Apparently, it’s not even close.
NerdWallet’s Arielle O’Shea writes up the results of their latest research and finds savers who make maximum annual contributions to an individual retirement account will net more after-tax retirement dollars if they use a Roth IRA instead of a traditional IRA.
In some cases, she adds, it could be well over $100,000.
“Conventional wisdom on IRAs suggests that a Roth IRA favors savers who will occupy a higher income tax bracket in retirement than in their working years, while a traditional IRA favors those who occupy a lower bracket in retirement,” O’Shea writes. “But the NerdWallet study reveals that at the maximum contribution level, Roth IRAs beat traditional IRAs far more often than that wisdom suggests.”
The margin of victory for the Roth is significant, she claims.
“The study found several scenarios in which the take-home value of a Roth IRA at retirement is more than $100,000 higher than that of a traditional IRA that received the same contributions ($5,500 each year) over a 30-year investment period. In one tax scenario, the Roth IRA adds more than $180,000 in after-tax retirement savings.”
[Update: For clarification purposes, NerdWallet has updated the language surrounding the key findings, as well as taken them down from four points to three. This new copy makes it clear that the comparison of maximum contributions was based on not investing any of the tax savings from the Traditional IRA contributions.]
Three key findings include:
- Maximum contributions always favor the Roth if traditional IRA tax savings aren’t invested separately.The analysis finds no tax scenarios in which the value of a traditional IRA at retirement beats the value of a Roth IRA, assuming both accounts receive maximum contributions and the traditional IRA tax savings aren’t invested in a separate investment vehicle.
- Investors who pay the highest tax rates in retirement stand to benefit (or lose) the most. The additional value amassed in Roth IRAs is most significant for investors facing the highest effective income tax rates at retirement; they stand to net an additional $184,364 over a 30-year period.
- Investing tax savings can help the traditional IRA. If you invest 100% of the tax savings from each annual traditional IRA contribution, most tax scenarios still favor the Roth IRA. It is worth noting, however, that savers with very high tax rates during their careers and very low rates in retirement can also come out significantly ahead with a traditional IRA if they reinvest their tax savings — see the tables below for details.
According to 2016 data from the Investment Company Institute, 25 percent of U.S. households have a traditional IRA, while only 17 percent have a Roth.
“The bottom line,” O’Shea concludes. “Savers who make the maximum annual contribution to an IRA will always end up with more take-home cash at retirement if they choose a Roth IRA over a traditional IRA, assuming they don’t invest their traditional IRA tax savings in a separate brokerage account every year.”