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Traditional vs. Roth: Which Retirement Account Is Right for You?
If your employer offers a 401(k), or you are opening an IRA, you will often see two versions: traditional and Roth. They invest the same way. What differs is when you pay the tax, and that affects how much you keep in retirement.
The basic difference
- Traditional: You generally get a tax break now, because contributions may reduce your taxable income this year. Your withdrawals in retirement are taxed as ordinary income.
- Roth: You pay tax on the money now, with no deduction. If you follow the rules, qualified withdrawals in retirement, including the growth, are generally tax-free.
Which tends to be better?
There is no universal answer. A common rule of thumb is to compare your tax rate today with the rate you expect in retirement:
- If you expect to be in a lower tax bracket in retirement, traditional may come out ahead.
- If you expect to be in a higher bracket, or want tax-free income later, Roth may come out ahead.
- If you are unsure, splitting contributions between both gives you flexibility, because you can choose which account to draw from each year.
Many people in their 40s and 50s are in their highest-earning years, which can make the traditional tax break valuable now. Others like Roth accounts because they provide tax-free income that does not raise taxable income later.
Other differences worth knowing
- Required withdrawals: Traditional accounts generally require you to start taking required minimum distributions in your 70s (the exact age depends on your birth year). Roth IRAs do not require withdrawals during the owner's lifetime.
- Early withdrawals: Taking money out before age 59½ can trigger taxes and a 10% penalty, with some exceptions.
- Income limits: Eligibility to contribute directly to a Roth IRA depends on your income. Check the current rules on irs.gov.
- Employer match: Employer matching contributions are generally treated as traditional, even if your own contributions are Roth, though this can vary by plan.
How this connects to your retirement numbers
When you decide how much you need, remember that $1 in a traditional account is not worth a full $1 of spending, because tax will be due when you withdraw it. Our calculator does not include taxes, so if most of your savings are in traditional accounts, consider entering a somewhat higher desired income or using the cautious scenario.
Questions to ask yourself
- Do I expect my tax rate in retirement to be higher or lower than now?
- Do I want a mix of taxable and tax-free income to choose from?
- Does my plan offer a Roth option and an employer match?
Use the free calculator to see whether you are on track.Open the retirement calculator
This article is for general educational purposes and is not financial, tax or legal advice. Rules and limits change; confirm details with official sources or a qualified professional. See our Disclaimer.