But it seems like if you pick a Roth, you can effectively save more.
Yes, that makes sense. No, I haven't heard this before.
So, the amount saved in retirement accounts is higher, but is this better?
(One note: your $6250 number should be $6666 (*0.75=$5000), which makes your argument stronger, until we look at the big picture below.)
The alternative to investing $5000 post-tax dollars in a Roth is investing $5000 pre-tax dollars in the Traditional plus $1666*0.75 post-tax dollars in a non-retirement account. If you're in the 15% tax bracket when you retire, then with the Traditional IRA, you get ($5000+gains)*0.85 plus ($1666+gains)*0.75 minus capital gains tax, and with the Roth, you get $5000+gains.
Traditional >?< Roth
0.85*($5000+gains) + 0.75*($1666+gains-capitalgains) >?< $5000+gains
0.85*$5000*(1+R) + 0.75*$1666*(1+R*(1-CG)) >?< $5000*(1+R)
Assume a gain of 50% and capital gains of 15%.
($5000*1.5)*0.85 + ($1666*(1+0.5*0.85))*0.75 >?< $5000*1.5
$8156 > $7500
A little fiddling shows that it's pretty hard to find a case where the Roth beats the Traditional.
(1-T2)*5000*(1+R) + (1-T1)*5000*(1/(1-T1)-1)*(1+R*(1-CG)) >?< 5000*(1+R)
(1+R*(1-CG))/(1+R) >?< T2/T1
The left-hand side ranges between 1 if gains R are small or capital gains tax is low, and (1-CG) if gains are large. With large gains, the ratio of your future tax rate to your current tax rate would have to be larger than (1-CG) in order for a Roth to be better. For the above example, your future tax rate would have to exceed 0.85*25% = 21.25%.
If you're choosing between a Traditional and a Roth, and you think that the future tax rate (not just marginal, but overall, accounting for the standard deduction) will exceed 21.25% for someone in the Mustachian expense range of $30K/year (2012 dollars), then use a Roth instead of a Traditional. Otherwise, choose a Traditional. Or hedge and do a little of both.
It's still true that a Roth is better than non-retirement accounts alone.