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Henry, did you run the numbers with equal out of pocket costs? If you just consider $2,000 to a Roth or deductible or non-deductible, the Roth will win. The goal is to get $2,000 into an IRA. The cost of doing that is different for the various types of IRAs. The true cost of the Roth is $2,000 to the IRA and $778 to the IRS. The true cost of the tax deductible IRA is $2,000 to the IRA and $778 to a taxable investment to make the out of pocket costs the same.

There is a case to be made for assuming a lower tax rate in retirement, even if you have the same income. When you are working and investing in the IRA, you are working with the marginal dollar and the marginal tax rate should be used. However, when you are retired, you will have income from several sources, the IRA being one source. Any of your sources of income could be considered the marginal dollar or any of the sources could be considered the first dollar. I think the average tax rate could be used for this time in life. Of course, if you cashed out the IRA or made a large withdrawal for a purchase, you would want to use the marginal tax rate.

Regards, Jim
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