Retirement · 7 min read
Roth vs Traditional IRA: How to Choose the Right Account
A complete guide to Roth and Traditional IRAs and 401(k)s. Learn which account saves more tax based on your current and future tax rates.
How Traditional accounts work
Traditional IRAs and 401(k)s give you a tax deduction in the year you contribute. Your money grows tax-deferred, but withdrawals in retirement are taxed as ordinary income. If your tax rate is lower in retirement, you come out ahead.
How Roth accounts work
Roth contributions are made with after-tax dollars. You get no deduction today, but qualified withdrawals in retirement are completely tax-free. If your tax rate is the same or higher in retirement, Roth usually wins.
The max-out argument
If you can afford the maximum contribution, Roth effectively shelters more money because the contribution limit is the same in after-tax terms. A $7,000 Roth contribution is worth more than a $7,000 Traditional contribution plus the tax savings invested separately.
Action step
Use the Roth vs Traditional IRA comparison calculator. Enter your contribution, current tax rate, expected retirement tax rate, return, and years until retirement. The calculator shows the after-tax value of each account.