A Special Trick to Increase Cash Flow
Mr. Money Mustache says:
There really is no suffering here, in this highly frugal life. Just a lot of rewarding work and effort and accomplishment.
I am one of the lucky American’s that gets free money from my employer just for saving money for retirement! Whoever invented this system is a genius. Additionally the Company I work for gives me the option of paying taxes on those retirement savings now or in the future. I have the choice between a traditional 401(k) and a Roth 401(k).
For those of you who are unaware a Roth 401(k) allows me to save money into a 401(k) account after I pay my taxes. Traditionally people are able to save into a 401(k) before paying taxes. Under the traditional plan you are forced to pay taxes when you withdraw that money in retirement. For me that is over 30 years away. Under the Roth plan any qualified distributions in retirement are made tax free because you paid taxes on that money before you put it into the account.
I decided to go with the Roth option when I started my 401(k) because I am currently in the 25% federal tax bracket. While it is impossible to guess what the tax rates will be in 30 years I am absolutely convinced that taxes will never be as low as they are right now. Tax rates are generally at the lowest level they have been in the past few decades. However, the United States has a massive debt that sooner or later is going to have to be paid back and in the coming years millions of baby boomers will be retiring with little to no savings and ever rising health care costs. The burden will fall to the people still working to pick up this tab, that includes me. I am happy to pay the 25% now and avoid the coming higher rates.