Traditional or Roth: would you rather pay the tax now or later?
When you set up a 401(k) or open an IRA, you’re usually asked to choose: traditional or Roth. The difference sounds technical, and it’s easy to pick one at random or leave the default. But the choice is really a simple question about timing: do you want the tax break now, or when you take the money out?
Two ways to handle the same tax
With a traditional account, contributions reduce your taxable income today. The money grows without yearly tax, and withdrawals in retirement are taxed as income.
With a Roth account, you contribute money you’ve already paid tax on. It grows without yearly tax, and qualified withdrawals in retirement are tax-free.
Either way, the money is taxed once. The question is when.
When the rate is the same, the result is the same
Imagine someone in the 22% bracket deciding what to do with $5,000 of pay. Over the years, their investments quadruple.
If they put the $5,000 in a traditional account, it grows to $20,000. When they withdraw it at a 22% rate, they keep $15,600.
If they choose Roth instead, they first pay 22% tax, leaving $3,900 to invest. It grows to $15,600, and they withdraw it tax-free.
The results are identical. When your tax rate is the same now and later, the two accounts come out the same.
So the real question is your future tax rate
If your rate in retirement is lower than it is now, traditional comes out ahead. In the example, at a 12% rate in retirement, the traditional account would leave $17,600, compared with $15,600 for Roth.
If your rate in retirement is higher, Roth comes out ahead. At 24%, traditional would leave $15,200.
Nobody knows their future tax rate for certain. But some situations make one direction more likely.
Roth often appeals to people early in their careers or in low-income years, whose rate today is low and likely to rise. It can also suit people who expect large retirement income from pensions or substantial savings.
Traditional often appeals to people in their highest-earning years, whose current rate is high and who expect lower income in retirement.
Other differences that matter
Roth IRAs don’t require withdrawals during your lifetime, and since 2024, Roth accounts in workplace plans don’t either. Traditional accounts require minimum distributions starting in your seventies.
Roth IRA contributions, though not earnings, can generally be withdrawn at any time without tax or penalty, which gives some flexibility. Withdrawing earnings early generally means tax and a penalty.
Direct Roth IRA contributions are limited at higher incomes, while Roth 401(k) contributions aren’t.
And holding both types can be useful. Having some money in each gives you more control over your taxable income in retirement, when you can choose which account to draw from in a given year.
Contribution limits
For 2026, you can contribute up to $24,500 to a 401(k), traditional and Roth combined, and up to $7,500 to IRAs, with additional catch-up amounts if you’re 50 or older. Employer matching contributions are a separate matter and go on top.
If your employer matches contributions, getting the full match usually matters more than the choice between traditional and Roth. The 401(k) calculator shows what contributions and a match could grow to.
The takeaway
Traditional and Roth accounts tax the same money at different times. If your tax rate is likely to be lower in retirement, traditional tends to win; if it’s likely to be higher, Roth does. When you can’t tell, splitting contributions between the two is a reasonable way to hedge.
Sources
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This article is general education about US personal finance, based on the assumptions and sources described in it. It isn’t financial, tax or legal advice, and examples use hypothetical people and figures.