The Roth Versus The Traditional IRA: A Comparative Analysis

Butterfield, Scott; Jacobs, Fred A.; Larkins, Ernest R.

doi:10.19030/jabr.v16i4.2059

Cited by 3 publications

(8 citation statements)

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“…Butterfield et al (2000) also compare the IRA and Roth IRAs. They, like most researchers, believe an IRA is better for those in significantly lower tax brackets at retirement than when contributions are made.…”

Section: Literature Reviewmentioning

confidence: 99%

Comparing a Traditional IRA and a Roth IRA: Theory Versus Practice

Adelman¹,

Cross²

2010

Risk Manage Insurance Review

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Financial planners often advise their clients to first take advantage of employersponsored 401(k) plans, especially those with matching employer contributions. They often recommend next that clients consider a traditional or Roth IRA, depending on their current eligibility and tax bracket. Generally, the traditional IRA tends to be preferable to the Roth IRA if one expects to be in a lower tax bracket during the retirement versus the contribution years. This preference could be impacted by the theoretical or the practical assumptions one could make as to the tax bracket effect, minimum distribution requirements, and the impact of withdrawals on the amount of Social Security benefits taxed. This research compares the traditional and the Roth IRA, examining both the theoretical and practical assumptions of client behavior. The results indicate that the best choice between the types of IRAs depends on whether the investor's actual behavior is consistent with theory or practice.

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Section: Literature Reviewmentioning

confidence: 99%

Comparing a Traditional IRA and a Roth IRA: Theory Versus Practice

Adelman¹,

Cross²

2010

Risk Manage Insurance Review

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“…However, only the contributors to the traditional IRA will benefit from this shifting, while the Roth contributors will not. On that account, the traditional IRA has generally been preferred to the Roth IRA (Butterfield et al, 2000;Hulse, 2003). Many studies have also indicated that to make comparable and equal comparisons between the two retirement accounts, it is equally necessary to make certain assumptions about investors' tax rates during and at the end of their working years.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Butterfield et al (2000) and Kutner et al (2001) also highlighted the importance of the marginal tax rates (MTR) of the investors at the two phases (contribution and withdrawal) to ascertain the tax-favored IRA. Butterfield et al (2000) conducted their study using three scenarios: MTR at the contribution period (herein MTRc) was greater than the MTR at the withdrawal phase (herein MTRw), MTRc was equal to the MTRw, and MTRc was less than the MTRw. Kutner et al (2001) examined the optimal choice on an after-tax investment basis.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Kutner et al (2001) examined the optimal choice on an after-tax investment basis. Butterfield et al (2000) illustrated that the Roth IRA was only superior to the traditional IRA in rare circumstances and should only be used by individuals who did not qualify to use a traditional IRA. Kutner et al (2001) resolved that the comparison between the two IRAs was crucially dependent on the relationship between the two phases.…”

Section: Literature Reviewmentioning

confidence: 99%

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The Effect of the Tax Cuts and Jobs Act on the Choice between Traditional and Roth IRAs

Nichols

Nwogu

2020

jabminternational

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This paper analyzes the impact of the tax cuts and jobs act on the income taxeffectiveness of the Roth IRA versus the traditional IRA for investors who maximizetheir contributions prior to retirement. Since the tax cuts and jobs act reduced marginalincome tax rates, the tax benefits gained from a traditional IRA decrease compared toa Roth IRA. Based on set investment parameters, an investor makes monthly paymentsto the IRAs for a specific period and the tax savings obtained from the traditional IRAare reinvested into a separate taxable account. The after-tax accumulation of wealth ineach account is calculated to determine which IRA produces the largest available aftertax withdrawals after retirement. A break-even analysis is also constructed to determinethe marginal income tax rate and investment return that makes an investor indifferentbetween the two IRAs. The results illustrate that the decision to invest in a traditionalIRA versus a Roth IRA depends on both the rates of return and whether the marginalincome tax rate is the same or different during the contribution and withdrawal periods.

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“…Engen et al 1994). For example, Butterfield et al (2000) conclude that 'traditional IRAs have significant wealth accumulation advantages over Roth IRAs in all but rare circumstances'. For example, Butterfield et al (2000) conclude that 'traditional IRAs have significant wealth accumulation advantages over Roth IRAs in all but rare circumstances'.…”

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confidence: 99%

Roth versus traditional accounts in a life-cycle model with tax risk

Lachance¹

2012

Journal of Pension Economics and Finance

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Link to this article: http://journals.cambridge.org/abstract_S1474747212000054 How to cite this article: MARIE-EVE LACHANCE (2013). Roth versus traditional accounts in a life-cycle model with tax risk. AbstractThis paper analytically solves a life-cycle model that compares traditional and Roth retirement accounts. It includes realistic features such as tax deductibility of contributions and taxation of withdrawals, tax bracket structure with deductions, taxation of Social Security benefits, and tax risk at retirement. With current taxes, choosing a traditional account over a Roth creates small welfare losses in only a few cases, largely for those with higher incomes and pensions who are subject to the taxation of Social Security benefits. We also investigate tax variability and find that diversified strategies offer only small risk reduction benefits in our illustrations.

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The Roth Versus The Traditional IRA: A Comparative Analysis

Cited by 3 publications

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Comparing a Traditional IRA and a Roth IRA: Theory Versus Practice

Comparing a Traditional IRA and a Roth IRA: Theory Versus Practice

The Effect of the Tax Cuts and Jobs Act on the Choice between Traditional and Roth IRAs

Roth versus traditional accounts in a life-cycle model with tax risk

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