Investment Performance Comparison Between Roth And Traditional Individual Retirement Accounts

Abstract

With the recent introduction of the Roth Individual Retirement Account (IRA) along with a significantly improved Traditional IRA, there has been considerable interest in comparing the performance of these investment vehicles.  Some confusion regarding these comparisons has evolved.  In this paper we show that this confusion may be attributed to scale and tax differences between the two investment vehicles.  We adjust for these differences by focusing on the after-tax rate-of-return on investment for each IRA vehicle.  We find that performance depends crucially on the relationship between an individual’s tax rates at the time of investment and at the time of withdrawal.