RetirementIntermediate6 min read
Roth vs. Traditional: which to pick
A tax decision disguised as a retirement decision. Here's the honest breakdown.
The Roth-vs-Traditional question sounds like a big deal because it's wrapped in tax jargon. The core is simple: do you want to pay tax on the money going in (Roth) or on the money coming out (Traditional)?
The basic tradeoff
- Traditional: contribute pre-tax (reduces your current tax bill), grows tax-deferred, withdrawals taxed as ordinary income in retirement. Favored when your current tax rate is higher than your future rate.
- Roth: contribute post-tax (no current tax break), grows tax-free, withdrawals tax-free in retirement. Favored when your current tax rate is lower than your future rate.
The rule of thumb
Early in your career, when income is low, Roth tends to win. Mid-to-late career, when income is high, Traditional tends to win. But uncertainty about future tax rates is the reason many people split their contributions.
Other considerations
- Roth has no Required Minimum Distributions (RMDs) during the original owner's lifetime — more flexibility in retirement.
- Roth contributions (not earnings) can be withdrawn at any time without penalty. That's a stealth emergency fund feature.
- Traditional contributions lower your Adjusted Gross Income today, which can qualify you for other tax benefits (Saver's Credit, premium ACA subsidies, etc.).
- Roth is locked in — once taxed, it stays tax-free forever. Tax policy risk is lower.
The 'both' answer
Plenty of people contribute to both Roth and Traditional. It's a form of diversification against tax-rate risk. If you have a Roth IRA and a Traditional 401(k), you already have both covered without thinking about it. That's fine.
Put this into practice
Worth tracks your accounts, budgets, and goals — so the concepts in this article aren't just theory.
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