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Which Retirement Account Strategy Is Best for Your Clients: Traditional or Roth?

In this session, George Mason University finance professor Derek Horstmeyer joined Tom Dickson to examine one of the most debated questions in retirement planning: whether clients are better served allocating retirement savings to Roth accounts, traditional retirement accounts, or a combination of both. Drawing on Monte Carlo simulations, historical market analysis, and retirement income modeling, Horstmeyer explored how tax rates, required minimum distributions (RMDs), Roth conversions, inflation, commodities, and Treasury Inflation-Protected Securities (TIPS) affect long-term retirement outcomes. 

The discussion challenged several common assumptions used in retirement planning. Horstmeyer’s modeling suggested that, under static tax assumptions, a balanced 50/50 Roth-versus-traditional allocation often performs surprisingly well. However, the research also showed that overweighting Roth accounts frequently outperformed overweighting traditional accounts, largely because Roth accounts are not subject to RMDs during the original owner’s lifetime. 

The session also examined Roth conversion strategies, including whether converting all at once or gradually over time produces better outcomes. In the simulations presented, Roth conversions generally outperformed leaving assets entirely in traditional retirement accounts, though Horstmeyer repeatedly emphasized that real-world tax planning, Medicare premium surcharges, state taxes, and estate planning factors can materially alter results. 

Beyond retirement account strategy, the webinar also explored portfolio construction topics, including the use of commodities in diversified portfolios and the timing challenges associated with TIPS investments during inflationary periods. The presentation emphasized that many planning decisions depend less on broad rules of thumb and more on individualized assumptions around taxes, income timing, withdrawal sequencing, longevity, and future policy uncertainty.

Key Topics and Expanded Insights

Roth vs. Traditional Retirement Accounts

Key Takeaways

• The research found that balanced Roth/traditional allocations frequently perform well under static tax assumptions. 
• Across the simulations presented, overweighting traditional accounts was never the optimal outcome. 
• The primary variable influencing outcomes was the difference between current and future marginal tax rates.  

Horstmeyer modeled three retirement allocation approaches:

1. 50/50 Roth vs. traditional split 
2. 60/40 split favoring Roth 
3. 40/60 split favoring traditional accounts 

The simulations assumed:

• A 20-year-old investor 
• $30,000 starting salary 
• 3% annual salary growth 
• 10% annual retirement savings rate 
• Static 6% portfolio return 
• 15% annualized volatility 
• Static tax rates over time 
• Required minimum distributions beginning at age 73 

One representative scenario modeled an investor retiring at age 65 but delaying withdrawals until age 75. Under that scenario:

• Roth-heavy allocation ended with approximately $2.88 million at age 85 
• Balanced allocation ended with approximately $2.80 million 
• Traditional-heavy allocation ended with approximately $2.75 million 

Why Roth Accounts Frequently Performed Better

The central reason Roth-heavy allocations outperformed in many scenarios was the impact of RMDs on traditional accounts.

Traditional retirement accounts lose part of their tax-deferral advantage once mandatory distributions begin. Those RMDs force taxable income into the client’s return, reducing ongoing tax sheltering and potentially increasing exposure to:

• Higher marginal brackets 
• Medicare IRMAA surcharges 
• Taxation of Social Security benefits 
• Net Investment Income Tax thresholds 
• State income taxation 

Roth IRAs, by contrast, are not subject to lifetime RMDs for the original owner under current law.

Important Limitations and Caveats

Horstmeyer repeatedly emphasized that the analysis assumed static tax rates over time. That assumption was intentionally simplified for modeling purposes, but he acknowledged that real-world planning often hinges on anticipated future tax brackets. 

The presenter noted that if a client knows with high confidence that future tax rates will be materially lower in retirement, traditional accounts may become more attractive.

Examples where traditional accounts may still make sense include:

• High-income earners expecting dramatically reduced retirement income 
• Clients planning geographic relocation to low-tax states 
• Clients retiring early with temporary low-income years before RMDs 
• Business owners with fluctuating income patterns 

The session also highlighted that many advisors advocate dynamic allocation strategies rather than static Roth/traditional percentages throughout a client’s career.

Roth Conversion Strategies

Key Takeaways

• Roth conversions generally outperformed leaving assets entirely in traditional retirement accounts in the simulations presented. 
• Full lump-sum conversions slightly outperformed gradual installment conversions. 
• Tax planning, IRMAA effects, and outside liquidity remain critical implementation considerations. 

Horstmeyer modeled three Roth conversion strategies for a hypothetical 72-year-old retiree with a $1 million traditional retirement account:

1. Leave all assets in a traditional account 
2. Convert all assets immediately into a Roth IRA 
3. Convert assets gradually over 10 years 

Assumptions included:

• 6% annualized portfolio returns 
• 15% volatility 
• Static tax rates 
• Retirement beginning at age 72 
• Final account evaluation at age 83 

Findings From the Simulations

The simulations found:

• Roth conversions generally outperformed maintaining a fully traditional account. 
• Full immediate conversions slightly outperformed gradual conversions. 
• The advantage was often approximately $50,000–$70,000 in additional ending wealth over a 10-year period. 

The primary reason was again tied to RMDs. By converting assets to Roth accounts, retirees avoided mandatory taxable distributions and preserved tax-free compounding.

Important Advisor Considerations

Horstmeyer stressed that these results should not be interpreted as universal advice.

Critical real-world variables not fully modeled included:

• Medicare IRMAA premium surcharges 
• State income taxes 
• Tax bracket compression 
• Social Security taxation interactions 
• Estate planning considerations 
• Charitable giving strategies 
• Liquidity constraints for paying conversion taxes 

The discussion also highlighted that paying conversion taxes with outside assets often improves Roth conversion efficiency because more retirement assets remain inside the tax-free Roth environment.

Estate Planning Implications

An important discussion emerged during the Q&A regarding inherited retirement accounts.

Horstmeyer acknowledged that Roth accounts can offer estate planning advantages because beneficiaries generally receive tax-free distributions, though inherited Roth IRAs are still subject to the SECURE Act’s 10-year distribution rule for many non-spouse beneficiaries.

Advisors listening to the session also raised the importance of:

• Multi-generational wealth transfer 
• Estate tax exposure 
• Legacy planning efficiency 
• Heir tax management 
• Trust coordination for inherited IRAs 

The presenter indicated that future modeling tools may incorporate estate planning variables more directly. 

Commodities in Diversified Portfolios

Key Takeaways

• Modest commodity allocations reduced portfolio volatility in the historical analysis. 
• Commodities performed particularly well during inflationary and rising-rate environments. 
• Commodity exposure may improve diversification but can modestly reduce long-term expected returns. 

Horstmeyer evaluated whether adding commodities to a traditional 60/40 stock-bond portfolio improved portfolio characteristics over a 50-year period.

The research examined:

• Bloomberg Commodity Index exposure 
• Custom commodity baskets 
• Commodity-focused ETFs 

One modeled allocation shifted a 60/40 portfolio into:

• 55% equities 
• 35% bonds 
• 10% commodities 

Results

The modified portfolio:

• Slightly reduced annualized returns 
• Reduced overall volatility 
• Performed particularly well during the 2021–2022 inflationary period 

During the rising-rate environment:

• Traditional 60/40 portfolios experienced negative returns 
• Commodity exposure provided diversification benefits and positive performance contributions 

Advisor Planning Implications

The session emphasized that commodities may serve as:

• Inflation hedges 
• Diversification tools 
• Correlation reducers during market stress 

However, advisors were cautioned that commodities:

• Can underperform during disinflationary periods 
• May increase portfolio complexity 
• Often produce no income stream 
• Require careful implementation and sizing 

Treasury Inflation-Protected Securities (TIPS)

Key Takeaways

• TIPS tend to perform best before inflation spikes become widely recognized. 
• Buying TIPS after inflation is already elevated often produces disappointing relative performance. 
• TIPS remain useful for risk reduction even if excess return timing is difficult. 

Horstmeyer examined the common investor assumption that TIPS should outperform whenever inflation is high.

The analysis instead found that markets often price inflation expectations efficiently before inflation peaks.

Important Distinction

The presenter explained that investors who waited until inflation was already elevated to buy TIPS often “missed the boat” because inflation expectations had already been incorporated into bond pricing. 

The research showed:

• TIPS outperformed most when inflation expectations were still relatively subdued 
• Long-duration Treasuries performed poorly during inflation spikes 
• TIPS still provided important inflation protection and volatility reduction 

Advisor Planning Applications

The session highlighted that TIPS may be particularly useful for:

• Retirees seeking purchasing power protection 
• Liability-matching strategies 
• Inflation-sensitive spending needs 
• Fixed-income diversification 

However, advisors were cautioned against treating TIPS as tactical inflation-trading vehicles after inflation concerns become widespread.

Practical Advisor Takeaways

Retirement Account Allocation Should Be Dynamic

The session reinforced that Roth-versus-traditional decisions should not rely solely on generic allocation rules.

Advisors should evaluate:

• Current vs. expected future tax rates 
• State taxation 
• Retirement timing 
• Withdrawal timing 
• Legacy objectives 
• Social Security taxation 
• IRMAA thresholds 
• Charitable planning opportunities 

Roth Conversions Require Comprehensive Tax Modeling

Even if Roth conversions improve projected long-term outcomes, implementation remains highly individualized.

Advisors should carefully evaluate:

• Current-year taxable income 
• Medicare premium effects 
• Cash available for taxes 
• Estate planning goals 
• Future RMD exposure 
• Beneficiary tax implications 

Inflation Protection Requires Nuanced Timing

The session demonstrated that:

• Commodity exposure can improve diversification during inflationary periods 
• TIPS can reduce inflation risk 
• Markets often price inflation expectations quickly 
• Tactical inflation trades may disappoint if implemented too late 

Behavioral and Planning Flexibility Matter

A recurring theme throughout the session was uncertainty.

Horstmeyer repeatedly emphasized that retirement planning outcomes depend heavily on assumptions that are unknowable with certainty, including:

• Future tax policy 
• Inflation 
• Longevity 
• Healthcare costs 
• Investment returns 
• Withdrawal behavior 

As a result, diversified tax positioning and planning flexibility may remain valuable even if simulations favor one approach under a specific set of assumptions.

External Reference Sources

IRS Required Minimum Distribution Rules
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

IRS Roth IRA Information
https://www.irs.gov/retirement-plans/roth-iras

IRS Roth Conversion Guidance
https://www.irs.gov/retirement-plans/rollovers-of-retirement-plan-and-ira-distributions

IRS Publication 590-A and 590-B
https://www.irs.gov/forms-pubs/about-publication-590-a
https://www.irs.gov/forms-pubs/about-publication-590-b

Social Security Administration Medicare IRMAA Information
https://www.ssa.gov/benefits/medicare/medicare-premiums.html

TreasuryDirect TIPS Information
https://www.treasurydirect.gov/marketable-securities/tips/

SECURE Act Retirement Distribution Rules
https://www.congress.gov/bill/116th-congress/house-bill/1994

Bloomberg Commodity Index Overview
https://www.bloomberg.com/professional/product/indices/bloomberg-commodity-index/

Federal Reserve Inflation Data
https://fred.stlouisfed.org/

George Mason University Costello College of Business
https://business.gmu.edu/

Wall Street Journal Personal Finance Section
https://www.wsj.com/news/personal-finance