Roth vs Traditional IRA Calculator
Compare the long-term value of Roth and Traditional IRA accounts
Understanding Roth vs Traditional IRA: Making the Right Choice for Your Retirement
Choosing between a Roth IRA and a Traditional IRA is one of the most important decisions you'll make for your retirement planning. Both accounts offer powerful tax advantages, but they work in fundamentally different ways. Understanding these differences can help you maximize your retirement savings and minimize your tax burden over your lifetime.
What is a Traditional IRA?
A Traditional IRA (Individual Retirement Account) is a retirement savings account that offers tax-deferred growth. Contributions to a Traditional IRA may be tax-deductible in the year you make them, depending on your income and whether you're covered by a retirement plan at work. The money grows tax-free until you withdraw it in retirement, at which point you pay ordinary income tax on both contributions and earnings.
For 2024, you can contribute up to $7,000 annually ($8,000 if you're 50 or older). The immediate tax deduction can provide significant tax savings in your working years, especially if you're in a high tax bracket. However, you must start taking Required Minimum Distributions (RMDs) at age 73, whether you need the money or not.
What is a Roth IRA?
A Roth IRA is a retirement account where you contribute after-tax dollars, meaning you don't get a tax deduction when you contribute. However, the money grows completely tax-free, and you can withdraw both contributions and earnings tax-free in retirement, provided you're at least 59½ and have held the account for at least five years.
Roth IRAs have the same contribution limits as Traditional IRAs: $7,000 in 2024 ($8,000 if 50+). However, there are income limitations for contributing to a Roth IRA. For 2024, single filers with modified adjusted gross income (MAGI) above $161,000 cannot contribute directly to a Roth IRA, though backdoor Roth conversions remain an option.
Key Differences Between Roth and Traditional IRAs
Tax Treatment: Traditional IRAs provide an upfront tax deduction but require you to pay taxes on withdrawals. Roth IRAs offer no immediate tax benefit but provide tax-free withdrawals in retirement. This fundamental difference makes your current and expected future tax rates the most critical factor in your decision.
Required Minimum Distributions: Traditional IRAs require you to start taking RMDs at age 73, which can push you into a higher tax bracket and affect Medicare premiums. Roth IRAs have no RMDs during your lifetime, giving you more control over your retirement income and allowing your money to grow tax-free for longer.
Early Withdrawal Rules: With a Roth IRA, you can withdraw your contributions (not earnings) at any time without penalty or taxes, providing more flexibility for emergencies. Traditional IRA withdrawals before age 59½ typically incur a 10% penalty plus income taxes, with some exceptions for first-time home purchases, qualified education expenses, and medical expenses.
When to Choose a Traditional IRA
A Traditional IRA makes sense if you expect to be in a lower tax bracket during retirement than you are now. This is common for high earners who anticipate reduced income in retirement. The immediate tax deduction can provide significant savings, especially if you're in the 24% tax bracket or higher.
For example, if you're 35 years old, earning $150,000 annually, and contributing $6,500 to a Traditional IRA, you could save approximately $1,560 in taxes this year (at a 24% rate). Over 30 years with a 7% return, that contribution could grow to about $49,500 before taxes. If your retirement tax rate drops to 12%, you'd pay about $5,940 in taxes, leaving you with $43,560.
When to Choose a Roth IRA
A Roth IRA is ideal if you expect to be in the same or higher tax bracket in retirement. This is particularly advantageous for younger workers early in their careers, as they have decades for tax-free growth to compound. Additionally, if you value flexibility and want to avoid RMDs, a Roth IRA is superior.
Consider a 25-year-old contributing $6,000 annually to a Roth IRA. With no immediate tax deduction, they pay taxes now (perhaps at a 12% rate, or $720). Over 40 years at 7% annual returns, this contribution could grow to approximately $89,900 — completely tax-free. If tax rates rise or they're in a higher bracket in retirement, the tax savings could be substantial.
The Power of Tax-Free Growth
The Roth IRA's tax-free growth becomes increasingly powerful over longer time horizons. While you miss the immediate tax deduction, decades of compound growth without future tax liability can result in significantly more after-tax wealth. This is especially true if you're young and have 30-40 years until retirement.
Consider this example: A 30-year-old contributes $6,500 annually to a Roth IRA for 35 years with a 7% return. At age 65, they'd have approximately $917,000 — all tax-free. In a Traditional IRA scenario with the same contributions and returns, they'd have the same pre-tax balance, but if taxed at 24% in retirement, they'd only net about $697,000 after taxes, a difference of $220,000.
Tax Rate Considerations
Your decision hinges largely on comparing your current marginal tax rate to your expected retirement tax rate. If you're currently in the 32% or 35% bracket but expect to be in the 12% or 22% bracket in retirement, a Traditional IRA likely provides more value. Conversely, if you're in the 12% bracket now but expect higher taxes in retirement (due to career growth, pension income, or tax law changes), a Roth IRA is advantageous.
Tax rates are historically low by historical standards and are scheduled to increase after 2025 when current tax cuts expire. This uncertainty makes Roth IRAs increasingly attractive as a hedge against future tax increases. Additionally, having both Roth and Traditional retirement accounts provides tax diversification, allowing you to manage your retirement tax liability more effectively.
Income Limits and Contribution Strategies
Traditional IRA contributions are available to anyone with earned income, but the tax deduction phases out for higher earners covered by workplace retirement plans. For 2024, single filers covered by a 401(k) lose the full deduction starting at $77,000 MAGI, with complete phase-out at $87,000.
Roth IRA contribution eligibility phases out at higher income levels. For 2024, single filers begin to phase out at $146,000 and are completely ineligible at $161,000. However, high earners can use the "backdoor Roth IRA" strategy, making non-deductible Traditional IRA contributions and immediately converting them to a Roth IRA.
Estate Planning Benefits
Roth IRAs offer superior estate planning benefits. Since there are no RMDs during your lifetime, you can leave the entire account to grow tax-free for your heirs. Beneficiaries must withdraw the funds within 10 years under current law, but all withdrawals remain tax-free, making Roth IRAs an excellent wealth transfer vehicle.
Traditional IRAs, by contrast, pass to heirs with a tax liability. Beneficiaries must pay income tax on withdrawals, and they're required to withdraw the entire balance within 10 years, potentially pushing them into higher tax brackets during those years.
Conversion Strategies
You can convert Traditional IRA funds to a Roth IRA at any time by paying taxes on the converted amount. This strategy, called a Roth conversion, makes sense during years when your income is lower, such as early retirement before claiming Social Security, or during market downturns when account values are temporarily depressed.
Strategic conversions allow you to fill up lower tax brackets. For example, if you're married filing jointly in 2024, you could convert Traditional IRA funds up to $94,300 and stay in the 12% tax bracket. This "bracket management" can significantly reduce lifetime taxes compared to being forced into higher brackets by RMDs later.
Making Your Decision
The optimal choice depends on your individual circumstances, including current income, expected retirement income, age, career trajectory, and tax planning goals. Many financial experts recommend a diversified approach, contributing to both account types to provide flexibility in managing retirement taxes.
Use this calculator to model your specific situation with realistic numbers. Experiment with different tax rate assumptions and contribution strategies. Consider consulting with a financial advisor or tax professional to develop a comprehensive retirement tax strategy that aligns with your long-term financial goals.
Remember that retirement planning is not one-size-fits-all. Your choice between Roth and Traditional IRAs should reflect your unique financial situation, tax circumstances, and retirement objectives. Regular reviews and adjustments as your circumstances change will help ensure you're maximizing your retirement savings and minimizing your lifetime tax burden.