I've read many articles in the past about the differences between Roth IRAs and Traditional IRAs and no matter how I read it, it always seems like the author leaves some detail out that makes the Traditional option sound better, but when considered the Roth is actually better. I think my confusion boils down to a single misunderstanding of a general rule in the Roth setup.

referencing this stackoverflow post: Why is a Roth 401(k) good if there is a long time before retirement?

The top answer goes into a big discussion of why fidelity has a misleading post on their site about the benefits of a Roth over a traditional account.

Here, he says this statement:

The Roth side, they assume the $5000 goes in at a zero tax rate. This is nonsense, as Elaine can't deposit $5000, she has to pay tax first, no? She'd deposit $3600, and would have the identical $27,404 at withdrawal time."

The next solution down says something similar:

You invest 10k into a Roth. After paying the taxes, your initial investment is $7500. After 50 years, you have $880,431 - the same you have with the traditional.

This is what I have been seeing anywhere, and it literally doesn't make sense. These numbers are talking about a 401k, but the concept is similar. So, lets assume that you're maxing your contribution at $5,550. So, for a traditional you would invest $5,500 and pay taxes later on the earnings and contribution. From what these people are saying, it is impossible for you to put $5,500 in if it were a Roth though, because the money has to be taxed.

From my understanding of taxes, they are paid completely separate of the actual account in which I choose to invest my money in. So, when the end of the year comes, and its time to pay my taxes, this $5,500 would be considered taxable and be calculated in my tax return. I would pay taxes on that money normally, as if I had put it in a Roth account or done nothing with it. The taxes does not have to come from this $5,500 I invested, it can come from the other money I made the rest of the year as part of my salary. So, in a maxed out traditional and Roth account, the limit is still 5.5k, not 5.5k for the traditional and then 5.5k - taxes on the Roth, since I can choose to use other money I have made to pay those taxes if need be.

If the statements above are wrong, then do not continue to read any further, as the rest of the post just goes to back my logic. If my reasoning so far is correct, then you may continue to see if everything else I am saying is making sense.

Now that we're in agreement, let me run through a few scenarios:

Let's assume that you are 25 years old, married, and making $90,000 jointly. This puts you dead in the center of the 25% tax bracket (today's tax bracket), and you are going to invest $5,500 a year. So when you contribute to the account, you pay 25% of 5,500 for 1,375. Lets assume that you withdraw in 40 years and made 6% interest each year on average (long term CAGR of the market has shown to be at least this, so its reasonable to say). 5,500e^0.06(40) = 60,627. Of this amount, 1,375 / 60, 627 = 2.27% tax rate on total balance.

Now, for that same person, a traditional would have been $0 up front. We will do the same scenario where it grew to 60,627. Say you manage to live a very simplistic life and only need 40,000 a year to survive. So with today's tax brackets, that would give you an actual tax rate of 12.67% for a total of $7,687 in taxes. Obviously the numbers don't quite add up, since the next year your remaining balance is less, so the tax rate is less, but over numerous years of investment this trend would continue since you would be able to lean on profits from additional years. Which leads to the long term example:

So, from a 40 year calculation standpoint, assuming the same amount was invested each year and the interest rate was flat across all 40 years. My Traditional would grow to 946k, and upon depleting it all at 40k a year, I would have paid 120k in taxes, leaving me with 826k. For the Roth IRA, I paid $55,000 in taxes and made the same 946k, leaving me with a profit of 891k. This number is greater than the previous example, and one might even argue that because they have already paid the taxes, it is nice to know that you will have 946k starting at retirement, not 826k after taxes.

Now, on the extreme example, lets say you make 180k a year, which is the max you can make to still contribute to the plan. Now, without boring you with all the math, the Traditional would remain the same 12.68%, while the Roth only increases to 2.54% from the 2.27%. Still almost a factor of 6 times as large!

From my calculations, this trend would continue to repeat itself until roughly 10-12 years out from retirement for salaries under 90k and 12-14 years for salaries up to the maximum 180k limit for investing into the Roth. This calculation also assumes that upon retirement, your money is placed in some investment where it stops growing interest (money market?).

Interestingly, the spread only increases when the CAGR increases. This is not intuitive at first, but think about it this way. If you push off paying taxes for your traditional plan, and then it does very well, there is a larger sum of money, which means there is no more money to tax. With more money to tax, the difference in tax paid is even higher than the initially analyzed factor of 6. I could never imagine investing into an account that literally relies on less growth for your amount of taxes to change. Also, if you were to use a more detailed example that included the compounding interest after retirement (maybe from bonds?), then I believe the case for a Roth account would be even more extreme, although I haven't run the numbers yet. Intuitively at this point, if increasing the growth causes more taxes on the traditional, but not the roth, then the roth will benefit even more over a longer period.

Also, some people may mention the argument of getting a tax deduction with the traditional and possible reinvestment of that money. I did run the numbers here and in this case, the traditional does come out on top (1,033,000 vs 946,000). However, this case requires that literally every single year you take the tax break money and invest it into the market to grow. What happens when your taxes are off one year and, even with the tax break here, you end up owing money or break even? Now it's going to be hard to balance that money out to ensure that you meet this case.

Also, one detail that is overlooked with a traditional IRA is that there is a maximum salary where a deduction can be made. If you make more than 99k a year, than the deduction decreases until eventually nothing around 120k. This further limits who benefits from the traditional.

So in conclusion, a traditional is only the better option if you make less than 99k a year and religiously reinvest the tax returns from the deductions, even if your tax return is bad that year. Otherwise, a Roth seems to be superior.

I can show my excel spreadsheet if anyone is interested, and any feedback would be greatly appreciated. Thanks.

EDIT: A link to my personal git with my excel spreadsheet

Changing the annual investment and CAGR changes the rest of the calculated numbers, and depending on whether or not the taxes per year of the traditional are greater than, less than, or roughly equal to, I shade the value red to show higher, green lower, and yellow equal. This is compared to the 28% tax bracket that the 120k and up salary holds, since I imagine myself being within that bracket most of my working career.

Excel Spreadsheet

  • 2
    I am sure JoeTaxpayer will chime in on this as he wrote an article that covers this subject. However, good for you for paying attention. This kind of attitude coupled with discipline and action will lead you into wealth.
    – Pete B.
    Apr 10, 2017 at 14:50
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    IMO the best solution to the ROTH vs Traditional "dilemma" is to diversify in to both. There's no telling what taxes will look in XX years, might as well have money in both buckets.
    – quid
    Apr 10, 2017 at 17:39
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    Beside the article you linked, please read Does a Roth IRA offer any explicit benefits over a Traditional IRA? I think I did a decent job of briefly explaining the interplay between the two. Apr 10, 2017 at 21:42
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    No idea why you think you're paying 12% on 40k income. You're paying 0% on $10,350, then 10% on $9,275, then 15% on $20,375, for under 10%. You don't hit 12.86% until much, much higher. (This is single, of course.)
    – Joe
    Apr 10, 2017 at 22:14
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    The standard deduction and the personal exemption add to about $10k single.
    – Joe
    Apr 11, 2017 at 7:04

8 Answers 8


Your confusion is that that answerer is not comparing a $5500 Roth IRA contribution to a $5500 Traditional IRA contribution. Rather, they were comparing a $3600 Roth IRA contribution to a $5000 Traditional IRA contribution.

It is fairer to do such a comparison because (assuming that this person's marginal tax rate is 28%) both of them start with the same amount of pre-tax money ($5000 of pre-tax money is equivalent to $3600 of post-tax money in 28% tax bracket). As a result, both a $5000 Traditional IRA contribution and a $3600 Roth IRA contribution will leave you with the same amount of cash in your bank account at the end (after taxes are filed). That's why it's a fair comparison. And when you do such a comparison, it will mathematically indeed always turn out to the same result for Traditional and Roth if the contribution and withdrawal are at the same tax rate.

On the other hand, if you were to compare a $5000 Roth IRA contribution to a $5000 Traditional IRA contribution, even though it's the same nominal dollar figure, you would be comparing apples and oranges because in one case it's a post-tax dollar amount and in the other case a pre-tax dollar amount. The Roth IRA contribution actually leaves you with less in your bank account at the end (after taxes are filed) than the same nominal dollar amount of Traditional IRA contribution. So you are comparing an (effectively) "larger" Roth IRA contribution to a "smaller" Traditional IRA contribution. Of course the "larger" contribution gets more tax advantages over time, and so the result looks better.

Note that since Traditional IRA contribution and Roth IRA contributions share the same nominal dollar amount annual limit, but we know that $1 of Roth IRA contributions is effectively larger than $1 of Traditional IRA contributions, that means that Roth IRA contributions has an effectively "higher" annual limit than Traditional IRA contributions. For example, a $5500 Traditional IRA contribution is equivalent to a $3960 Roth IRA contribution for someone in the 28% bracket; whereas a $5500 Roth IRA contribution would be equivalent to a $7638.89 Traditional IRA contribution, which you can't do. So it's not possible to do a fair comparison when you go near the limit. If it is important to you to tax-advantage the "largest" amount of money, then that is a reason to go for Roth IRA, since it has an effectively higher annual limit. You cannot replicate the tax advantage of a $5500 Roth IRA contribution with a Traditional IRA contribution, because that money in pre-tax dollars is beyond the limit of a Traditional IRA contribution.

  • The key to your answer really is buried in the statement in parenthesis: "assuming that this person's marginal tax rate is 28%". The answer completely changes when your marginal tax rate is different - it could even be 0%, for instance if you are the second earner with a part-time job in an unmarried couple. Mar 13, 2022 at 6:48

Welcome to the 'what should otherwise be a simple choice turns into a huge analysis' debate. If the choice were actually simple, we've have one 'golden answer' here and close others as duplicate. But, new questions continue to bring up different scenarios that impact the choice.

4 years ago, I wrote an article in which I discussed The Density of Your IRA. In that article, I acknowledge that, with no other tax favored savings, you can pack more value into the Roth.

In hindsight, I failed to add some key points. First, let's go back to what I'd describe as my main thesis:

A retired couple hits the top of the 15% bracket with an income of $96,700. (I include just the standard deduction and exemptions.) The tax on this gross sum is $10,452.50 for an 'average' rate of 10.8%.

The tax, paid or avoided, upon deposit, is one's marginal rate. But, at retirement, the withdrawals first go through the zero bracket (i.e. the STD deduction and exemptions), then 10%, then 15%.

The above is the simplest snapshot. I am retired, and our return this year included Sch A, itemized deductions. Property tax, mort interest, insurance, donations added up fast, and from a gross income (IRA withdrawal) well into the 25% bracket, the effective/average rate was reported as 7.3%. If we had saved in Roth accounts, it would have been subject to 25%.

I'd suggest that it's this phenomenon, the "save at marginal 25%, but withdraw at average sub-11%" effect that account for much of the resulting tax savings that the IRA provides.

The way you are asking this, you've been focusing on one aspect, I believe. The 'density' issue. That assumes the investor has no 401(k) option. If I were building a spreadsheet to address this, I'd be sure to consider the fact that in a taxable account, long term gains are taxed at 15% for higher earners (I take the liberty to ignore that wealthier taxpayers will pay a maximum 20% tax on long-term capital gains. This higher rate applies when your adjusted gross income falls into the top 39.6% tax bracket.) And those in the 10 or 15% bracket pay 0%. With median household income at $56K in 2016, and the 15% bracket top at $76K, this suggests that most people (gov data shows $75K is 80th percentile) have an effective unlimited Roth. So long as they invest in a way that avoids short term gains, they can rebalance often enough to realize LT gains and pay zero tax.

It's likely the $80K+ earner does have access to a 401(k) or other higher deposit account. If they don't, I'd still favor pretax IRAs, with $11K for the couple still 10% or so of their earnings. It would be a shame to lose that zero bracket of that first $20K withdrawal at retirement. Again working backwards, the $78K withdrawal would take nearly $2M in pretax savings to generate. All in today's dollars.

  • Density was definitely what I was considering, and now that it has been elaborated I have started to think deeper into it. I have considered the taxes involved in a secondary taxable account, but have not calculated that into my considerations yet. Also, when I have a 401(k) available to me, that will basically remove the density factor from consideration. Based on all of these posts, it seems that there is an importance in balancing the two to reap both of the benefits (which is what everyone has always said, I just couldn't see in detail why both have their benefits until now) Apr 11, 2017 at 15:05
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    Excellent. This board is the wisdom of crowds at its best. You can count on getting a variety of views, and answers to questions like this from a dozen perspectives. I can (and might, still) write a book just on the Roth topic. Apr 11, 2017 at 15:08
  • "the effective/average rate was reported as 7.3%" I very well may be misunderstanding what you're saying, but the it's the marginal tax rate that matters as far as figuring out the marginal benefit of the IRA. Apr 19, 2019 at 17:24
  • Both are of interest. Deposits into a 401(k) or IRA are all at the marginal rate, but withdrawals are really at the average rate. Your point is correct, the last dollar matters. I don’t think you misunderstand. I am retired. When working, I was at 28/33%. Now, at 22/24%. But my current average rate is far lower than that. If that doesn’t make sense, I’m happy to edit/expand my answer. Since rates changed, it may be time to update regardless. Apr 19, 2019 at 17:31

From what these people are saying, it is impossible for you to put $5,500 in if it were a Roth though, because the money has to be taxed.

You are correct that this is wrong. You can still put $5,500 in a Roth - the tax payment comes when you file, not when you make the investment. This is when the Roth is better than a Traditional IRA, when you can invest the max either way. Yes you get the tax break for the Traditional investment, and if you invest the tax savings you'll be in the same spot, all else being equal.

If you only have a certain amount (after taxes) to invest, say $3,000 in a 25% marginal tax bracket, then it works out the same either way. You can either invest $3,000 in a Roth and let it grow tax free, or put $4,000 in a traditional IRA since you can deduct $1,000 (15%) from your taxes when you file. Then your tax-adjusted balance when you withdraw is the same, since you'll have a lot more (33% more in fact) in your traditional IRA but will have to pay tax on the withdrawals.

  • If this is true, then can this logic be applied to a 401k as well? If I am able to max the account after taxes, then the Roth would be more favorable? Apr 10, 2017 at 15:35
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    @TreverWagenhals Yes the math is the same. The difference is what you do with the tax savings.
    – D Stanley
    Apr 10, 2017 at 15:37
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    @TreverWagenhals With the exception of a match - a match trumps tax treatment in both cases.
    – D Stanley
    Apr 10, 2017 at 20:15
  • Match is always non-Roth, and to pre-tax contributions, though. So that doesn't affect it.
    – Joe
    Apr 10, 2017 at 22:09
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    @Joe Right, but the presence of a match trumps the tax treatment, meaning I would contribute to a 401(k) of either type versus an IRA of either type.
    – D Stanley
    Apr 10, 2017 at 22:11

You're ignoring the fact that you still had the taxes from the $5500 (so $1375) left over when making the traditional IRA contribution. So yes, the Roth IRA grew without further taxing more than the Traditional IRA did; but you could've just as easily invested that $1375 in the same investments. While you'd owe taxes on them, true, you'd still earn a boatload of money. That's another $10,607 you've earned, not tax-free, but with gains at the 15% CGR is still $9170.

Same $6875

  • Roth: $5500 invested plus $1375 taxes paid; $0 in non-IRA account
  • Trad: $5500 invested; $1375, minus $344 taxes, $1030 in non-IRA account


  • Roth: $60627, tax free = $60,627
  • Trad: $60627 * .88 = 53351 + 9170 = $62,521

So you now have $60,627 in the Roth, available tax-free, or you have $60,627 available at a 10% or so average rate (12% if you like, though I think you'll find it's more like 10%). Say $53351, plus $9170 from the not-sheltered income after taxes, for $62,521 after taxes.

So you make about $2000 more by using the traditional IRA for $5500 and then just investing the rest in a long term account. The math might be slightly worse if you invest in something that has regular dividend taxes due, but if you're careful to use tax-favored investments you should be okay, and even if you don't you'll still end up ahead in the end if you make the same exact investment as your tax-sheltered account.

Ultimately the question is: are you paying more in taxes now, or later, comparing now marginal rate to later average rate. If you are paying more in taxes now, then traditional IRA plus invest the rest unsheltered. If you're paying more later, then Roth IRA.

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    I think this looks right, but the numbers can be made simpler. My choice would be $5000 in T-IRA or $3750 in Roth. The analysis can get pretty convoluted if, say, one had $7000 to invest. All T-IRA wouldn't be a choice. Apr 10, 2017 at 22:25
  • I think my issue with this is two-fold, as I addressed in my post: 1. In order for the benefits of this to actually be seen, the individual has to have great discipline in always contributing the tax break back into an investment. 2. What happens when their taxes were off that year and now their return is $0, or worse, and they still have to find the "tax break" money somewhere to benefit from this method. Apr 11, 2017 at 7:10
  • Also, @JoeTaxpayer, most of my examples are talking more specifically the convoluted situation where they have more to invest than the limit. If this is the case, it seems overall you get more bang for your buck since there's the same amount of money working for you, except one is tax free at retirement. Apr 11, 2017 at 7:13
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    You can't ignore the $1375, though. That's why the numbers look that way. Of course when you calculate it with the $1375 taken out of one side and not the other, that side comes out ahead.
    – Joe
    Apr 11, 2017 at 7:14

You're right. But we need to work around this:

Mind you, this is not my thesis, this is just in the way of my thesis. There's a fundamental principle of distributivity that bears heavy on your question.

Contributions / taxes * appreciation


Contributions * appreciation / taxes

In ideal circumstances, say you contribute $5500 to an IRA.

  • In a traditional IRA, you contribute $5500, it grows (your figures) 1102.3% to $60,627, then is taxed 25% ($15,157) giving $45,470.
  • In a Roth, you earn $5500, get taxed 25% ($1375) giving $4125 which you actually contribute, that grows 1102.3%, giving $45,470.

Same difference. That's disappointing. What is the benefit to the Roth, then?

(We'll double some ground with other answers here.) The first clue is your peculiar choice of $5500. That happened to be the maximum contrib [at the time you asked]. That shows you want to contribute the maximum. As I show above, you compared apples to oranges by ignoring the tax you needed to pay on the $5500 that went into the Roth. Let's fix that, and push to maximums.

  • In a Roth, you earn $7333, get taxed 25% ($1833) giving $5500, contrib that, it grows 1102.3% giving $60,627.
  • In a Traditional, you contribute $7333 No you don't. The max contrib is [was] $5500. you contribute $5500, that grows 1102.3% to $60,627, which is taxed 25% giving $45,470. Ha! Roth wins already and we're not even trying!

  • But hold on. You take that $1833 you couldn't invest tax-deferred, pay 25% tax on it leaving $1375, and invest it the old-fashioned way. Normal investing, in tax-advantaged funds, growing the same 1102.3% to $15153. Pay 15% capital gains tax ($2273) on that, and it's $12,880. Add that to the Trad IRA $45,470 and you get $58,350. Not so bad! A small price to pay for the other advantages of Trad IRAs over Roths. Right?

That extra investment is vulnerable

Realistically, that outside-IRA investment is not likely to happen in the first place. However you are not a statistic, so maybe you do in fact make it. Then what happens? Life happens.

Keep in mind this extra plain investment is not "magical" the way IRA or Roth is; it's not tax-protected and there are no contribution limits. So mentally, you're far less likely to treat it as special or irreversible. I can bust into my Roths, but I don't -- because I know I can't put it back.

What could go wrong? You misspend your youth lol. You have a spell of unemployment. Since the money is not "magical", it is fungible/exchangable for any other money (in nonprofit parlance, it is not a "Restricted Fund"). You can "borrow" it for any spending priority, say, buying a house, and "put it back later" (yeah right).

You can marry and the spouse does not share your financial values, and something happens there.

In many states, IRAs and Roths have asset protection similar to 401Ks. This money doesn't. And yeah, I used to think "Asset protection" was only relevant to the Cayman Islands gang, and yeah, it's rare for Joe Regular to get sued... but it's vulnerable to divorce. Or bankruptcy. And before you say "bankruptcy is for idiots", most are actually medical bankruptcy. Whoops.

If you live in the right state (or if you move to the right state), Real IRAs are protected. This means it matters how much you can effectively contribute, and Roth has the advantage there.

Tax brackets aren't different enough

One of the big selling points of a Trad is that you'll be deducting the money in a much lower tax bracket. No, you won't. I'm putting my parents' financial records in order for a move, and they're in the same bracket now as then.

Trad IRAs lower your contrib tax bracket, by raising your withdrawal bracket.

Everyone goes "la la la, you contribute in a 28% bracket and withdraw in 10%." No, that's how Roths work. With Trad/401K, you'll contribute in a 25% bracket (IRA/401K contribs lowered it) and withdraw in a 22% bracket (IRA/401K withdrawals pushed it up).

Even this assumes ideal, uniform withdrawals. God help you if you have a medical emergency. Because then, you're yanking out 6-digit amounts in a single year, pushing you into higher tax brackets than in your contribution year.

This means you need to actively and steadily manage your Trad withdrawals, drawing out money before you need it, to avoid the excess taxation of a surge. And once the money is out of the 401K or Trad, it loses the asset protection previously mentioned.

With Roth, this works the opposite direction. Contributions do not lower your tax bracket, and Roth withdrawals are not taxed so you stay in a low bracket caused by your Social Security, pensions and non-Roth 401Ks and the like. Why does that matter? Roths are immune to surged withdrawals...

Roths don't have compulsory or necessary withdrawals

To expand on the above point, in a traditional IRA after retirement, you have to move out money evenly and consistently every year (i.e. move it from the IRA to a regular savings or brokerage account) because

  • A withdrawal spike in any tax year pushes you into a higher tax bracket in that year. So to minimize that, you want to pull out the same every year for the rest of your life (how long is that, anyway?)

  • After a point the government requires you take some money out every year. (or you pay even more taxes, ugh).

With Roth, you can leave the money in the Roth until you need it -- surging a Roth withdrawal is your right and it has no mandatory distributions. This affects asset protection in states that protect IRAs/Roths -- even if you're eligible to withdraw it, it's harder for a creditor to pierce that state protection.

Also, money still in retirement accounts may not count as "assets" for eligibility for government assistance programs.

Trad is taxed when you're financially most vulnerable

You pay taxes on traditional IRAs, during your retirement when you are in the unique financial circumstances of a fixed income. While it's true that in pure mathematics it's the same thing to withdraw $1000 in a Roth or $1333 in a Trad to pay the 25% tax. But that is cold comfort while you are withdrawing it.

It may only be an emotional issue, but hey, so is the "snowball method", and people endorse that.

Roth conversion lets you time taxation to your advantage

One very useful option is to contribute to traditional IRA or 401K, then convert to Roth in a gap year. So if you want to take a year off mid-career for education, travel or personal time, you can play the best of both worlds - defer tax in high-income years by contributing to Trad or 401K, and then take the tax hit in the "gap" year when you are in a low bracket. I did just that and paid about 7% effective tax on the converted amount.

Roth principal is part of your Emergency Fund. IRA isn't.

You don't want to do this, because you can't put it back. But you are allowed to withdraw the initial principal you contribute to a Roth IRA without tax consequences (other than your Roth getting smaller). That means when you're planning your Orman/Ramsey "6 month emergency fund", your Roth can cover part of that, which frees up other money to manage life events.

The argument is that the Trad is mathematically equal to the Roth if everything goes exactly to plan. Okay. But that doesn't account for the non-math factors.

  • Failed to account for average vs marginal tax rates (yes, a traditional IRA will take advantage of 0% and 10% rates when withdrawing, even if not all of the withdrawal each year is at the low rates). And why are you talking about "compulsory withdrawals" in the same sentence as Roth IRA? Are you talking about the heirs?
    – Ben Voigt
    Apr 19, 2019 at 6:14
  • @Ben I forgot all about the compulsory withdrawal issue, that is a defect serious enough to need its own section. Thanks. As far as marginal tax rates, since we are here to compare choices in tax deferral. what matters is the tax on the difference, which occurs on the "next dollar" or highest bracket. In OP's example that means 25%. Remember the 0-10% brackets will probably be filled up with other income such as SS, pension, dividends, etc. Apr 19, 2019 at 16:08
  • The 0-10% brackets will probably be filled with other income such as Traditional IRA/401(k), but if someone takes your advice and converts it all, it won't be. Other income such as SS and pensions -- true today, but for the people making financial plans today, those things will not exist by the time we retire. And only dividends on investments outside tax-advantaged retirement accounts are taxable, so those aren't likely to fill the 0%-10% brackets either. So marginal changes to contributions consider marginal tax, but conversions consider marginal now and multiple brackets later.
    – Ben Voigt
    Apr 19, 2019 at 17:12
  • Also the RMD rules are a bit more complex -- Roth 401(k) balances must be rolled over into Roth IRAs to avoid the RMD.
    – Ben Voigt
    Apr 19, 2019 at 17:14
  • @BenVoigt On the deletion of SS, [citation needed]. On deletion of government pensions, [citation needed], I'll let you have the point on private companies. Apr 19, 2019 at 17:31

Other people have pointed this out, but there are a few considerations in whether you should do a Roth or Traditional IRA, such as:

  • Your future tax rate when you retire
  • Your current tax rate
  • Whether you can afford to contribute the same amount to the Roth as you would contribute to the Traditional IRA given your financial situation when you're doing the contribution.
  • Future governmental tax policy

One of the major arguments for using a Traditional IRA is that you can (at least in theory) afford to contribute more money initially than you'd be able to afford if you were using a Roth IRA. While this is, in theory, true, I'm not at all convinced that using a Traditional IRA will actually cause people to contribute more to it. Realistically, how many people will actually contribute, say, $500 more to their IRA because they knew that their contribution for this year will save them $500? To know if this is the case, consider the last time that you actually invested some of your tax refund in your retirement account; I haven't seen any actual statistics on this, but I'm guessing that very few people do this. Please see other people's answers for details on the mathematics behind that.

The second argument for contributing to a Traditional IRA is if you expect your future income tax rate to be lower than your current tax rate for some reason - e.g. due to a change in government policy (e.g. replacing income taxes with Value Added Tax or something like that), the fact that you're doing the contribution relatively close to when you're planning on withdrawing it, etc. Please see this question for more discussion about this.

Keep in mind that, while a Traditional IRA saves you tax money this year, a Roth IRA saves you money when you withdraw it, so it's not really a question of paying taxes on $5000 now or $5000 later, it's a question of paying taxes on $5000 now vs., for example, $50,000 later (or however much the money's grown by the time you withdraw it). Maybe the Traditional IRA is still worth it, though, if there are changes to tax policy or you end up with a lot more money in your Traditional IRA due to being able to contribute more.

  • 1
    " it's a question of paying taxes on $5000 now vs., for example, $50,000 later" If the money you contribute grows by a factor of 10, then that means that every dollar of tax saved today is worth ten dollars of tax saved later, because the dollar saved today will grow into ten dollars. Apr 19, 2019 at 17:31
  • And for many of us - certainly for me - it wasn't really an investment, but a way of paying less in tax. After all, I could easily have died without ever spending a penny of that IRA "investment", but I got the immediate benefit of not having to give the government quite so much money.
    – jamesqf
    Apr 20, 2019 at 4:54

There is yet another way to look at it. Most answers here seem to deduct the taxes you pay from the Roth contributions. But in reality, both Roth and traditional IRA are capped at the same amount, which opens up another way of looking at it. The current limit for 2022 is $6000, or $7000 if you are age 50 or older.

The other problematic part in many of the answers is assuming a 28% marginal tax rate. That's a reasonable number, but the results vary dramatically depending on your actual tax rate. They also vary dramatically with the tax rates at the time of withdrawal, and with your return in the years in between.

I will do the same calculation several times, for several different combinations of tax rates.

All scenarios assume that you are under age 50, that you achieve a 2% annual return (some people think 8% is more appropriate, but I personally think that the era of these returns is coming to an end), and that you withdraw the funds after 10 years. Over 10 years, the 2% annual return is about 22% total after compounding. Note that in most of the scenarios, taxes will eat up all of your returns, and then some (but leaving the money in a taxable account would still be worse!)

Unlike the other answers, I always assume that you max out the contributions in year 1 (and don't contribute any more, to keep things simple). So after ten years, both the Roth and the IRA will always be worth approximately $7300. The difference is in how much you paid for that return, and how much of it you get to keep after taxes.

I also add a third option, a regular taxable investment of the same amount. Remember, a regular taxable investment comes out of the same investment as a Roth. But the withdrawals are taxed differently from a traditional IRA; you only pay taxes on the capital gains, and capital gains taxes are also lower. There also are tax-free investments (such as certain municipal bonds). So my comparison only scratches the surface here.

In each case, I list the input (which is your contribution, plus taxes on it if applicable), and I also list the result, which is the cash you would get on withdrawal. In other words, the balance, minus any taxes due.

There also are other factors to consider, some other answers already touched on that. For instance, in case of bankruptcy, maybe due to a medical issue, a taxable account would be lost, while traditional and Roth IRAs are usually protected. If you ever owe a large amount of taxes but are squeezed for cash (for instance, if you had to short-sell your home), the IRS may forgive the taxes if you are insolvent, but they do take your retirement account into account. In that case, it helps to have a particularly low retirement account balance.

Current tax rate: 0%. Tax rate after 10 years: 0%.

This may be the case, for instance, when you have a low-income job but little expenses. For instance, a high schooler working a summer job and living with the parents might fall into that group, or a second earner in an unmarried cohabitating couple.

In that case, it's a no-brainer:

  • IRA: input-$6000, result-$7300
  • Roth: input-$6000, result-$7300
  • Taxable: input-$6000, result-$7300

All three are exactly the same. Not surprising since there are no taxes involved.

Current tax rate: 0%. Tax rate after 10 years: 28%.

  • IRA: input - $6000, result: $5700
  • Roth: input - $6000, result: $7300
  • Taxable: input - $6000, result: $7100

In this case, the IRA is worst because you are taxed on the full amount at your regular rate. In a taxable account, you are only taxed on the capital gains, and at a lower rate. In a Roth, there are no taxes involved at all.

Current tax rate: 28%. Tax rate after 10 years: 0%.

This is the scenario IRAs were designed for, and why most professionals will recommend a Roth. It may apply if your retirement income is dramatically lower than your work-life income.

  • IRA: input $6000, result $7300
  • Roth: input $8333, result $7300
  • Taxable: input $8333, result $7300

This is the scenario where the traditional IRA shines, and what the IRA was created for. The Roth performs poorly because you have to pay taxes on the contribution, but you don't save any on the withdrawal.

Current tax rate: 28%. Tax rate after 10 years: 28%.

This might be a realistic scenario post-retirement today if you expect to have a good income from either a pension, from taxable investments, or from a traditional IRA.

  • IRA: input - $6000, result $5700
  • Roth: input - $8333, result $7300
  • Taxable: input - $8333, result $7100

This is a tricky one. In terms of return, the IRA wins. You only lose about 5%, but you lose 12% in a Roth.

But the Roth still has a few tricks up its sleeve. First, because the contributions are after-tax, the effective contribution limit is, in this case, 28% higher. So if your goal is to end up with the highest account balance you can, then a Roth still has the edge over a traditional IRA.

Second, if you also have a 401(k) from your employer, a traditional IRA contribution may not always be possible, but you can still contribute to a Roth IRA. If your income is high enough and you are over age 50, that may let you save up to $33000 per year towards your retirement.

The real bottom line, of course, is that there are many factors to consider; there is no one-size-fits-all.


Think about contributing to both a Traditional IRA and a Roth IRA if you have the funds. In theory, you could receive the lowest tax rates by depositing money into a regular IRA during years of democratic rule, depositing money into a Roth during years of Republic rule, and then withdrawing from the Roth during democratic rule and the tradition during Republican rule. Then you would be depositing with lower tax rates and withdrawing with lower tax rates. Granted this method would involve some speculation.

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