Not sure what you are doing here but I believe that you end up identical if the tax rates are the same today as they are in the future and you invest identical amounts of income (see below). For instance, if so have 20k to invest and 20% tax rate today and when retired, you either invest 16k in a Roth today and watch it grow or you invest 20k in an IRA and shave 20% off when you pay the taxes in retirement.
For me and my wife, our taxes for money we put into our 401ks is at the top tax rate so I don’t do Roth 401ks assuming my tax rate will be lower later. A key thing to remember is anything that takes away taxable income is done at your highest tax rate.
I think one of the things that makes Roths look way better now is that people do apples to oranges and take my example and instead of investing $16k in a Roth (same $20k available minus 20% taxes) they compare $20k in Roth investment to $20k in traditional which aren’t the same. In pure income terms that really means you invested $25k and lost $5k to taxes in the Roth case. That also means you have an extra $4k in after tax money to invest in a brokerage account for the traditional case because you only use $20k of income to fund the traditional IRA/401k. If you invest in a brokerage account, you should get the benefit of lower capital gains taxes.
Again, it gets messy but $20k into a Roth is not an apples to apples comparison to $20k invested in traditional because you used $5k more income to get to $20k after tax for the Roth. In my current care of dual income in our higher stages of earning, I’m all about saving on taxes now. If our tax rates in retirement are as high as they are now, I weep for high earners in the future. One other advantage we should hopefully have us that we’ve got a nice amount in taxable brokerage accounts so we should be able to make our income as low as possible to make any IRA/401k withdrawals taxed at low rates. I’ll definitely try to manage that well with SS, etc. Definitely will be checking all of that in our where do we retire trips. We’ve looked at lakes in SC and they don’t tax SS income. So many variables to be honest.
There's a limit to how much can go into an IRA per person per year. 6,000 under 50, 7,000 over 50.
If you claim the deduction: that's 1800 back on taxes. (Assuming 30% tax rate in the original example).
A. That may just lower your tax bill and you won't see a dime to invest.
B. You're not going to be able to invest it into a tax protected account that you've already maxed out. Someone will argue, I'll put that 1800$ into next year's IRA contribution. OK. But assuming you have 6,000 a year to put into accounts, you've now driven 1800$ that would have gone into an IRA into a taxable account and it comes out in the wash.
In retirement, you have to now pay taxes on the 120,000$ you didn't pay taxes on. You'll have to pay taxes on the growth that you got in your traditional IRA. And you'll have capital gains taxes on the the money that went into the taxable account.
I think I did do the taxes wrong on the previous example. It should be:
You can put 120K into a roth IRA. You've already paid taxes on it.
120K at 8% compounded growth annually over 20 years will give you 300,000 that's tax free.
Traditional IRA: 120K compounded over 20 years will give you 300,000 that's not tax free. BUT
You've got another 36,000 (1,800 *20) that compounding at the same 8% will now give you 82,000.
300,000 tax free=300,000.
382,000. After you pay taxes on your 120K, assuming 20% for simplicity: you're now down to 305,6000$.
The 36,000$ that you invested will have capital gains taxes. Even at tax rate of 20% with all long term capital gains: You'll owe over 8,000$ in capital gains.
So you're now down to 297,600. This doesn't account for dividends and such.
The difference becomes increasingly dramatic with increasing amounts of time.
I'm sure there are situations where the tax deduction now works out better for some. But for most, you're better off letting uncle Sam have a bigger piece of a smaller pie.