Roth vs. Traditional: Which Retirement Account Is Better for You?

The Fundamental Question: Pay Taxes Now or Later?

Choosing between Roth and Traditional retirement accounts comes down to one question:

Do you want to pay taxes now, or pay taxes later?

• **Traditional accounts**: Tax deduction now, pay taxes on withdrawals later
• **Roth accounts**: Pay taxes now, withdrawals are tax-free forever

Simple concept, but the right choice depends on your unique situation.

How Traditional Accounts Work

The Tax Benefit Contributions reduce your taxable income today.

Example: - Income: $80,000 - Traditional 401(k) contribution: $10,000 - Taxable income becomes: $70,000 - Tax savings at 22% bracket: ~$2,200

The Tradeoff When you withdraw in retirement, every dollar is taxed as ordinary income.

Example withdrawal: - Withdraw $50,000 from Traditional 401(k) - All $50,000 is taxable income - At 22% effective rate: $11,000 in taxes - Net: $39,000

Traditional Account Types: - Traditional 401(k) - Traditional IRA - 403(b), 457(b) - SEP IRA, SIMPLE IRA

How Roth Accounts Work

No Tax Benefit Today Contributions don't reduce current taxes—you're investing with after-tax dollars.

Example: - Income: $80,000 - Roth 401(k) contribution: $10,000 - Taxable income stays: $80,000 - No tax savings this year

The Massive Benefit Later Qualified withdrawals are 100% tax-free—including all growth.

Example withdrawal: - Withdraw $50,000 from Roth 401(k) - Taxes owed: $0 - Net: $50,000

After 30 years of growth, your $10,000 contribution might be worth $76,000+. With Roth, that entire $76,000 comes out tax-free.

Roth Account Types: - Roth 401(k) - Roth IRA - Roth 403(b)

The Decision Framework

Choose Traditional If:

1. You're in a high tax bracket now (24%+) The immediate tax savings are more valuable.

2. You expect lower income in retirement Most people spend less in retirement—lower expenses = lower tax bracket.

3. You're close to retirement Less time for Roth's tax-free growth to compound.

4. You need to reduce current taxable income To qualify for other tax benefits (credits, deductions).

5. Your employer only matches Traditional Employer matches always go into Traditional accounts.

Choose Roth If:

1. You're in a low tax bracket now (12% or lower) Pay the low taxes now, avoid higher taxes later.

2. You expect higher income/taxes in retirement - High earners - Pensions or other income sources - Tax rates may increase nationally

3. You're young (20s-30s) Decades of tax-free compound growth ahead.

4. You want tax-free income flexibility Roth withdrawals don't affect Social Security taxation or Medicare premiums.

5. You want to leave tax-free money to heirs Inherited Roth accounts are generally tax-free for beneficiaries.

Income Limits (2026)

Roth IRA Income Limits

Above the limit? Use the Backdoor Roth IRA strategy (contribute to Traditional IRA, then convert).

Traditional IRA Deduction Limits

If you have access to a workplace retirement plan:

Note: Roth 401(k) has NO income limits—anyone can contribute regardless of income.

The Math: When Does Roth Win?

Scenario: Same Tax Rate

If your tax rate is identical now and in retirement, Roth and Traditional produce the same after-tax result.

Traditional: - Invest $10,000 pre-tax - Grows to $76,000 (7% for 30 years) - Withdraw at 22% tax: $59,280 after tax

Roth: - $10,000 pre-tax = $7,800 after 22% tax - Invest $7,800 - Grows to $59,280 (7% for 30 years) - Withdraw tax-free: $59,280

Same result. But...

Scenario: Higher Tax Rate Later

If taxes rise to 32%:

Traditional: - $76,000 withdrawal at 32%: $51,680 after tax

Roth: - Still $59,280 (tax-free!)

Roth wins by $7,600.

Scenario: Lower Tax Rate Later

If taxes drop to 12%:

Traditional: - $76,000 withdrawal at 12%: $66,880 after tax

Roth: - Still $59,280

Traditional wins by $7,600.

The Tax Diversification Strategy

Not sure which is better? Do both.

Having money in both Traditional and Roth accounts gives you flexibility in retirement to:

• Withdraw from Traditional up to the top of a lower tax bracket
• Withdraw additional needs from Roth (tax-free)
• Manage your tax bracket year by year
• Minimize lifetime taxes

Example Retirement Withdrawals:

Need: $70,000/year

• Withdraw $45,000 from Traditional (stay in 12% bracket)
• Withdraw $25,000 from Roth (tax-free)
• Total taxes: ~$5,400 (vs. $10,000+ if all Traditional)

Roth Conversions: Getting the Best of Both

Already have Traditional accounts? You can convert to Roth.

How It Works: 1. Move money from Traditional IRA/401(k) to Roth IRA 2. Pay taxes on the converted amount this year 3. Money grows and comes out tax-free forever

When Conversions Make Sense: - Low-income years (job transition, early retirement) - Before Social Security starts - Before Required Minimum Distributions (RMDs) begin - If you expect higher taxes later - To reduce future RMDs

Conversion Strategy: - Convert enough to "fill up" your current tax bracket - Do it over multiple years to spread out the tax hit - Don't convert so much that you jump into a much higher bracket

Special Considerations

Required Minimum Distributions (RMDs)

Traditional accounts: Must take RMDs starting at age 73

Roth IRAs: No RMDs during your lifetime

Roth 401(k): Has RMDs, but can roll to Roth IRA to avoid them

Social Security Taxation

Traditional withdrawals count as income and can make your Social Security benefits taxable.

Roth withdrawals don't count—they're invisible to the Social Security tax calculation.

Medicare Premiums (IRMAA)

High income in retirement increases Medicare Part B and D premiums.

Traditional withdrawals count toward this income threshold. Roth withdrawals don't.

Leaving Money to Heirs

Traditional: Heirs pay income tax on withdrawals

Roth: Heirs get tax-free withdrawals (must withdraw within 10 years)

Quick Decision Guide

The Bottom Line

There's no universally "better" account—it depends on your tax situation now versus retirement.

Best practices: 1. Always get employer 401(k) match first (it goes to Traditional) 2. If in low tax bracket (22% or below), favor Roth 3. If in high tax bracket (32%+), favor Traditional 4. When in doubt, split contributions for tax diversification 5. Review annually as your situation changes

Use our [401(k) Calculator](/401k-calculator) to model different scenarios and see how your choice affects your retirement outcome.

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This content is for educational purposes only. Tax situations vary—consult a tax professional for personalized advice.