Reconsidering IRA and Roth IRA

Abstract

The notion that the traditional IRA savings plan is superior to the Roth IRA is widely accepted, with some qualifications. Given the diversity of savers' financial goals and needs, however, do the general conclusions about the superiority of the IRA hold for all savers? A considerable number of savers have the ability and opportunity to start saving early. Their accumulated wealth, not only in their IRAs or Roth IRAs, but also in their standard pension plans, such as 401(k) plans, may be substantial. Thus, these savers may not need to tap into their IRAs or Roth IRAs for their retirement consumption. This article analyzes the different option values that the Roth IRA offers wealthier savers, which can make a Roth-type account preferable to the traditional IRA. Specifically, this article addresses the issue of account selection given savers' likely preference to time withdrawals, preserve savings for bequests, or delay withdrawal. Simulation results and discussion are presented in favor of the Roth IRA over the traditional IRA.

TOPICS: Retirement, simulations, performance measurement