Most US retirement accounts come in two tax flavours. With a traditional account, contributions are usually tax-deductible now, and withdrawals in retirement are taxed. With a Roth account, contributions are made with after-tax money, and qualified withdrawals in retirement are tax-free. Which is better depends mostly on one question: will your tax rate be higher now or later?
The basic rule of thumb
- If you expect to be in a lower tax bracket in retirement, traditional contributions usually come out ahead: you take the deduction at a high rate and pay tax later at a lower one.
- If you expect to be in the same or a higher bracket, Roth contributions usually win.
Early-career workers on modest incomes often favour Roth for this reason; people in their peak earning years often favour traditional.
Other factors
- Uncertainty about future tax law. Nobody knows what tax rates will be in 20 or 30 years. Having money in both types of account, sometimes called tax diversification, gives flexibility to manage taxable income in retirement.
- Required minimum distributions. Traditional accounts require minimum withdrawals from a set age. Roth IRAs have no RMDs for the original owner, and since 2024 Roth 401(k)s don't either.
- Effects on other benefits. Taxable withdrawals can raise the share of Social Security benefits that is taxed and Medicare premiums for higher-income retirees. Roth withdrawals do not count.
- Estate planning. Heirs who inherit a Roth account generally receive withdrawals tax-free, though most must empty inherited accounts within ten years.
- Access. Roth IRA contributions can be withdrawn at any time without tax or penalty; earnings have stricter rules.
Income limits
Anyone with earned income can contribute to a traditional IRA, though the deduction may be limited. Direct Roth IRA contributions phase out at higher incomes, which is why some high earners use the backdoor Roth. Roth 401(k) contributions have no income limit.
The practical answer
If you are unsure, splitting contributions between both is a reasonable hedge. Limits and phase-outs change every year, so check the IRS figures for the current year.
Sources
General information about the law as it stood when this page was updated, not financial, tax or legal advice. Rules and limits change; check the official source or a qualified adviser before acting.