The core trade-off
Traditional and Roth accounts offer opposite tax treatments:
Traditional: Contributions may be tax-deductible now. You pay taxes later when you withdraw in retirement. Tax-deferred growth.
Roth: Contributions are made with after-tax money (no deduction now). Withdrawals in retirement are completely tax-free. Tax-free growth.
The question isn’t which is “better” universally—it’s which is better for your specific tax situation. The answer depends almost entirely on your current tax rate versus your expected future tax rate.
The math when rates are equal
If your tax rate is identical now and in retirement, both approaches produce the same result. This isn’t intuitive, so let’s prove it:
Traditional: Invest $6,000 pre-tax. At 25% tax rate, this would have been $4,500 after-tax. It grows to $60,000 over 30 years. You withdraw and pay 25% tax: $45,000 after-tax.
Roth: Invest $4,500 after-tax (the same actual money). It grows to $45,000 over 30 years. You withdraw tax-free: $45,000.
Identical outcomes. The tax rate (25%) is the same; only the timing differs.
This equivalence means the decision comes down to rate comparison: pay taxes at today’s rate, or pay at tomorrow’s rate?
When Traditional wins
Traditional accounts win when your current tax rate exceeds your future tax rate. You deduct contributions at a high rate now and pay taxes at a lower rate later.
High earners expecting lower retirement income. Someone earning $200,000 now might withdraw $80,000 annually in retirement. Their marginal rate drops significantly. The deduction at 32% now beats paying 22% later.
Peak earning years. Mid-career professionals often hit their highest lifetime tax brackets. Traditional contributions during these years capture deductions at maximum value.
State tax arbitrage. Someone working in California (13%+ state tax) who retires to Texas (no state tax) gains additional value from Traditional deferrals.
Maxing contribution limits. Traditional 401(k) contributions of $23,000 represent more actual money than Roth contributions of $23,000 (which required earning ~$30,000 pre-tax to contribute). This allows effectively higher savings.
When Roth wins
Roth accounts win when your future tax rate exceeds your current rate. You pay taxes at a low rate now and avoid taxes at a higher rate later.
Early career with low income. A 24-year-old in the 12% bracket who expects higher lifetime earnings should capture that low rate now. Paying 12% to never pay taxes on growth is likely a good trade.
Expecting higher future rates. If you believe tax rates will rise significantly (due to policy changes, deficit concerns, etc.), locking in current rates via Roth makes sense.
Large Traditional balances already. Someone with $2 million in Traditional accounts faces substantial Required Minimum Distributions later. Roth contributions or conversions provide tax diversification and reduce future RMD burdens.
Retirement income uncertainty. Roth withdrawals don’t count as taxable income, which affects Social Security taxation, Medicare premiums (IRMAA), and other income-tested benefits.
The tax bracket nuance
Tax brackets are marginal, not total. Your effective rate is always lower than your marginal rate because initial income is taxed at lower brackets.
A Traditional contribution at the 24% marginal bracket might produce a 24% tax benefit now. But retirement withdrawals might be taxed starting at 10%, then 12%, then 22%—a lower blended rate.
This nuance generally favors Traditional contributions during high-earning years, since the deduction captures the highest marginal rate while withdrawals fill up lower brackets first.
Why both is often the answer
Tax diversification—having both Traditional and Roth accounts—provides flexibility:
Unknown future rates. Nobody knows what tax policy will look like in 30 years. Having both account types hedges this uncertainty.
Withdrawal optimization. In retirement, you can withdraw from Traditional accounts up to a certain bracket, then switch to Roth to avoid pushing into higher brackets.
RMD management. Traditional accounts require minimum distributions starting at age 73. Roth accounts don’t. Having Roth assets available allows taking only required Traditional distributions while letting the rest grow.
Income smoothing. Years with unusually high or low taxable income can be balanced by choosing which account to tap.
The retirement accounts landscape includes both types for good reason. Most people benefit from accumulating both rather than going all-in on either.
Contribution limits and eligibility
Limits are per-person across both types combined:
401(k)/403(b): $23,000 for 2024 ($30,500 if 50+). The limit is the same whether Traditional, Roth, or split between them. Employer matches always go to Traditional.
IRAs: $7,000 for 2024 ($8,000 if 50+). Combined limit across Traditional and Roth.
Eligibility differs:
Traditional IRA deductibility phases out at higher incomes if you have a workplace retirement plan. You can still contribute, but without the tax deduction, there’s little point versus a Roth IRA.
Roth IRA eligibility phases out at higher incomes ($161,000-$176,000 for single filers in 2024). The “backdoor Roth” strategy circumvents this—contribute to a non-deductible Traditional IRA, then convert to Roth. The IRS permits this; consult IRS Publication 590-A for details.
Roth conversions
Converting Traditional balances to Roth triggers immediate taxation but shifts the money to tax-free growth. This makes sense in specific situations:
Low-income years. A year between jobs, a sabbatical, or early retirement before Social Security creates a low-tax window. Converting Traditional funds fills up low brackets at minimal tax cost.
Market downturns. Converting when account values are depressed means paying taxes on a smaller amount. If markets recover, the growth happens tax-free.
Estate planning. Roth accounts don’t have RMDs for the original owner and pass to heirs with tax-free growth (though heirs must withdraw within 10 years under current law).
Conversions require paying the tax bill from non-retirement funds to maximize the benefit. Using retirement funds to pay conversion taxes is counterproductive.
Common mistakes
All-or-nothing thinking. Splitting contributions between Traditional and Roth is valid. Contributing 60% Traditional, 40% Roth captures some deduction now while building tax-free assets.
Ignoring state taxes. A state with 9% income tax adds significantly to the Traditional deduction value (or Roth tax cost). State tax rates vary from 0% to 13%+.
Forgetting about income limits. High earners can’t contribute directly to Roth IRAs but can use backdoor strategies. They can also choose Roth 401(k) contributions if their employer offers them.
Assuming future rates. Nobody knows whether tax rates will rise or fall over 30 years. Confident predictions in either direction are speculation, not planning.
A practical framework
If you’re early career in a low bracket (12% or below): lean heavily Roth.
If you’re mid-career in a higher bracket (24%+): lean heavily Traditional.
If you’re uncertain or in the middle (22%): split contributions between both.
This framework is simplified but captures the core logic. Individual circumstances—expected pension income, state tax considerations, estate planning goals—refine the decision but don’t change the underlying principle: pay taxes at the lower rate, whether that’s now or later.
The income factor
Income level affects the decision in ways beyond just current tax bracket:
Very high earners may be forced into Traditional 401(k) contributions because Roth IRA income limits exclude them from direct Roth IRA contributions (though backdoor Roth strategies exist). However, many employers now offer Roth 401(k) options with no income limits.
Very low earners in the 10-12% brackets should almost always choose Roth. These brackets are historically low, and the probability of being in a lower bracket in retirement is slim.
Variable income (entrepreneurs, commission-based workers) can optimize year-by-year. Low-income years favor Roth contributions or conversions; high-income years favor Traditional deductions.
What if I don’t know my future rate?
You don’t—and no one does. Tax policy will change multiple times before you retire. Personal circumstances are also unpredictable.
Given this uncertainty, diversification makes sense. Having both Traditional and Roth assets provides flexibility to optimize withdrawals regardless of future tax policy. You’re hedging against the unknown rather than betting on a specific outcome.
The default for uncertain situations: split contributions or lean toward Roth if you’re younger (more time for tax-free growth to compound) and Traditional if you’re older (fewer years before withdrawal).