Roth vs Traditional

I have seen many discussions purporting to advise on choosing between Roth and traditional retirement accounts, but they are all pretty useless. They all say Roth is better if you expect tax rates to go up by the time you retire. That's kind of confusing, since by definition you stop working and theoretically don't have any income. Of course the retirement account itself is income (and may be taxable), but it is likely to be a very different amount from what you are earning while working. So your tax bracket becomes much more significant than the tax rates. I think these articles are aimed at people who have large investment income outside the retirement account itself.

The difference between Roth and traditional is when you get taxed. With Roth, you get taxed before you put it in, and with traditional you are taxed when you take it out. If the tax rate is a constant 30%, then putting $130 in trad has the same result as starting with $130, getting taxed, and putting the remianing $100 in Roth. This is because investment returns and taxes are both multiplicative factors on your balance.

Of course tax rates are not constant. And they are also not flat. Assuming you have no income outside your retirement account, your first dollar withdrawn from a traditional will be at the lowest tax rate (0%). But your first dollar contributed to a Roth will be at your marginal tax rate, much higher. So, for most people, traditional is better.

If you have significant investment income outside the retirement account, you will have to compare your marginal rates when you are working against your marginal rates at retirement from sources outside your retirement accounts. The very wealthy are in the highest tax bracket both times, so they only care about whether the max tax rate goes up or down. I wonder what kind of people write financial articles?

For people who are above average, but not wealthy, there is another factor to take into consideration. The limit to how much you can contribute to your account is nominally the same between trad and Roth (IRAs and 401(k)s have different limits, but the reasoning is the same). Because Roth money has already been taxed, your effective contribution is higher by your marginal tax rate. The difference after earnings may be a bigger factor than the tax bracket. The choice depends on your situation, such as what you would do with the money now, so you're on your own there.