Is It Better to Contribute to a Roth or Traditional IRA? - NerdWallet
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Is It Better to Contribute to a Roth or Traditional IRA?


One of the most common retirement planning questions is about account choice: Should you contribute to a Roth account, or a traditional one? Both IRAs and 401(k)s let you choose between these two options (although some companies don’t offer a Roth 401(k), the availability of these accounts is growing).

With a Roth account, you pay the taxes upfront, investing with after-tax income, and the investment and earnings grow tax-free. That means distributions in retirement are not taxed.

Traditional accounts function the opposite way, tax-wise: You pay no income tax upfront because contributions are tax-deductible. You do, however, pay taxes in retirement when you take distributions from the account.

Which is better? Consider these factors:


If you expect your tax rate to be higher in retirement than it is now, or to stay the same, a Roth IRA is generally the better choice. If you expect your tax rate to go down in retirement, you may want to go with a traditional.

It’s hard to predict your future tax rate, particularly if retirement is far off. However, there are a few factors you can consider: Tax rates in general are likely to rise over the coming decades for nearly all tax brackets, especially given the high national debt and an aging population that will ultimately mean a declining tax base.

Individually, as you get older you are likely to advance in your career and earn more money, potentially putting you in a higher tax bracket. On the other hand, you may have a lower income in retirement than during your working career, putting you in a lower bracket than your current one.

It’s a judgment call, but most young people who are at an early stage of their careers should probably choose a Roth account.  For older workers nearing retirement, a traditional account often makes more sense. To play it safe, many people choose to diversify their tax exposure by contributing to both Roth and traditional accounts.


Roth vs. Traditional
Lower tax rate in retirement Higher tax rate in retirement
Roth Traditional Roth Traditional
Current tax rate 25% 25%
Future tax rate 15% 33%
Annual investment $5,500 $5,500 $5,500 $5,500
After-tax totals at retirement* $555,902 $572,898 $555,902 $472,835

* Assumes a 7% annual return and 30-year time horizon.

Early withdrawals

While taxes are the primary consideration in this decision, there are also some minor technical differences between the two account types. While it is generally not advisable to withdraw retirement assets early, sometimes life circumstances make this unavoidable. Traditional IRAs incur a hefty 10% penalty and taxes on withdrawals before age 59½. Roth IRAs are generally more lenient here: You can withdraw contributions made to the account at any time, tax- and penalty-free. However, any earnings on contributions are still subject to the 10% penalty if withdrawn before age 59½.

There are, however, exceptions in both accounts, including withdrawals of up to $10,000 for first-time home purchases; post-secondary educational expenses; substantially equal periodic payments within the IRS guidelines; medical expenses exceeding 10% of your adjusted gross income; health insurance premiums after 12 weeks of unemployment; IRS levies; and disability or death of the account holder. Consult the IRS website for more information on qualified early distributions.

Required minimum distributions

Another difference to consider between Roth and traditional IRAs is that traditional IRAs require the account holder to begin taking minimum distributions at age 70½, while Roth IRAs do not.  If you plan to start living off your retirement savings by your 70th birthday, as most people do, then this difference will not affect you. But for those who are fortunate enough to not need their retirement savings right away — or those who want to pass on the account holdings to an heir — a Roth may be preferable.

Income limits

There are income limits that determine who can make Roth IRA contributions: To make the full contribution of $5,500 in 2015, you must have a modified adjusted gross income of $183,000 or less if married filing jointly or $116,000 or less if single. (However, the backdoor Roth IRA is open to those of all income levels.)

Traditional IRAs don’t have income limits, but account holders who also have an employer-sponsored retirement plan like a 401(k) may not be able to deduct their full contribution (which makes a Roth more attractive). To deduct the full contribution to your traditional IRA if you are also participating in an employer-sponsored plan, your modified AGI in 2015 must be less than $98,000 if single or $61,000 if married.

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Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @arioshea.

Image via Shutterstock.

  • Nick Hepler

    The logic on this is flawed. If one is investing in an IRA (Traditional or Roth) they would have the same initial investment because the money they have to invest has already been taxed. This assumes that the person investing in the Traditional IRA gets an instant tax rebate to invest, but in reality the reduced tax liability (of $1,250) is not realized until the individual files their tax return. Therefore, if two people invest the same amount ($5,000), the individual with the Roth will end up with less tax liability in the end because the return far exceeds the initial investment. The individual with the Traditional IRA will have more disposable income at the end of the year they invested, but the Roth investor will have much more at retirement.

  • NickB

    I like what Nick said. Honestly, investing in an IRA is a great thing. The issue today is that many people would like to invest in things other than the stock market but don’t realize that they can with their retirement accounts. If you are wanting to invest in things like gold, real estate or even private businesses you can do it with a self directed IRA. Why not invest in the things you know and love? Investing in the stock market or bonds may not be your thing or you may want to invest in something a bit safer or more your style. You can do it with a self directed IRA. Investing in your retirement the way you want really is possible.

  • Pat Thomasson

    Thinking about retiring early? The Roth could provide an option for retirement income before you reach the magic age of 59.5 and have access to your 401(k) because you can withdraw your contributions with no penalty.

  • BJToepper

    This example is correct, but doesn’t show the more usual case of a saver contributing the full amount into a Roth. As I write current contribution limits are $5,500, though in this example they were at $5,000. At a 25 percent tax rate, a saver would have to earn over $6,000 — and pay taxes — to contribute the full $5,000 amount, making the effective contribution limit into a Roth higher than in a traditional IRA. The extra savings over the years can have a startling effect on total value.

  • fifocoralsea

    The conventional approach is to compare your current tax bracket with what you think it will be in retirement, which would depend on your taxable income and the tax rates in place when you retire. If you expect it to be lower, go with pre-tax contributions. If you expect it to be higher, go with the Roth. If you’re not sure, go with both.