It is assumed that the tax deduction is always invested, which often in reality is not the case. This doesn’t negate the point, it’s just another factor to consider.

At any rate, this discourse has pointed out that the question isn’t necessarily cut and dried – each individual’s circumstances needs to be considered in weighing out the possibilities.

Thanks for the input, Damon – glad to have you involved!

jb

The tables, as laid out, forget about the “Global” Compounding function of interest. (Global defined as total wealth of a client on his balance sheet) The total tax liability in simple addition forgets that there is a net differential that is calculated with interest on the first day. As all financial advisors know, after last year more than ever…if you go 50% down last year and then 50% up the following year you are still not whole. (Remember this point when I point out about making up a 15% deficit in my next argument)

I am not sure I can explain what I mean without complete boredom ensuing.

Let’s just say, outside the benefits and qualification, an investor has a choice between a Roth or Traditional IRA. The money to invest comes from a real net worth and income of the participant. If you invest their qualified money and their taxable investments in concert…then every Roth subscriber ultimately has less taxable money to invest after they pay, instead of deferring. Alternately the investor that goes with the Traditional IRA has the same qualified money, though he saves the deferred taxes in his taxable account as an immediate savings to invest, today.

Savings (Before) IRA Total Wealth (After)
Roth Investor $14000 $4k $13,000
(25% Tax)
Trad. Investor $14000 (Before) $4k $15, 000
(25%)

The Roth Investor loses some taxable savings and net worth today for additional benefits and the maybe he will avoid a bigger bill later…if he makes it to retirement. (I defend against “IF’s” for my clients, not use them for financial conjecture or hypothesis)
The Traditional Investor gets a refund of $1000 to his savings account. that was a tax bill for the Roth Investor. Imagine the compounding effect of an investor adding an additional 15%+ to his portfolio every year especially in their early years.
i.e. I would hate to be the Advisor that has to compete with another, over time, that will always be 15% ahead on January 1st. 15% is a heck of a return differential to catch up to, in just one year. Couple a 15% head start with a 10% market return, in year 1, and the gap widens. This gap, quite possibly, will be more than enough to cover any current and future taxes that may (another word for “IF) occur.

Let me know if you follow this thought. Thanks for subscriber access to your blog it has great information.

On to Damon’s comments: I don’t disagree with what you say about income being lower for a retiree as opposed to a “near retiree” – but the post was geared toward folks at all age levels. With that in mind, it’s not hard to believe that 20, 30, 40 years in the future taxes will be higher for most everyone, versus the aggregate tax deduction over the years.

When you take the other flexibility benefits into account – access to the contributions at any time for any reason and no RMD requirement – coupled with the tax-free growth, the Roth is pretty darned attractive, in my humble opinion.

As Damon indicates, Roth IRA contributions may not be as beneficial later in your working career – but typically at this stage you’re covered by a retirement plan and your income is high enough that you can’t make deductible contributions to a traditional IRA anyhow.

jb

With that being said,
I have yet to experience with any of my clients, an increased tax liability upon retirement. Even my higher net worth clients, in general have less taxable income (in retirement) and automatically are in a lower tax bracket the day they retire.

I have no doubts that taxes will go up over time, especially after the last couple of years with government spending. My concern is that most folks do not have more income in retirement, they have less. (On average a 15% lower bracket on less income even taking into account their RMD’s)

In other words, if my clients had more income in retirement than in their working years….Roth is much better. If they have less and by one or two conventional brackets… I am not sure this theory is correct. (Unless we go to a 55% flat tax in 2030.)

Discuss?

-Damon