While not wrong, you are looking at them in a vacuum, which isn't really appropriate for much of this crowd. If you have a 401k at work, contributions for IRAs start phasing out at lower income than Roth IRAs (In fact Roth IRAs have no income limits if you are willing to do a backdoor contribution). Its often not "Roth vs Traditional", but rather "Roth vs normal taxed account"

> If you have a 401k at work, contributions for IRAs start phasing out at lower income than Roth IRAs

Can you link to a source for this? I was not under the impression that IRA contribution income limits were impacted by whether or not you also have a 401k at work.

Wikipedia has the tables listed: https://en.wikipedia.org/wiki/Traditional_IRA#Income_limits

Note that really its not a real contribution limitation, just a phase out of the contributions being tax deductible, which is most of the point of using an IRA

I still don't see what that has to do with additionally having a 401k, though. Where is the stipulation that having a 401k affects your phase-out for Traditional IRA deductions?

From that wikipedia article: "If a taxpayer's household is covered by one or more employer-sponsored retirement plans, then the deductibility of traditional IRA contributions are phased out as specified income levels are reached (Modified Adjusted Gross Income is between)."

There is no deduction phase out if you don't have a 401k available through work, but that is not the common case

Gains in Roth IRAs are also tax free in addition to withdrawals. This means that if you have 30 or more years until retirement, you enjoy a 30 year growth at 8% compounded tax free (based on The numbers in the article). This is why if you're young and qualify for a Roth IRA it's almost always the correct choice.

That doesn't matter. Roth vs. Traditional is purely a bet on current vs. future tax rates.

    P = principal, 
    T_0 = current tax rate, 
    T_t = Tax rate at retirement (t years in the future). 
    r = rate of return between time 0 and t

    Roth IRA: (P * (1-T_0)) * (1+r)^t
    Traditional IRA: (P * (1+r)^t) * (1-T_t)

Which are identical save for the tax rates.

It's not quite that simple. There is other relevant weirdness in the tax code. Roths are not subject to required minimum distributions and don't count as income during retirement. That can be very useful because a lot of provisions of the tax code phase out as your income rises.

Of course, Congress could also fix that oversight by the time you make it to retirement ...

Unless I am mistaken, your investments in either IRA grow tax free. In the case of the traditional IRA, you are taxed when you withdraw the money. In the case of the Roth IRA, you are not. It is more a question of whether the returns on your investments are going to be significantly greater than your initial contributions. I certainly hope so, if you are compounding returns over decades. In that case, with a Roth IRA, you can create a lot of investment income tax free that would eventually be taxed in a traditional IRA. That, in a nutshell, is why I would prefer a Roth IRA. As a point of fact, I am not a "US person," so it is moot for me.

Your math is wrong, even though it feels correct. The only difference is tax rate, because you're multiplying by taxes and order doesn't matter. You pay less tax initially but have lower growth. Assuming 1%/year, (Taxes * principal) * 1.01^n, or Taxes * (principal * 1.01^n)

I think (and correct me if I'm wrong) the advantage of a Roth is that you're paying the tax on a much smaller amount at entry than you are at exit. For example:

- I deposit $4000 into my Roth IRA this year.

- This was post-tax income on $6000.

- In 40 years, It grows to $20000.

- My total tax burden is still $2000.

You have to think about it in terms of what you get out.

Let's say that you deposit $4,000. You've paid $2,000 in tax or 1/3rd of your money. That grows to $20,000 (5 * 4,000) which you can put into your pocket.

Let's say that you deposit the entire $6,000 into a traditional IRA. That grows (at the same rate) to $30,000. You take that money out and owe the government 1/3rd of that money so $10,000 goes to the government and you pocket $20,000 - the same amount.

So, with one exception, they come out the same assuming the same tax rate at both times. You're paying more tax to the government, but the amount in your pocket is the same.

The one exception is that the cap is the same for both. So, if the cap is $5,500 and you put $5,500 into both, you'll get more out of the Roth. 5,500 * 5 = 27,500 in both cases, but in the case of the traditional, you'll still owe taxes. So, in effect, the Roth has a higher real contribution cap (even though the caps are nominally the same).

Because the government didn't set the Roth contribution cap at 2/3rds of the traditional cap, you can effectively contribute more.

This is why any analysis of Roth vs Tradiational is inherently flawed.

The maximum contribution amount for both Roth and Tradional accounts is $5,500.

If you're condidering funding a Roth with $5,500, that means that you committing $8,209 of pretax income (if your marginal rate is 33%) to the cause.

If you chose to go the Tradiational route with that $8,209, you'll put $5,500 in your Tradational account and have $2,709 of pretax earnings left over. Once you pay your 33% marginal tax on that, you'll have $1,815 left over to put into a taxable account.

So the real question is Would I rather have: $5,500 in a Roth IRA or $5,500 in a traditional IRA AND $1,815 in a taxable account.

At first glace the second option seems better, but this quickly evaporates when your time horizion is many decades in the future. The $1,815 you invested in the taxable account will see a slightly lower compound growth rate (as you have to liquidate a small fraction each year to pay the dividend/capital gains taxes that year). Even if the tax drag on your growth is just 40 basis points anually, that means over a 40 year horizon identically invested funds in the taxable account will be worth 15% less than in a tax-sheltered account.

For any reasonablly long time horizon, the extra tax sheltering of the ROTH is more advantagous than the higher nominal balance in the tradional&taxable scenario.