“It’s tough to say what the world will look like in 30 years,” Cederburg said. “With a Roth account, you can lock in current tax rates.”
The study modeled the future based on past investment returns and tax rates, which were anything but stable. Since 1913, the marginal tax rate has changed 39 times for a single person with an inflation-adjusted income of $100,000, varying from 1 percent to 43 percent. The wealthiest Americans have paid an even wider range of rates. For 15 years in the mid-20th century, the top tax bracket was above 90 percent.
While well-paid workers are often told to skip Roth 401(k)s entirely, the new paper could change that advice. "This suggests that Roth accounts should be given a more serious look by those in high tax brackets,” said Daniel Ostrov, a Santa Clara University math professor who has written about (PDF) Roth and traditional retirement strategies and who praised the Cederburg study as “quite good.”
Though the study tried to quantify optimal strategies, finding significant benefits in mixing Roth and traditional accounts for almost all savers, its simplified model doesn't offer a recipe. Cederburg and his colleagues couldn’t take into account certain distinct advantages of each option. Assets in a Roth are easier to withdraw before retirement and don’t require mandatory withdrawals when you get older. Traditional accounts can sometimes be converted to Roth IRAs in a way that avoids taxes. And there's always the small chance that Congress could change the rules for Roth accounts and make them less valuable.
For his part, Cederburg, 34 years old and saving for a retirement that won’t start until 2050, decided to split his contributions 50/50 between Roth and traditional options. Many employees don’t have the option. A Vanguard Group study last month of its own 401(k) plans found that 40 percent of employers don’t offer Roth accounts.
“What is clear from the paper," Ostrov said, "is that every company should give their employees a Roth option to save for retirement.”