Procedure to Determine the Optimal Roth IRA versus Deductible IRA Allocation

Abstract

This paper offers financial advisors a spreadsheet application to solve the Roth IRA versus deductible IRA (RVD) allocation choice. Our algorithmic procedure requires advisors to input values for nine variables. An optimal RVD choice is computed based on these values and other values supplied by our procedure. The optimal choice reveals what percent of IRA retirement funds should be put in a deductible IRA in order to maximize retirement wealth. The key computations to determine an optimal RVD are the contribution and withdrawal tax rates. Algorithms are used that are applicable to income levels for all effective statutory tax rates.