Roth vs Traditional IRA

Question

I plugged my age, income, assumed savings amount, current tax rate, and expected retirement tax rate, etc, etc into these two calculators:

http://www.bankrate.com/calculators/retirement/traditional-ira-plan-calculator.aspx http://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx

The (Traditional) IRA After Taxes value is 6.3% higher than the (Roth) Taxable Savings amount. (Both had an equal gross amount.)

Does that mean I should put my money in a tIRA instead of a Roth?

EDIT: assumed ROR: 6%, current tax rate: 25%, retirement tax rate: 15%, married, have an employer retirement plan.

Answer 1

Using the default values for age and retirement and only making the changes you specified in the question.

assumed ROR: 6%, current tax rate: 25%, retirement tax rate: 15%, married, have an employer retirement plan.

The results from the two calculators are:

Traditional IRA:

631,341 IRA before taxes 536,640 IRA after taxes.

Roth IRA: 631,341 Roth IRA 450,207 Taxable Savings

where:

Total taxable savings The total amount you would have accumulated by retirement in a taxable savings account.

your question:

The (Traditional) IRA After Taxes value is 6.3% higher than the (Roth) Taxable Savings amount. (Both had an equal gross amount.)

Does that mean I should put my money in a tIRA instead of a Roth?

My percentages don't match your percentages because you didn't specify the numbers you used.

In any case the 450K number shows you what you would have if the money was not invested in an IRA or 401K. To decide between a Roth and a traditional IRA ignore the taxable savings number, that only shows what happens if you decide not not use a retirement account.

Answer 2

The different things in each calculator are showing you a bunch of different things.

In the "Roth IRA calculator", it is comparing what you would have in the end after contributing and withdrawing from a Roth IRA, with what you would have in the end with a taxable account (i.e. an investment outside of any IRAs).

In the "Traditional IRA calculator", the "IRA after taxes" shows you what you would have in the end after contributing and withdrawing from a pre-tax Traditional IRA. The "IRA before taxes" simply shows the same amount before you pay the taxes on withdrawal, which is not a useful number.

So if you want to compare Roth IRA vs. Traditional IRA, you want to compare the "Roth IRA" from the Roth IRA Calculator and the "IRA after taxes" from the Traditional IRA calculator, but there are some things you need to be aware of to make a fair comparison, because if you just plug in the same numbers you are going to get a very unfair comparison (it will look like Roth IRA is a lot "better" even though it's not). The Roth IRA contribution is after-tax, whereas a (pre-tax) Traditional IRA contribution is pre-tax, and an after-tax dollar is much more than a pre-tax dollar, so if you put in the same nominal contribution amount, you are actually contributing much "more" from your wallet in the Roth IRA case.

To make a fair comparison, you would need to start with the same pre-tax amount, and put in a Roth IRA contribution amount that corresponds to the equivalent amount after taxes. So for example, a $5000 pre-tax amount with 25% taxes is equivalent to $5000 * 0.75 = $3750, so you would put in $5000 for Traditional IRA contribution vs. $3750 for Roth IRA contribution. Note that if you have the same flat tax rate at contribution and at withdrawal, (pre-tax) Traditional IRA and Roth IRA are exactly the same, and you can see this by putting in 25% for the "Retirement tax rate" in the Traditional IRA calculator (we already assumed 25% tax rate for Roth IRA when calculating the contribution). You will see that Traditional IRA would be better in a lower retirement tax rate (e.g. 15%), whereas Roth IRA would be higher in a higher retirement tax rate.

Answer 3

Online retirement calculators are mostly if not entirely worthless. I would not trust them as far as I could throw...well, something really heavy.

The Roth vs Traditional IRA is an interesting subject though, with IMO no clear-cut answer, though Roth seems to be the trendy pick these days. Personally I'm still trying to figure out how tax rates are established for each (searching on the internet drew surprisingly few clues). I don't think Roth is always or necessarily "the" way to go.