beforehand. That's why you consider that you're investable amount is reduced by your top applicable rate when you choose Roth, because that's the rate you're paying (not avoiding) on those dollars.
Final edit here: If you're fortunate enough to reach a level where you can max out your 401K and a Roth IRA to IRS limits, then your calculus might change. The pre-tax route is going to give you more money you could invest additionally. The after tax route will not afford you those same dollars. The externally invested dollars could then grow, you would pay taxes at capital gains rates on long term gains, and you might have to think a bit more on where it makes sense to perhaps divide your money into pre-tax and after-tax contributions. But these are advanced exercises. If you're somewhere below those maximums, then it's a bit simpler, in my opinion.
