IRAs under progressive tax regimes and income growth

Abstract

This article investigates the choice between a traditional IRA and a Roth IRA in the presence of a progressive tax regime, income growth and exogenous retirement income. These factors affect the tax rate that applies to deductible IRA contributions and taxable distributions and can therefore influence the optimal choice. Assuming constant income tax rates or exogenously determined tax rates for working years and retirement years, which has been popular in the literature, may lead to misleading conclusions. For aggressive savers enjoying high rates of return or high levels of other retirement income, the Roth IRA can be a better choice than a traditional IRA.