Traditional IRA vs. Roth IRA: What’s Best? Pt. 2—The Details

My March 28 blog— Traditional IRA vs. Roth IRA: What’s Best?— compared the benefits, particularly on taxes, of a traditional IRA to a Roth IRA. Judged by its heavy traffic on ThinkAdvisor, this subject is of great interest in the advisor community, so we’ll continue the discussion and address some reader questions. 

A Brief Recap

After reading the comments from readers, I thought a brief recap and additional information might be beneficial.

My conclusion in the original blog was this:

A shorter contribution period favors the traditional IRA. Higher future tax rates favor the Roth IRA. Since the tax benefits of the traditional IRA are realized during the contribution period and the Roth’s tax benefit is realized during the withdrawal period, relative tax rates for both periods are a critical element in this decision.Here is a list of key assumptions I modified to analyze this decision.

And here’s more about my assumptions:

• Amount of annual contributions
• Amount of annual withdrawals
• Number of years for contributions
• Number of years for withdrawals
• Federal and state income tax rates during the contribution period
• Federal and state income tax rates during the withdrawal period
• Average annual return

The contribution assumption posed the greatest challenge.

For example, I ignored the annual IRA contribution limit and assumed $10,000 per year with one caveat. What caveat? If I assumed a $10,000 annual contribution to each, there would be an unfair advantage to the Roth.