In that example, traditional makes more sense up to the point at which the traditional balance would be $500K at retirement.wrongfunds wrote: ↑Sat May 19, 2018 9:24 pmConceptually, to understand what I am asking, assume single 20% tax bracket after having first 20K exempt from taxes i.e. all income over 20K is taxed at 20%. How would current analysis then change? Everybody would be in the same bracket trivially. I think if you run that mental exercise, it will be clear that one can not make decisions just on the bracket but the actual amounts are needed for that analysis.
Under that conceptual scenario, for non-Roth, the entire tax deferred will always be funded at 20% assuming one has after tax earnings of at least $20K.
Suppose it had grown to $1M. Taking 4% out i.e. $40K out every year during 25 year retirement.
How are the taxes paid on the $1M coming out? Half of the money will NEVER be taxed!
Yes, a trick question and yes completely hypothetical and no relation to the reality HOWEVER the fundamental point that identical incoming and outgoing marginal tax rate could still mean one is better than other AND as long US tax system keeps some base income as untaxed, in most of the cases, TIRA makes more sense.
Beyond that, if the pre-tax amount needed to fund a Roth contribution is less than the IRS maximum for a traditional contribution, traditional and Roth are equivalent.
If, however, the pre-tax amount needed to fund a Roth contribution is more than the IRS maximum for a traditional contribution, Roth is better.
See Traditional versus Roth - Bogleheads, in particular the parts about "commutative property of multiplication" and "Maxing out your retirement accounts".