Here is a hypothetical question that closely resembles my dilemma this year. I would appreciate any advice.

Assume that I will receive a year-end $4,000 bonus from my employer and I have already maxed out any matching my company will do on it's 401k so any money I invest will be 100% of my own funds.

My first option would be to put the entire $4,000 in my 401k deferring all federal (27%) and state (3% IL) income taxes. Now let's fast forward 30 years on this one transaction and say that it has increased by tenfold and is now worth $40,000 and I am taking a distribution on this money. I would try and keep my distributions in the 15% tax bracket and the state of IL does not tax retirement income so my net distribution on this money would be $34,000 ($40,000 less 15% federal taxes = $34,000).

My second option would be to take the entire bonus, which would be taxed at the 27% federal and 3% state income tax rates, leaving a net bonus of $2,800 which I would put into a Roth IRA. Again, we will assume this initial transaction has increased by tenfold over the same amount of time and is now worth $28,800. Since the Roth IRA requires no taxes at the time of distribution I would get the full $28,000.

According to my calculations the 401k would have outperformed the Roth IRA $34,000 to 28,000. Even if my 401k distribution would be taxed at the 27% rate instead of the 15% rate I still show that the 401k would have outperformed the Roth $29,200 to 28,000 due to the state of IL not requiring retirement distributions to be taxed.

Is my math correct? Everyone I talk to tells me to maximize my company matching on my 401k then put money into a Roth IRA but I think my calculations would prove otherwise and that I should just keep putting any extra money into my 401k. Any help on this decision would be appreciated. Thanks in advance.

Sam