Should I Choose a Roth or Traditional Retirement Plan?

When choosing a retirement plan like an IRA or 401(k), the primary difference between a Roth and a Traditional option is when you pay income taxes. The structure you select determines whether you pay taxes on your savings now or later. This decision influences your net contributions, the growth of your investments, and the amount of spendable income you have in retirement.

Core Tax Differences

Traditional accounts, like IRAs and 401(k)s, are funded with pre-tax dollars. Contributions may be tax-deductible, lowering your current taxable income. For instance, if you earn $60,000 and contribute $5,000 to a Traditional IRA, you might only pay income tax on $55,000.

Inside a Traditional account, investments grow tax-deferred, so you owe no tax on gains as they accumulate. Taxation is postponed until retirement, when withdrawals are taxed as ordinary income, including contributions and earnings.

Roth accounts use post-tax contributions from money that has already been taxed. These contributions are not tax-deductible and provide no immediate reduction in your tax liability.

The benefit of the Roth structure is that investments grow completely tax-free. Qualified withdrawals in retirement, typically after age 59½ and after the account is five years old, are free from federal income tax.

For example, a $1,000 contribution to a Traditional 401(k) might only reduce your take-home pay by $780 in a 22% tax bracket due to the deduction. A $1,000 Roth contribution reduces take-home pay by the full amount. If both accounts grow to $10,000, the Traditional withdrawal is fully taxable, while the Roth withdrawal is tax-free.

Key Factors for Your Decision

Your decision should compare your current income tax rate against your expected rate in retirement. A Traditional plan offers a tax break today, while a Roth plan provides tax-free income tomorrow. The goal is to pay taxes when your rate is lowest.

If you expect a higher tax bracket during retirement, a Roth account is often better. This applies to young professionals with expected salary growth. Paying taxes now in a lower bracket avoids higher taxes on a larger sum later. Future increases in federal tax rates also make paying taxes now attractive.

If you expect a lower tax bracket in retirement, a Traditional account may be more suitable. This is common for those at peak earning years whose income will drop after they stop working. Deferring taxes provides a deduction when your tax rate is high, and you pay taxes later when your rate is lower.

Income Eligibility and Contribution Rules

IRS income limits affect the decision for IRAs. For 2025, direct Roth IRA contributions are subject to Modified Adjusted Gross Income (MAGI) phase-outs. Single filers with a MAGI between $150,000 and $165,000 can make a partial contribution, and those with a MAGI of $165,000 or more cannot contribute. For married couples filing jointly, the phase-out range is $236,000 to $246,000.

The deductibility of Traditional IRA contributions also depends on MAGI if you or your spouse has a retirement plan at work. For 2025, a single individual with a workplace plan sees their deduction phased out with a MAGI between $79,000 and $89,000. For a married couple where the contributing spouse has a workplace plan, the phase-out is $126,000 to $146,000. Anyone can contribute to a Traditional IRA; these limits only determine if it is tax-deductible.

Workplace 401(k)s are more flexible, as neither Traditional nor Roth 401(k)s have income limitations for contributions. High-income earners ineligible for a Roth IRA can still contribute to a Roth 401(k) if their employer offers one. This makes the 401(k) choice strategic, not based on eligibility.

Required Minimum Distributions (RMDs)

The rules for Required Minimum Distributions (RMDs) are another factor. The IRS requires you to withdraw from most retirement accounts to ensure taxes are paid on deferred funds. Traditional IRAs, SEP IRAs, SIMPLE IRAs, and Traditional 401(k)s are subject to RMDs, beginning in the year you turn 73.

These mandatory withdrawals create a tax liability, even if you do not need the funds. The amount is calculated annually based on your account balance and IRS life expectancy tables. Failure to take an RMD results in a 25% penalty on the required amount, reducible to 10% if corrected promptly.

Roth IRAs are not subject to RMDs for the original account owner, offering greater control over assets. You can leave money in a Roth IRA to grow tax-free for your entire life, for your own use or as a tax-free inheritance. Roth 401(k)s are also not subject to RMDs for the original owner.

Advanced Strategies and Considerations

A Roth conversion transfers funds from a pre-tax account, like a Traditional IRA or 401(k), into a post-tax Roth IRA. The converted amount is added to your taxable income for that year. This strategy is effective during years of temporarily low income, such as a sabbatical, unemployment, or early retirement.

Converting during a low-income year lets you pay tax at a more favorable rate than in the future. For example, converting while in the 12% tax bracket locks in that lower rate, which is better than converting later when you might be in a 22% or 24% bracket.

The Backdoor Roth IRA

High-income earners exceeding MAGI limits for direct Roth IRA contributions can use the “backdoor” Roth IRA strategy. This involves making a non-deductible contribution to a Traditional IRA and then promptly converting it to a Roth IRA. Because the contribution was post-tax, the conversion is not a taxable event, except for any investment earnings.

A complication arises if you have other pre-tax IRA assets because of the IRS pro-rata rule. This rule requires the conversion to be taxed based on the proportion of pre-tax and post-tax money across all your aggregated IRA accounts. For example, if 90% of your total IRA assets are pre-tax, then 90% of your conversion is taxable. To avoid this, some people roll existing pre-tax IRA funds into their current employer’s 401(k) plan, if allowed, to isolate the non-deductible contribution for a tax-free conversion.

Employer 401(k) Plan Specifics

Your employer’s 401(k) plan rules also influence strategy, especially the company match. Even if you contribute to a Roth 401(k), employer matching funds are almost always deposited into a pre-tax Traditional 401(k) account. This means you will likely have both Roth and Traditional balances in your workplace plan.

This automatic tax diversification is advantageous, giving you access to both tax-free and taxable funds in retirement. The SECURE 2.0 Act allows employers to offer a Roth match, but this feature is not yet widely adopted. For most people, personal Roth contributions and a pre-tax employer match create a balanced tax approach.