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As a new investor I'm trying to decide between a Roth IRA and a traditional IRA if I'm going to pull money out for quite a while before hitting traditional retirement age.

I crunched some numbers.

* You have $10,000 of pre-tax income available for the purpose (and can, for the purpose of this exercise, ignore IRA contribution limits
* You are in the 30% tax bracket for ALL ordinary taxable income relevant to this account, no matter when it occurs, and the long-term capital gains tax rate is half that rate.
* You'll get a 10% profit, NOT inflation adjusted, each year, BEFORE any ongoing taxes.
* You'll invest for 10 years, and then withdraw all the money. All along the way you'll pay taxes as the law calls for.
* You want the maximum amount of final withdrawal after taxes.

Now in a taxable account, the result depends on how the profits along the way are taxed.

All short-term gains: you end up with $13,770.06.
All long-term gains, but taxed annually, you end up with $15,826.88.
All long-term gains, taxed only at withdrawal (i.e. you do buy-and-hold-forever investing, with no dividends or capital gain distributions), you end up with $16,482.77.

Next, the two major varieties of tax sheltered account. The profits are NOT taxed along the way.

Roth IRA, you end up with $14,809.34.
Conventional IRA, you end up with $18,156.20.

Why the difference?

Because most "premature" withdrawals of earnings from a Roth IRA are taxed as ordinary income, just like from a conventional IRA. The difference is the result of the tax deferral on the money initially put in the account.

What might overrule that judgment?

If you expect your tax rate in early-retirement to be HIGHER than your current tax rate. This could be because you are low income currently, or because you expect Congress to push the tax rates up substantially. 30% now versus 53% in retirement would do it.

(I don't particularly expect a tax hike like that. If you consider income taxes only. But when Congress is desperately looking for a way to bail out the bankrupt Social Security and Medicare systems, it would be no surprise for them to cast a baleful eye on early retirees.)
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