CurledMoss wrote: ↑Fri May 03, 2019 7:22 am

This is my first time posting on here. Be gentle

I have been putting my money into a Roth account for the last 3 years but this is really bothering me. If you have $5,500 to invest post-tax every year, would it make more sense to invest in a traditional ($5,500 pre-tax). Then if you are in a 22% tax bracket that would save $1,210 on taxes. So you really only have $4,290 tied up. Then take the tax savings of $1,210 and invest that into a taxable account. Over 30 years that would give you like an additional $123,508 of savings. Thoughts? I'd had to be leaving that much money on the table, assuming I'm in the same tax bracket present and future.

You had it right the first time. At a constant tax bracket, the Roth is a big winner.

Example 1: you put $5,500 in a Roth. Over 30 years, if you earn 6%, it grows to $31,589, all of which is yours.

Example 2: you put $5,500 in a traditional. Over 30 years, if you earn 6%, it grows to $31,589. You or your beneficiaries pay 22% tax, or $6,950, and have $24,640 left. You also have your $1,210 of tax savings. Over 30 years, if you earned the same 6% on it, it would grow to $6,950, and you would be equally well off.

But you won't earn the same 6% on the $1,210 of initial tax savings. That money will be in a taxable account, and the income and gains on it will be taxable each year. So it will grow to something less than $6,950. So if everything else is equal (which isn't always the case), the Roth will be preferable.

The Roth has other advantages, which I discuss in my articles on this in the April 2013,

https://www.kkwc.com/wp-content/uploads ... r_ATRA.pdf, and June 2018,

https://www.kkwc.com/wp-content/uploads ... ations.pdf, issues of Trusts & Estates.

The articles focus on Roth conversions, but the analysis is the same for contributions.

Of course, there are countervailing factors and situations where the traditional is preferable for some or all of the IRA.