Using round numbers, let's assume I have $5,000 (pre-tax) to invest annually in an account that earns 10% per year.
In a Roth IRA scenario, this $5,000 would be reduced to $3,750 if we assume a (nice and round) 25% tax rate. For the Traditional IRA, the full $5,000 would be invested.
Now, if we fast forward 40 years, the Roth IRA account will hold roughly $1.6M whereas the traditional IRA will hold closer to $2.2M. This makes sense, as the Traditional IRA account had a larger basis on which to grow annually. However, if we assume that the $2.2M is taxed as the same 25% rate that the Roth money was taxed going in, then we end up with the same $1.6M that is present in the Roth account.
That being the case, is the sole advantage of the Roth account that you 'lock in' your tax rate? In other words, is a Roth IRA play simply a hedge against higher income taxes in the future? Or is there something I'm missing in my analysis?