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Author: teddywu Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: IRA vs. ROTH IRA Date: 3/9/1999 2:55 AM
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In analysis of trad IRA vs ROTH IRA (made either by Datek or Motley Fool), they had ROTH IRA saving lots of money:
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Scenario 1: Regular IRA for 30 years

If Sarah starts putting away $2000 in a regular self-directed non-deductible IRA (not a Roth) at age 30, and does this each year for 30 years, she'll have invested principal of $60,000 (30 years x $2000 dollars each year). Assuming Sarah has the money in a stock market index fund and she earns 10% a year, at the end of 30 years her nest egg will be worth $361,886. Now, because Sarah has never paid any tax on this money, she is now liable to pay taxes on ALL of this money when she takes it out for retirement. Let's assume Sarah takes it all out at age 60. Let's also assume that Sarah is not working and in a 15% tax bracket. Her tax due on this money will be $54,283.

Scenario 2: Roth IRA for 30 years

Now, using the same assumptions as above, what will Sarah pay in taxes using the Roth IRA instead of the regular IRA? Let's assume that over the course of her working life, Sarah pays tax at a 28% tax bracket. So, over the course of 30 years, Sarah will pay 28% on her $60,000, which amounts to $16,800. Best of all with the Roth IRA, Sarah will not have to pay any tax on her qualified distributions from the Roth IRA in the future! So, using these assumptions, Sarah's total tax liability with a Roth IRA is substantially less than that with a regular non-deductible IRA, and it probably makes sense for her to use the Roth, all other things being equal.
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But did the analysis neglect to account for the future value of yearly tax savings of $560 invested at a IRR of 10% for 30 years ($2000 * 28% tax bracket) in the Traditional IRA case? the sum is something like $92,XXX

Can someone confirm this? From this additional contribution, it looks like traditional IRA is far better than a ROTH IRA.

thanks,
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