Roth vs. Traditional is one of the most important financial decisions you'll make. The difference can be worth hundreds of thousands of dollars.
The Core Difference
| Traditional | Roth | |
|---|---|---|
| Tax break now? | Yes | No |
| Tax break later? | No | Yes |
| Pay taxes on... | Withdrawals in retirement | Contributions now |
Traditional: Pay taxes LATER Roth: Pay taxes NOW
How Each Works
Traditional 401(k) or IRA
- Contribute pre-tax money ($1,000 contribution costs you ~$750 after tax savings)
- Money grows tax-deferred
- Pay income tax when you withdraw in retirement
Roth 401(k) or IRA
- Contribute after-tax money ($1,000 contribution costs you $1,000)
- Money grows tax-FREE
- Withdrawals in retirement are 100% tax-free
Pro Tip
With Roth, you're betting that your tax rate in retirement will be HIGHER than today. With Traditional, you're betting it will be LOWER.
When to Choose Roth
Roth is likely better if:
| Situation | Why Roth Wins |
|---|---|
| Early in career (low income) | You're in a low now |
| Income will grow significantly | You'll pay more taxes later |
| Want tax-free retirement income | Flexibility and certainty |
| Already have lots in Traditional | Tax |
| Worried about future tax rates | Hedge against tax increases |
"I started my at 22 making $35,000. I'm now 45 making $150,000. All that early money has been growing tax-free for 23 years. Best financial decision I ever made."
When to Choose Traditional
Traditional is likely better if:
| Situation | Why Traditional Wins |
|---|---|
| High earner now | Get the tax break when it matters most |
| Near retirement | Less time for tax-free growth |
| Expect lower retirement income | You'll be in a lower bracket later |
| Need to reduce taxable income now | AGI affects other benefits |
| Maxing out contributions | Pre-tax means you're saving "more" |
The "Both" Strategy
Do This
Many financial planners recommend having BOTH:
- Roth for tax-free growth and flexibility
- Traditional for current tax savings
- Tax diversification protects against uncertainty
This gives you options in retirement—withdraw from whichever bucket makes sense that year.
The Math Example
$6,000/year for 30 years, 7% return:
| Account Type | Final Balance | After-Tax Value* |
|---|---|---|
| Roth | $566,000 | $566,000 (100%) |
| Traditional | $566,000 | $424,500 (75%)** |
*Assuming 25% tax bracket in retirement **You'll owe taxes on Traditional withdrawals
The Roth wins IF you would have invested the tax savings from Traditional. Most people don't.
Roth Conversion: A Middle Path
Have money in a Traditional account? You can convert it to Roth:
- Pay taxes NOW on the converted amount
- Future growth is tax-free
- Good strategy in low-income years
Watch Out
Roth conversions count as income. Large conversions can bump you into higher tax brackets. Do the math first.
Quick Win
If you're early in your career and in the 12% or 22% bracket, prioritize Roth contributions. You're unlikely to pay lower taxes in retirement.