A wise planner and spender has no income tax liability at retirement. You need to be very rich at retirement for the roth to pay off.

I really don’t buy the argument of penalty free withdrawals being a downside. It’s a benefit, because it’s one less fee to pay. If your credit credit company increased fees, it would be silly to argue that that’s a benefit because it urges people to rack up less credit card debt. If people can’t exercise self control, that’s their problem. If you have that much trouble with self control, then make a bet with your spouse/family/friends to give them 10% of the money if you withdraw it early, or do something similar.

Ric Edelman makes many of the same points as presented in your post in his article at

http://www.ricedelman.com/cs/education/article?articleId=704

One point overlooked in the “net after tax” comparison is that you can contribute as much AFTER TAX to the Roth as you can PRETAX to the Traditional IRA, resulting in a HIGHER after tax amount in a Roth account.

Modifying Edelman’s table as presented in his article to reflect an increase in the invested amount in the Roth would result in the following:

ROTH DEDUCTIBLE IRA
EARNINGS 143 100
TAXES @ 30% 43 0
LEFT OVER (TO INVEST) 100 100
INVESTMENT DOUBLES TO 200 200
TAXES ON WITHDRAWAL 0 86
NET VALUE AFTER TAXES 200 114

Although I made the table similar to Edelman’s example, the real advantage comes when you maximuze your contributions ($5000 for 2009 — so multiply table amounts by 50).

Note that you would pay $13 in taxes on the extra $43 in either case, as it is not tax-deferred in the Deductible IRA case (staying with my assumption that the AFTER tax Roth contribution is the same as the PRE tax Deductible IRA). The result is that you would have 43% more “tax free” money in your Roth account than in a traditional IRA.

Two additional points:
1) Income taxes are likely to go up in the future (deficit reduction, anyone?)
2) A consumption tax is also a possibility (see http://www.fairtax.org/)*

* The fairness of the “Fair Tax” plan is also debatable, and does not currently address allowance for prior Roth contributions. As presented, you COULD be effectively taxed twice on your Roth.

http://www.carolinajournal.com/exclusives/dems-target-private-retirement-accounts.html

Imagine you need to make a large purchase, or have a large bill in one single year of your retirement (e.g., house renovation, medical bill, helping pay for grandkid’s college…) that cannot be financed over multiple years. You may need to withdraw a large amount from your retirement funds in addition to the money you are living on. If you only have tax-deferred accounts, you will have to pay taxes on top of that large withdrawal and the large withdrawal may change your tax bracket to a higher tax bracket. If you have a tax-free retirement account (such as a ROTH), you will not have to pay increased taxes on that extra withdrawal and will not risk increasing your tax bracket (if those are still around).

Nobody knows what the future holds, and hedging your bets against tax changes could be a smart move.

Let’s say you contribute $4K a year to your 401K, that means by your plan you are now putting in $8K tax deferred (traditional + 401k) and $4k tax free (roth), which isn’t necessarily a bad mix. Just remember you have more tax deferred options than you do tax free options (Roth and Roth 401k, if your employer offers it).

One additional point. Say you plan to get the same income at retirement. Now, you probably have a lot more deductions (kids, home, etc.) that you wont have later. If you are contributing to a standard 401k, its good to do a ROTH to diversify your taxation exposure… just like you diversify your investments.