Roth Versus Traditional IRA: Who Wins EVERY Time?

In some cases, the difference is well over $100,000

Roth IRA, Roth 401k, retirementBut what about Roth 401ks?

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.”

6 Comments on "Roth Versus Traditional IRA: Who Wins EVERY Time?"

  1. Of course the Roth will beat the traditional every time if you are comparing the full limit contribution to each. But what isn’t factored into this is that the $5,500 Roth contribution cost you $5,500. While the traditional cost you much less. I’m not arguing in favor of one over the other. Just pointing out the obvious which makes this a much less useful study.

  2. What a stupid comparison. Is Suze orman using a pen name?

  3. Would need to see the math to believe it.

  4. It’s quite shocking to me that Arielle O’Shea would use such absolutes as one type of IRA “always favor” over another IRA. I’ve run many Excel spreadsheets on IRA vs. Roth and the “winner” mostly depends on tax rates pre-retirement vs. retirement. Because of that dependency, there isn’t a clear winner.

  5. Wow, Talk about Financial Illiteracy, Ms. O’Shea appears to be the poster child! Of course if you ignore the tax savings of ANY pre-tax vs post-tax savings the post tax will win. But that is NOT reality. First it depends on the contribution period tax bracket and your retirement tax bracket! I’ve been offering pre-tax retirement plans (403b) for 38 years. Added Roth when it came along, but rarely use it, in my years prior I did taxes, and to this day, I have ONLY had 1 client that has or will retire into a higher tax bracket, which is the only case where Roth’s benefits outweigh traditional. You should be seriously embarrassed to print this drivel.

  6. This analysis is 100% completely incorrect. There is ABSOLUTELY no difference in the two strategies unless the tax rates are different pre and post retirement. See my article with proof at http://blog.credit.com/2016/05/the-traditional-401k-or-the-roth-401k-which-should-you-choose-145281/

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