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Subject:  Re: To Roth or not.. Date:  12/28/1999  9:36 AM
Author:  LTPlayer Number:  16962 of 88786


I set up a spreadsheet because I didn't believe your numbers. You are right; with your assumptions, it doesn't matter how many years you hold the investment in either IRA. The amount you have after taxes is always identical.

However, there is still an advantage to using a Roth IRA. Per your figures and assumptions, a traditional IRA never performs better than a Roth. Assuming that one has sufficient funds to invest, it is the $2000 cap that controls how much can be invested each year in the IRA. Therefore, one can invest $2000 pre-tax dollars in a traditional IRA and $2778 in a Roth IRA (assuming a 28% tax bracket).

An IRA's tax advantages always allows it to get a better post-tax return than any standard investment (assuming one gets the same return in either vehicle). In a standard investment, one has to pay income tax up front, plus pay capital gains when they redeem it. Over 30 or so years an IRA will have a post-tax value about 27% greater than a non-tax-advantaged investment.

It is that one can invest more pre-tax dollars in a Roth that makes it better than a traditional IRA.

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