Traditional vs Roth IRA: The Tax Decision That Shapes Your Retirement

When Lisa started her career at 28, she maxed out her Traditional IRA every year. The tax deduction was tangible — $1,500 less to the IRS each April. That felt like winning.

Twenty-five years later, Lisa's Traditional IRA had grown to $450,000. She retired early at 53, planning to live on savings while waiting for Social Security. Her income dropped dramatically. She was barely in the 12% bracket.

"That's when I realized my mistake," Lisa says. "For years, I saved taxes at 22% and 24% rates. Now I could convert to Roth at 12% — but I should have been contributing to Roth all along during my early career when my rate was 12% anyway."

Lisa's situation isn't unusual. The Traditional vs. Roth decision seems straightforward — pay taxes now or pay taxes later — but the right answer depends on comparing rates across decades of your life. Most people guess. The ones who do the math often discover they chose wrong.

The fundamental trade-off

A Traditional IRA gives you a tax break today. Contributions reduce your taxable income in the year you make them. A $7,000 contribution in the 22% bracket saves you $1,540 in federal taxes this April. The money grows tax-deferred, and you pay ordinary income taxes when you withdraw in retirement.

A Roth IRA gives you tax freedom later. Contributions come from after-tax money — no deduction today. But the account grows tax-free forever, and qualified withdrawals in retirement owe nothing. Not a penny.

The question is: would you rather pay taxes on the seed or the harvest?

If your tax rate is higher now than it will be in retirement, Traditional wins — you avoid taxes at the high rate and pay at the lower rate. If your tax rate is lower now than it will be in retirement, Roth wins — you pay at the low rate and avoid taxes at the higher rate.

Lisa contributed to Traditional during her early career when she was in the 12% and 22% brackets. If she'd used Roth instead, she'd have paid taxes at those relatively low rates, and her withdrawals in retirement would be completely tax-free. Instead, she got small deductions at moderate rates and now faces the decision of whether to convert — paying taxes on the conversion but freeing the money from future taxation.

When Traditional makes more sense

The Traditional IRA shines when your current tax rate is high and your expected retirement rate is lower.

Consider Michael, a surgeon earning $400,000 annually. He's in the 35% federal bracket, plus California's 13.3% state rate. Every dollar of Traditional IRA contribution saves him nearly 50 cents in combined taxes. If he retires in Texas (no state tax) and lives on $150,000 per year, his federal rate drops to roughly 22%. Paying 22% later beats paying 48% now.

High earners late in their careers often fit this profile. Peak earnings years create high brackets that won't persist into retirement. The Traditional deduction captures tax savings at the highest rates.

The immediate cash flow benefit matters too. That $1,540 saved in taxes is real money available today — for paying down debt, investing in taxable accounts, or covering expenses. The Roth contribution offers no immediate benefit; the payoff is decades away.

For people who struggle to save, the Traditional deduction can actually enable larger contributions. The after-tax cost of a $7,000 Traditional contribution in the 22% bracket is effectively $5,460. The same $5,460 in after-tax dollars would only buy a $5,460 Roth contribution. The Traditional lets you put more dollars to work.

When Roth makes more sense

The Roth IRA wins when your current tax rate is low and your expected retirement rate is higher.

Early career workers often fit this profile. A 25-year-old earning $45,000 is in the 12% bracket. Contributing to Roth means paying 12% now on money that will never be taxed again — not on decades of growth, not on withdrawals. If that worker's career progresses and they retire with substantial income from multiple sources, they might face 22% or higher rates. The 12% Roth contribution looks brilliant in hindsight.

People expecting tax rates to rise generally also favor Roth. Federal debt is high and growing. Entitlement spending is increasing. The current rate structure — with its relatively low brackets and wide 12% range — might look generous compared to what future retirees face. Roth contributions lock in today's rates regardless of what Congress does later.

Anyone who expects large Required Minimum Distributions should consider Roth carefully. Traditional IRAs force withdrawals starting at 73, potentially pushing you into high brackets. Roth IRAs have no RMDs during your lifetime. Money stays invested, growing tax-free, as long as you want.

And for those focused on leaving tax-efficient inheritances, Roth accounts pass to heirs tax-free. Beneficiaries must withdraw within 10 years under current rules, but those withdrawals owe nothing. An inherited Traditional IRA forces heirs to add distributions to their own income — often at their peak earning years.

The same-rate scenario

What if your tax rate stays the same? Interestingly, the math works out identically.

Imagine you're in the 22% bracket now and expect to be in the 22% bracket in retirement. With a Traditional IRA, you contribute $7,000 pre-tax, it grows to $70,000 over decades, and you withdraw $70,000 paying 22% — netting $54,600. With a Roth IRA, you contribute $5,460 after-tax (the equivalent after-tax cost), it grows to $54,600 over the same decades, and you withdraw $54,600 paying nothing — netting $54,600.

The outcomes are identical when rates match. This is why the Traditional vs. Roth decision really comes down to rate comparison. If you can't predict whether your retirement rate will be higher or lower, a mix of both account types provides diversification against tax rate uncertainty.

The rules that constrain your choice

Income limits affect both account types, though differently.

For Roth IRA contributions in 2024, single filers begin phasing out at $146,000 of modified adjusted gross income, with no contributions allowed above $161,000. Married couples filing jointly begin phasing out at $230,000, with full phase-out at $240,000. Above these limits, direct Roth contributions are prohibited — though the "backdoor Roth" strategy (contributing to Traditional, then converting) remains available.

For Traditional IRA deductions, limits apply only if you or your spouse are covered by a workplace retirement plan. With workplace coverage, the deduction phases out between $77,000 and $87,000 for single filers ($123,000 to $143,000 for married filing jointly). Without workplace coverage, you can deduct Traditional contributions regardless of income.

Contribution limits are the same for both accounts in 2024 and 2025: $7,000 per year, or $8,000 if you're 50 or older. This limit applies across all your IRAs combined — you can't contribute $7,000 to Traditional and another $7,000 to Roth in the same year.

The withdrawal rules that matter

Traditional IRA withdrawals before age 59½ generally trigger a 10% penalty on top of ordinary income taxes. Exceptions exist for disability, first-time home purchases (up to $10,000), and certain other circumstances. After 59½, no penalty applies — just regular income tax.

Roth IRA withdrawals have more flexibility. Contributions — the after-tax money you put in — can be withdrawn anytime, for any reason, tax and penalty-free. You already paid taxes on that money. Earnings are different: they face taxes and penalties if withdrawn before 59½ and before the account has been open five years. After 59½ and five years, everything comes out tax-free.

Required Minimum Distributions apply to Traditional IRAs starting at 73 (or 75 for those born 1960 or later). You must withdraw a minimum percentage each year, whether you need the money or not. Roth IRAs have no RMDs during the owner's lifetime — a major advantage for those who don't need the money and want to maximize tax-free growth.

The conversion option: changing your mind

Already have a Traditional IRA but wish you had Roth? You can convert.

A Roth conversion moves money from Traditional to Roth. You pay ordinary income taxes on the converted amount in the year of conversion. After that, the money grows tax-free and comes out tax-free — just like original Roth contributions.

Conversions make sense when your current tax rate is lower than your expected future rate, when you want to reduce future RMDs, when you're planning to leave tax-free money to heirs, or when you simply want the flexibility and certainty of tax-free withdrawals.

The best conversion opportunities often arise during low-income years: early retirement before Social Security starts, a gap year between jobs, a year with large deductions or losses. Lisa, from our opening story, is now converting aggressively during her early retirement years at 12% rates — capturing the low bracket she could have used originally.

Conversions have no income limit. Even if you can't contribute to Roth directly due to income restrictions, you can convert unlimited amounts from Traditional to Roth. You'll pay taxes on the conversion, but the money then lives tax-free forever.

The real answer: probably both

For most people, the optimal strategy isn't pure Traditional or pure Roth — it's tax diversification across both account types.

Tax rates are unpredictable. You don't know what Congress will do. You don't know exactly what your retirement income will be. You don't know how long you'll live or what expenses you'll face. Having money in both Traditional and Roth accounts gives you flexibility to manage your tax bracket year by year in retirement.

A practical approach: contribute to Traditional accounts when you're in high brackets (getting maximum deduction value), contribute to Roth when you're in low brackets (locking in low rates), and convert from Traditional to Roth during low-income years (taking advantage of bracket space that would otherwise go unused).

Lisa now has both Traditional and Roth money. Her conversions during early retirement created Roth balances that will provide tax-free income for life. Her remaining Traditional balance will fund RMDs and taxable income. The mix gives her control she wouldn't have with only one type.

"I can't go back and change what I did in my 20s and 30s," Lisa says. "But I can make better decisions now. And I tell everyone younger than me: think harder about this than I did. It matters more than you realize."

Need personalized guidance on choosing between Traditional and Roth accounts? Connect with a retirement advisor who can analyze your specific situation.