In response to some questions that have come up recently, I'm proposing a few updates to the Traditional versus Roth wiki page.
Current page: Traditional versus Roth
Proposed page: User:Fyre4ce/Traditional versus Roth
I don't consider any one change to be major, although when taken in total this could be considered a significant update. Changes and rationale are below, roughly in decreasing order of significance.
- Moved common cases to the top. In my opinion, the top section of the page, "General guidelines", should include a list of common cases where traditional and Roth contributions are preferred. This will provide maximum bang-for-buck, right at the top of the page, for readers who can't or won't wade into the more complex math further down. The examples I included cover the cases of the majority of readers, so these readers can find their closest matching case and be done. The current page has a similar, but shorter, list, much further down ("Qualitative considerations"); I eliminated this section, as it's merged into General guidelines.
I also deleted a piece of content in General guidelines: "If one does not believe a reasonable estimate is possible (see estimating future marginal tax rate for suggestions), consider *Using 100% traditional because, for most people, traditional will be better, or *Using 50% traditional and 50% Roth because then you can't be more than 50% wrong". It's not that 100% T or 50/50 are bad suggestions, but this advice has some serious problems. First, it doesn't offer any way to decide between the two offered options. If this advice is to remain, we either need to (a) offer criteria for readers to choose between the two options, or (b) just offer the one option that will be the best for people on-average. But I deleted it entirely, because while I understand the desire to provide a "if you can't make any estimate at all, do X" suggestion, it doesn't really improve the page. The suggestion is hardly better than choosing randomly, so just remove the content and let readers choose randomly on their own if they can't make sense of anything. They won't be any better off with the suggestion that's there, and we might as well use that high-value space at the top of the page to help readers who can at least match their situation to one of the typical cases.
- Cleaned up the "Future marginal rate" section. The current page mentions that future contributions affect future tax rates ("When estimating retirement income, note the following possibilities: Predict high taxable retirement income > contribute to Roth > get low taxable.....") but it doesn't say what to do with that information. My updates give a more consistent method that will be easier for first-time readers to follow, where you assume a certain pattern of future contributions, then check that pattern to see if it's a correct one. I also added an explicit step to check wither you're affected by the SS taxation spike, which is a good idea - many investors are, or will be.
More of a problem, the current page as-written recommends always excluding future contributions from analysis, which is not a good idea and will give inaccurate results in many cases. I understand not counting your chickens before they hatch, but in some situations (eg. having a very secure job) it would be crazy not to factor in future pre-tax contributions as a baseline. It's been argued assuming no future contributions is "simpler", but I disagree. By the time you're using Future Value functions to estimate future balances, putting a non-zero value in the payment field doesn't really make it any less simple, but it does make it much more accurate. Actually, using a FV function with 0 payments is a bit misleading, you might as well use Vo*(1+r)^t instead.
I also added sub-section headers helps organize a complex and important part of the page, and some commentary about why traditional tends to be the right choice under "normal" conditions.
- Removed detail from Calculations section. The current page includes significant detail as "More complicated situations", but I replaced this with simple links to lower sections, for a few reasons. First, the content is redundant with the sections further down. Second, it interrupts the flow between the Simplest situation section, and the current and future marginal rate sections below, which follow naturally from it. Finally, the two examples that are there aren't exhaustive. So I replaced this with a much smaller bulletized list with 4 links instead.
- Tried to standardized calculations. Where possible, calculations are now in terms of a future tax rate on withdrawals, and use an inequality rather than an equals sign to make explicit when T or R is better. Tried to standardize variable names, and make consistent with formulas used in other parts of the wiki.
- Moved derivations onto a separate page. After some thought, this seems like a more effective use of space in the main page. If others agree this is a good idea, I'm prepared to do the same with tax-related analysis.
- Added content in the "Current marginal rate" section to cover business-related tax issues, which should be very useful to affected readers.
- Changed the terminology for the T vs R analysis to be a choice of "tax structure." The current page ties the description more to specific accounts, but the problem is, there are many different kinds of accounts with the same tax structure, and they all have quirks that complicate the analysis (eg. a Roth 457(b)). This wiki page properly ignores those differences (they're best discussed elsewhere), and focuses on the choice of whether to contribute pre-tax or Roth, and I think this is the most accurate way to describe it. It's consistent with terminology used elsewhere on the wiki (written by me, I admit).
- A couple analysis issues that are controversial (so far as I know), such as an asymmetric risk of traditional or roth, are now described as controversial and include links to relevant discussions in the forums. If these are actually settled questions (or if we settle them here) then these can be changed.
- Changed "Common misconceptions" header hierarchy. It makes much more sense for this section to be a child of "Calculations" than as the parent of current and future marginal rates. Actually, I assume this is an error in the current page.
- A few very minor additions or clarifications based on a couple more years of experience. For example, clarified that those worried about early death of a spouse and going to single filer tax brackets should prefer Roth; this is not explicit in the live page.