Retirement Planning

Roth vs Traditional IRA and 401(k) — Which Is Right for You?

Both accounts offer powerful tax advantages for retirement savings. The difference between them is when you pay the tax — and which timing is better for your si…

Retirement Planning

Roth vs Traditional IRA. Which Fits You?

A tax decision that compounds for decades. Worth getting right.

Both accounts offer powerful tax advantages for retirement savings. The difference between them is when you pay the tax — and which timing is better for your situation.

$7,000maximum annual IRA contribution in 2024 — a limit that rewards starting early because the tax advantage compounds on every dollar for decades

The Situation

The Core Trade-Off

Traditional IRA: you contribute pre-tax dollars, reducing your taxable income today, and pay taxes on withdrawals in retirement. Roth IRA: you contribute after-tax dollars today, and withdrawals in retirement — including all growth — are completely tax-free. The right choice depends on whether your tax rate now is higher or lower than it will be in retirement.

Traditional saves you taxes at your current rate. Roth saves you taxes at your future rate. The better deal depends on which rate is higher.
— Worthune Decision Framework

You're uncertain whether to contribute to a Roth or Traditional IRA this year
Your income is either low now (early career) or high now (peak earning years) and you're unsure how that affects the decision
You've never modeled what your tax rate in retirement is likely to be relative to today

About This FinBook

The Roth vs Traditional decision comes down to current vs future tax rates. Understand the framework, the exceptions, and how to build a mixed strategy.

InteractivePDF availableRetirement Planning