The image shows a person beginning to compare a traditional IRA with a Roth IRA. The best option for you depends largely on your current and future tax rate.
When saving for retirement, you will typically have two options for how to fund your IRA. With a traditional IRA, you will contribute pre-tax dollars that will grow within the account tax-free and pay taxes when the money is withdrawn. However, a Roth IRA taxes your initial contribution so you don’t have to pay taxes when you withdraw your savings.
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The difference between these two savings vehicles is pretty simple, but figuring out which one is best for you isn’t so simple. Ultimately, the answer depends on whether your tax rate in retirement (or when you start withdrawing your funds) will be higher than it is today. While low- and moderate-income workers may opt for a Roth IRA because they expect to be in a higher tax bracket when they begin withdrawing their retirement savings, higher-income earners can anticipate being in a lower tax bracket in the future, which makes the traditional IRA the best option.
Also, keep in mind that traditional IRA contributions are tax deductible and reduce a person’s annual tax bill, a benefit the Roth option does not offer. Remember, there are income limits for Roth IRA contributors: For the 2024 tax year, a single person must have a modified adjusted gross income (MAGI) of less than $146,000, and a married couple filing jointly must have a MAGI of less than $230,000. By 2025, those limits increase to $150,000 and $236,000, respectively.)
To see how a traditional and Roth IRA compare, we compared two variations under three different tax scenarios. For each, we calculate how much a person has left 30 years after contributing $6,000 to a traditional IRA and a Roth IRA. We assumed an 8% annual rate of return in each scenario and looked only at federal tax brackets, since state income taxes vary. (In each of the scenarios, for simplicity, we assume a lump sum withdrawal rather than gradual distributions.)
Scenario 1: Tax brackets remain the same
In our first scenario, we examine the difference between a traditional IRA and a Roth if a person’s tax rate (22%) is the same at age 60 as it was 30 years earlier. Someone who contributed $6,000 to a traditional IRA at age 30 will see their money accumulate at a faster rate over the next three decades compared to a Roth IRA. This is because the income tax would reduce the Roth contribution to $4,680, while the full $6,000 could grow within the traditional account.
As a result, the traditional IRA would be worth $60,376 after 30 years, while the Roth IRA would be worth $47,093. However, a person with a traditional IRA would pay almost $13,000 in taxes when they withdraw their money, making their after-tax withdrawal exactly the same as that of the Roth IRA: $47,093.
The image is a chart from SmartAsset titled “Traditional vs. Roth IRA: Tax Brackets Remain the Same at Ages 30 and 60.”
The final result? If your tax rate is the same at withdrawal as when you contributed to your IRA, it won’t matter which option you choose.
Scenario 2: highest tax bracket at age 60
What happens if a person’s salary grows exponentially between the ages of 30 and 60? Someone who was in the 22% tax bracket when they were 30 may be in the 32% tax bracket three decades later. This is when a Roth IRA really pays off.
Income taxes will substantially reduce a person’s traditional IRA at age 60, reducing the account to approximately $41,000. However, if the same person had used a Roth account, their tax bill would have already been paid, allowing them to withdraw the $47,093. By using a Roth account, the person would gain approximately $6,000 advantage.
The image is a chart from SmartAsset titled “Traditional vs. Roth IRA: Tax Bracket Lower at Age 30 Than Age 60.”
Scenario 3: lowest tax bracket at age 60
However, not everyone ends up in a higher tax bracket at age 60. Perhaps someone who was in the 24% group at age 30 is no longer working full time at age 60, putting them in the 22% group. With a Roth IRA, a person would contribute $4,560 to their account after taxes at age 30 and watch their savings grow to approximately $46,000. However, you would end up with a little more money at age 60 if you had contributed to a traditional IRA 30 years earlier. After paying taxes, the person would be left with about $47,000 in their traditional IRA, making it a marginally better option.
The image is a chart from SmartAsset titled “Traditional vs. Roth IRA: Tax Bracket Higher at Age 30 Than Age 60.”
Conclusion
When comparing a traditional IRA and a Roth IRA, a person’s initial and future tax rates will determine which option is more advantageous. While our three scenarios illustrate how different tax rates can affect a person’s eventual withdrawal, it’s important to understand that our simulations are based on several assumptions that may not apply to everyone’s financial situation, including specific tax brackets.
Not only are tax rates subject to potential changes in the future, but our analysis does not consider state income taxes, which can play a big role in whether a person chooses one account over the other. In the end, choosing between a traditional and a Roth IRA is a complicated financial decision that is best made with the help of a financial advisor.
Retirement Planning Tips
From Social Security and alternative income sources to medical expenses and long-term care, there is a lot to consider when creating a retirement plan. A financial advisor can guide you through this complicated process. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Is the 4% rule obsolete? The 4% rule has guided the retirement strategies of countless retirees since its development in the 1990s. However, new research from Morningstar suggests that retirees hoping to stretch their savings 30 years should start by withdrawing 3.3%. instead of 4%.
Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of significant fluctuations like the stock market. The downside is that inflation can erode the value of liquid cash. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
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