TY - JOUR AU - Kotlikoff,Laurence J. AU - Marx,Ben AU - Rapson,David TI - To Roth or Not? -- That is the Question JF - National Bureau of Economic Research Working Paper Series VL - No. 13763 PY - 2008 Y2 - January 2008 UR - http://www.nber.org/papers/w13763 L1 - http://www.nber.org/papers/w13763.pdf N1 - Author contact info: Laurence J. Kotlikoff Department of Economics Boston University 270 Bay State Road Boston, MA 02215 Tel: 617/353-4002 Fax: 617/353-4001 E-Mail: kotlikoff@gmail.com Ben Marx Columbia University Department of Economics 1022 International Affairs Building 420 West 118th Street New York, NY 10027 http://www.columbia.edu/~bmm2126 E-Mail: bmm2126@columbia.edu David Rapson Department of Economics University of California, Davis One Shields Avenue Davis, CA 95616 Tel: 530-302-1024 Fax: 530-752-9382 E-Mail: dsrapson@ucdavis.edu AB - Do regular 401(k) and IRA accounts offer greater tax benefits than Roth 401(k)s and Roth IRAs? This is a tough question. Regular 401(k)s and IRAs save taxes in the short term; Roth accounts save taxes in the long term. Regular 401(k)s and IRAs are vulnerable to future income tax hikes, but may benefit from a future switch to consumption taxation if the switch exempts withdrawals from income taxation. Roth accounts are exempt from future income tax hikes, but are exposed to future consumption taxation. For any given assumption about future tax policy, assessing the relative merits of the two types of saving vehicles requires very accurate calculations of taxes in each future year -- calculations that incorporate not just standard federal income tax provisions, but also the Savers Credit, the taxation of Social Security benefits, the Alternative Minimum Tax, and state income taxation. This paper uses ESPlanner (Economic Security Planner) -- a financial planning software program co-developed by Kotlikoff -- to study the relative merits of regular and Roth retirement accounts. In providing its consumption smoothing recommendations, ESPlanner makes the highly detailed tax and Social Security benefit calculations needed to compare retirement account options. In particular, ESPlanner can determine how different retirement account options affect different households' living standards under different assumptions about future tax policy. Our main findings are these: Absent future tax changes, middle-income, single-parent households benefit slightly more from Roth accounts; other single and married households generally fare better with a regular 401(k). Future tax changes, however, can dramatically change this horse race. In the case of low- and middle-income households, Regular 401(k) accounts under-perform Roth accounts in terms of long-run living standards assuming income taxes will rise by 30 percent in retirement. But the Roth falls far short of the regular 401(k) if taxes in retirement are assessed on consumption rather than on income and the transition to consumption taxation exempts 401(k) withdrawals from income taxation. ER -