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Retirement tax shields: A cohort study of traditional and Roth accounts

Published online by Cambridge University Press:  10 April 2025

Lucas Goodman Open the ORCID record for Lucas Goodman [Opens in a new window]  and
Ben S. Meiselman Open the ORCID record for Ben S. Meiselman [Opens in a new window]
Lucas Goodman*
Affiliation:
United States Department of the Treasury, 1500 Pennsylvania Ave NW, Washington, Columbia, United States
Ben S. Meiselman
Affiliation:
United States Department of the Treasury, 1500 Pennsylvania Ave NW, Washington, Columbia, United States
*
Corresponding author: Lucas Goodman; Email: [email protected]
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Abstract

In this paper, we study the relative tax advantages of traditional and Roth retirement accounts in the United States by examining the retrospective tax benefits of each account type for the 2003 cohort of retirees. We use the actual history of marginal tax rates at the individual level to estimate that the average tax shields of traditional and Roth retirement accounts‒the excess value of retirement consumption financed by those accounts relative to brokerage accounts‒were 68 percent and 47 percent, respectively. Traditional accounts were better for this cohort largely due to tax cuts in 2001 and 2003. Under a counterfactual with inflation-adjusted 2019 law, the average tax shields for traditional and Roth accounts would have been much closer (33% and 30%, respectively), and nearly half of savers would have achieved higher retirement by saving in Roth accounts rather than in traditional accounts. This is the first paper to apply the history of marginal tax rates‒informed by administrative income records‒to compare Roth and traditional accounts for a particular cohort of retirees.

Keywords

defined contributionretirementRothtraditionalJ32H24D15
Type
Article
Information
Journal of Pension Economics & Finance , First View , pp. 1 - 22
Copyright
© The Author(s), 2025. Published by Cambridge University Press.

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