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.

That’s probably too far to one side, but tax-advantaged accounts have a lot more oversight, penalties, and restrictions associated with them than unqualified accounts. And present rules governing these accounts can, and probably will, change, as needs arise. Guess whose needs. I certainly don’t expect less oversight, fewer penalties, or fewer restrictions attached to on these accounts.

I’d keep an ear to the ground and pull out if it looks like things are turning sour. Penalties or not.

1) State taxes – if you are in a high income tax state now and plan to retire in Florida or some other low income tax state, it may be better to defer the income until retirement to avoid higher state income taxes

2) Graduated tax structure – if you are in the 25% or 28% tax bracket, the amount you put into a regular IRA or 401(k) saves you based on the tax rate you are in (because the income is taken off the top when taxed). When you receive the money in retirement some of the money received is taxed at the lower tax brackets (10% & 15% in addition to the upper tax brackets). For example, if you are married earning $70,000 and save $5,000 in a 401(k), you will save taxes of 25% on the $5,000. When you receive it in retirement, you may get taxed on a $40,000 distribution at a combination of 15% and 25% rates. So, even if tax rates go up 10%, being taxed at different income rates may be beter off (17% and 28%).

3) People say that tax rates will go up (with sales, VAT or income) to pay for the baby boomers. Yet, some younger people may see the tax rates come back down as the baby boomer blimp disappears before they retire.

We want to say it is best to do a Roth or 401(k), yet everyone needs to see where they are at and what they feel will happen with taxes.