<prompt> Human: Roth vs. Traditional retirement accounts:Ive noticed more and more people here in this forum blindly suggesting to people that they should max out a Roth account instead of contributing to a traditional retirement account. It seems that a lot of those that are suggesting Roth accounts dont understand the tax implications, and are assuming that a Roth IRA would be better.In most cases, it isnt. This has a lot to do with the difference between marginal tax rate and the average tax rate. Every dollar put into your Roth IRA is taxed at your marginal tax rate The highest tax bracket your salary puts you into. Whereas contributions to a traditional retirement account take dollars away from your marginal tax rate which reduces your average tax rate, and when you withdraw them, they are taxed at your average rate.Since your marginal rate is always higher than your average rate, in most cases a 401k contribution is the smarter choice.Lets do an example:A single person is living on their own and making 50k salary. This person is trying to decide if he should contribute to a Roth IRA or contribute to his 401k. Fortunately this guys 401k is managed by Vanguard, and has access to every fund.Hes considering saving 10 of his income yearly, or 5k. How do his accounts look after 40 years?With the traditional 401k option, all 5000 is taken off of the top of his income, meaning that for tax purposes the IRS thinks that he made 5000 less that year. For 2012 that would mean his total taxes are 4855. He has 40,145 available to him for the year 50k - 4855 tax - 5000 in 401k.After 40 years of investments making 5 interest, his 401k account has 620,235. He wants this money to last him the next 30 years, so he calculates that he can withdraw 31,140 yearly, and with a 3 interest rate on his account, his account will hit 0 right at the 30 year mark.Now, because the money is in his 401k account, and its not a Roth type of retirement account, the money is taxed. 31,140 of income from a 401k account would be taxed 2775, leaving him with 28,365 of yearly income.Now lets make Roth IRA contributions instead.We need to make things fair, so remember that above we had 40,145 available yearly. So, without the additional deduction from 401k contributions 50k of salary will be taxed 6095. This leaves us with 3760 to invest in the Roth IRA. You have the exact same income available to you 40,145, but you can only contribute 3,760 per year.After 40 years of investments, with the exact same 5 interest rate, you will have 466,417 available in your retirement account. Again, we would like this money to last us the next 30 years invested at 3, so with some simple calculations we find that we can withdraw 23,417 yearly. Obviously, because this is a Roth account, there are no taxes that need to be paid, so your actual take home income is 23,417.The difference between these 2 is fairly staggering. In one scenario, you get 28,365 yearly, which is 2363 a month. In the other you get 23,417 yearly, which is 1951 a month. Thats a difference of 20! Youll have 20 more money available to you, every single year of your retirement, just by picking the correct retirement account to contribute into!Taxes:Another common topic that is brought up is the thought that taxes will rise in the future, thus it is imperative that you pay your taxes now by contributing to a Roth type account. This will shield you from advancing taxes in the future.Fear of increased taxes is perfectly understandable, but consider how low your income is likely to be during retirement. In all of the examples above the workingcontributing income is in the second or third brackets, and the retirement income is almost wholly in the very lowest tax bracket. It is incredibly unlikely that any political party would increase taxes on the Americans making the absolute lowest income.Another possibility is that retirement could be taxed entirely differently. With a totally separate set of tax brackets for people that are withdrawing money from a retirement account instead of from paychecks, similar to how capital gains are taxed separately from normal income. In this case it is equally likely that both Roth and Traditional retirees will be screwed.The bottom line is that speculation on tax increases is exactly that. Speculation. You dont speculate with your retirement investments, why should you speculate with your tax rates?Fees and penalties:A common selling point of Roth plans instead of 401k plans is that you can withdraw every dollar that you contributed without any penalties.This is an excellent benefit to Roth plans, as you can treat them almost like a high interest savings account. I wholeheartedly agree with this, and I believe they should be used in exactly that way.Heres an example:Youre making a 50k salary, and, like above, youre contributing to either a 401k or Roth IRA monthly 5k and 3760 respectively. 3 years into your career your roof collapses, your cars engine seizes, and you trip and break your ankle. All on the same day.Youre going to be out of work for a while, and you need more money than your emergency savings contains. So we need to pull money from the retirement account.Mr. 401k has 16,186 in his retirement account, and he needs 5000 right now in order to pay his bills. Now you must pay a 10 penalty, plus your full marginal tax rate on the money. Since were out of work for 6 months were only making 25k this year, so were currently in the 15 marginal tax bracket. So we need to withdraw roughly 5k 90 85 or 6535 in order to actually get 5000 in spending money. Now our retirement account is down to 9650.Mr. Roth IRA has 12,172 in his account. And again, needs to withdraw 5k for this emergency. Thankfully hes contributed more than 5k to his account, so there are no taxes or fees assessed. He pulls 5k out and his retirement account dips to 7172.Both people pulled out 5000 in spending money from their accounts, the 401k owner has 9650 still in his account, and the IRA owner has 7172 in his account.This shouldnt be terribly surprising, we learned earlier that dollar for dollar the 401k owner will have a larger account balance at every check point along the way to retirement, now what we need to find out is if the extra 2400 he has in his account actually makes his taxable account worth more than Mr. IRA.Lets work for another 37 years 40 years total and see how the two compare.Mr. 401k has 580,486 available at the end of year 40. Nearly 40k less than the guy that didnt have to withdraw 5k in year 3. He gets to retire on 29,140 per year, and is hit with 2475 in taxes, leading to a retirement income of 26,665 yearly or 2222 monthly.Mr. IRA has 436,010 available at the end of year 40. This is 30k less than the first example where we never withdrew 5k in year 3. 30 years of retirement money would equate to 21,890 yearly, or 1824 monthly.Yet again, even with having taken a 5k hit with taxes and penalties, the 401k account still comes out ahead. And, again, we have a difference of nearly 20 in favor of the 401k over the IRA contributor.You can stop reading here if you dont want to math.All of the calculations in the above examples were calculated in the following ways.Taxes are based on Standard Personal deductions for a single person with no children. No additional deductions were applied. Married filing jointly would follow the same patterns exactly with all monetary values doubled for the couple aka it would be the same math for individuals for the salaries we are talking about. Tax responsibilities wouldnt shift unless the individual is making over 85k yearly, or the couple is making over 142k yearly. If you are making above that, it should be blatantly obvious to you that you should be contributing to a traditional type of account instead of a Roth account due to the huge disparity between your Marginal and Actual tax rates.Interest was calculated with monthly contributions and interest compounded monthly ie, a 100 contribution in January, with no additional contributions, that has a 5 APY was compounded monthly at 0.4074, leading to an account balance of 105 in January the following year.Retirement withdrawals were compounded monthly at a rate of 0.2466 3 APY with regular monthly withdrawals of the yearly rate12. There were not calculated as having single large withdrawals followed by a full year of interest. Basically the same calculations as above, but with negative monthly contributions and a lower interest rate. The withdrawal rate was adjusted by the dollar until the account had less than 100 at the end of year 30, but was still positive.Ill provide any of these calculations that you may question to anyone interested. Just let me know.You can start reading again hereI am open for discussion on any of the assumptions Ive made during this incredibly long post. Some of them may seem unintuitive, but I tried the best that I could. The biggest point of contention is probably going to be the low retirement income. After all, who could retire on less than 30k a year. If thats your thinking than you should already know that an IRA alone wont hold you over, and due to all of the above math and examples, you should see that ever dollar you contribute to an IRA instead of a 401k is less efficient than just contributing to a 401k.If you actually read this whole thing, thanks!TLDR Dont blindly suggest that everyone should max their Roth IRA.  <response>: One thing you have not considered is that the nominal contribution limits for Roth and non-Roth are the same. So if one can afford to contribute the maximum allowable amount, Roth is effectively a higher limit since it is post-tax.Also, Im not sure that most people decide how much to save based a target net income. They may know that saving the same dollar amount in Roth vs non Roth will leave them with less money in the Roth case, but most likely they just decide on a dollar amount or paycheck percentage and live on whats left. So, its not exactly unfair to assume that people would choose between 5k Roth vs 5k traditional, even though those are different amounts in your pocket for spending now. In my view, 5k Roth would be better for most people, because it means they end up saving more money and spending less. 