Roth 401K vs. Regular 401K

Recently I've been thinking about my 401K options at work. I have the option of either investing in a Roth 401K (pay taxes now on the invested amount, but all the gains are tax-free when taken out) or the Regular 401K (tax-free now, but you'll pay the taxes at your tax bracket when the money is dispersed).

As a slight detour, my company doesn't match your contribution, so I did a quick back of the envelope calculation to see if it is worth investing in a 401K at all. Let's say you're in the 35% tax bracket and can invest $20,000 a year into your 401K (I know it is only $15,500 for 2007, but this is just a quick calculation) and are expecting an 8% rate of return. Over the course of 20 years you'll end up with $1,008,458 (a cool million) in your 401K. When you take it out you'll have $655,498 after takes (let's go with 35% even though it might be lower in retirement).

Ok, now what if you forgo the 401K. Each year you'll have $13,000 to invest after taxes (35% of $20,000). After 20 years at 8% per year you'll end up with$655,498. Assuming you're investing in stocks and the 15% capital gains tax is still around, you'll end up with $598,173.

So over 20 years you make $57,000 more by using the taxed deferred nature of the 401K. Not bad!

Going back to the discussion at hand, is the Roth 401K better? Since a company can only match into the Regular 401K, you should certainly contribute to the regular 401K to get that matching. Free money and all.

I read an interesting article about the entire subject: http://scolaro.com/McGoughMemo2006.pdf
He makes some very interesting points, especially about the possibility that the laws might change as they did for Social Security. Based upon his calculations it is better to invest in the Roth 401K (if you're in the higher tax bracket)...his final point being it is risky since who knows what the government will do.

Right now I'm still only investing in the regular 401K, but I'm seriously thinking about switching over to the Roth 401K.

P.S. The fund choices I have at my company are incredible. You have the standard index funds (all low cost) plus some interesting alternative investments: 4 hedge funds, 5 international funds (Emerging Markets, Global), 1 REIT Fund, and 1 Global Bond Fund.