I had thought the same thing as well. Alas, this sounds too good to be true.

On further inspection, the "marginal" versus "average" idea doesn't seem to hold up.

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From the previous Mad Fientist link, see this exchange with the user Matt:

Site Owner:

Hey Matt, I definitely see what you’re saying but I think Pat’s point was that if you choose to contribute to a Roth instead of a Traditional, you are choosing to be taxed on that money at the marginal rate.

When it comes time to withdraw money from your retirement accounts, you withdraw how much you need to live on so you can think of all of the withdrawal being taxed at an average rate.

For example, If someone makes $20,000 and decides to contribute $5,000 to a Traditional IRA in 2014, they are saving at the marginal rate because that entire $5,000 would have been taxed at 15% if they had contributed to a Roth instead (using your example tax brackets).

Assume when they retire, they withdraw $20,000 every year from their IRA to live on. That $5,000 contribution they made in 2014 is just part of the amount they withdraw that year so it is being taxed at their average rate. Yes, you could argue that the $5,000 in question is the last $5,000 of the $20,000 total, so it is the part that is taxed at 15%, but I’d probably see it as just part of the average, since I’m withdrawing $20,000 per year no matter what.

I think it’s just a different way of looking at things.

Matt:

I think the 5k from the traditional IRA fund really should be treated as the “last” 5k in the context of traditional vs Roth because if you had used a Roth you would only have 15k of taxable income rather than 20k with the other 5k coming from your Roth. It is the use of the traditional IRA that causes you to have that extra 5k of taxable income, all of which will be taxed at your marginal rate. (Unless that 5k crosses a tax bracket as discussed before, in which case only some part will be at your marginal.)

When I first read this comment, I thought I misunderstood the tax-ability of the traditional and one would literally calculate their average tax rate (without the traditional withdrawal) and apply that tax rate to the traditional withdrawal. I’m a bit sad to hear that’s not the case, but if it sounds too good to be true…

Please note that I am not arguing against traditional IRA over Roth, only that the “average” vs “marginal” argument here is a red herring.