Do you think income tax rates will go up or down by the time you retire? If you’re like many Americans, you suspect they’ll rise, and likely for good reason. Let’s just look at history. In 1944, the top U.S. federal income tax rate was an astounding 94% on the highest earners, and through the 1950s–1970s it never even dipped below 70%.¹ Today, the top rate is just 37%, which is actually historically low by comparison. Meanwhile, government debt is at record highs, and many experts believe this imbalance makes higher future taxes likely.²
As retirement savers, this information is not just relevant but absolutely critical in regards to the tax efficiency of your financial, investment, and retirement plans. Should you pay taxes on your retirement savings now or later?
Or in other words, should you focus on contributing to a Traditional or Roth IRA?
Both are types of Individual Retirement Accounts (IRAs) that offer tax advantages to encourage saving for retirement. However, they differ in when you get those tax benefits.
What is a Traditional IRA?
A Traditional IRA is a retirement account that typically gives you a tax break now. Contributions to a Traditional IRA are often tax-deductible, which means you can subtract the amount you put in from your taxable income for the year (if you meet certain IRS rules). In other words, you might save on taxes today by contributing to a Traditional IRA. The money then grows tax-deferred, meaning you don’t pay taxes each year on investment earnings inside the account. However, when you withdraw money from a Traditional IRA in retirement, those withdrawals are taxed as regular income. It’s “tax later” savings.
Key Features of Traditional IRAs
What is a Roth IRA?
A Roth IRA is essentially the mirror image of a Traditional IRA on taxes. With a Roth, you pay taxes now on the money you contribute (there’s no upfront deduction), but in exchange you get something powerful: tax-free income later. Money in a Roth IRA grows tax-free, and qualified withdrawals in retirement come out 100% tax-free. It’s “tax now, tax never later” savings.
The concept was introduced in the late 1990s (named after Senator William Roth) and has quickly become a favorite for many savers – especially younger ones. In fact, as of 2024 about 26% of U.S. households owned a Roth IRA (vs. 33% with Traditional IRAs)³, a number that has been growing over time. Why are they so popular? Because the idea of a pot of money in retirement that the IRS can’t tax at all is pretty appealing!
Key Features of Roth IRAs
Unfortunately, not everyone can directly contribute to a Roth IRA. If you earn “too much,” the IRS bars you from contributing directly. For 2025, a single filer with modified adjusted gross income around $150,000 or more (or a married couple with about $236,000 or more) cannot contribute the full amount to a Roth⁴. (There are phase-outs and partial contributions allowed at slightly lower incomes, and strategies like the “backdoor Roth” for high earners, but those are more advanced topics for another day.) Traditional IRAs, on the other hand, have no income limit to contribute, so anyone with earnings can put money in a Traditional IRA, though the tax deduction phases out at higher incomes if you have a workplace retirement plan.
Key Differences Between Traditional and Roth IRAs
Both account types help you build retirement savings with tax advantages, but the timing of those advantages differs.
Traditional vs Roth IRA — Quick Compare
| Traditional IRA | Roth IRA |
|---|---|
| Contributions may be tax-deductible | Contributions are made with after-tax dollars (no deduction) |
| All withdrawals in retirement are taxed as income | Qualified withdrawals in retirement are tax-free |
| Required Minimum Distributions starting at age 73 | No RMDs for the original owner’s lifetime |
| Income limits for tax deduction (if you have a work retirement plan) | Income limits for ability to contribute |
| Generally beneficial if you expect a lower tax bracket later | Generally beneficial if you expect a higher tax bracket later |
A few additional notes to the comparison:
- Contribution Limits: The combined annual limit for IRAs (Traditional + Roth) is $7,000 (or $8,000 if 50+) in 2025. 4 You can split that amount between a Traditional and Roth if you want, but the total can’t exceed the limit. This limit adjusts over time for inflation.
- Age Factor: There is no minimum age to contribute (as long as you have earned income, even teens with a part-time job can contribute to an IRA with the help of a guardian). Traditional IRAs used to bar contributions after age 70½, but that rule was removed and now seniors with earned income can contribute too. Roth IRAs never had an age cap.
- Withdrawal Rules: Both types discourage withdrawals before age 59½ (with the 10% penalty), but Roths give you more wiggle room since you can pull out contributions without penalty. Traditional IRAs may allow penalty-free early withdrawals for specific exceptions (e.g. first-home purchase, certain medical or education costs), but you’ll still owe taxes on the distribution in most cases. Roth IRAs have similar exceptions for early withdrawal of earnings but again, this is an advanced topic.
Now that you understand the mechanics, how do you decide which IRA makes more sense for you? It comes down to a few key considerations.
Which IRA Makes Sense for You?
Let’s revisit the question we posed at the beginning of this article: Would you rather pay taxes now, or later? As one rule of thumb, if you expect to be in a higher tax bracket in retirement than you are today, a Roth IRA may be the better choice. If you expect to be in a lower bracket in retirement, a Traditional IRA might make more sense. In other words, pay tax at the lower rate.
Sounds simple, right? If only!
Of course, none of us has a crystal ball. It’s hard to know what your exact income (and tax rate) will be in retirement, especially if it’s decades away. Plus, Congress can change tax laws. That said, here are some personal factors to help guide your decision.
Your Current vs. Future Tax Bracket
Compare your tax situation now to what you anticipate later. Are you early in your career (earning less) but expect significant raises, or do you think tax rates overall will be higher when you retire? If yes, leaning Roth could be wise.
Conversely, if you’re earning a high income now and expect to downsize your work or have lower income in retirement, a Traditional IRA’s deduction can give you big savings now and you’ll pay taxes later when your rate might be lower.
Need for a Tax Break Now
Do you need the immediate tax relief? A Traditional IRA can reduce your tax bill for the year, which might free up cash flow. Some might even find that the deduction is the nudge that makes saving possible. Roth IRAs give no such immediate benefit; you have to be able to stomach the full contribution without a tax break.
Discipline to Invest Tax Savings
If you go Traditional, will you invest the money you saved on taxes? A common argument for Roth is that it effectively forces good behavior: you pay the tax and be done. With a Traditional, you get a tax refund or lower bill, but if you just spend that extra cash instead of investing it, you could be missing out. One study found that in scenarios where investors contribute the same amounts, the Roth often ends up providing more after-tax retirement money than a Traditional, sometimes by over $100,000 extra, unless the investor diligently reinvested the tax savings from the Traditional each year.⁵ In short, if you aren’t likely to invest the tax break, a Roth might inadvertently lead to a larger nest egg.
Access and Flexibility
Are you worried you might need to tap your retirement savings early? If so, a Roth offers more flexibility (withdrawn contributions are tax/penalty-free). This isn’t a primary factor, but it’s a nice safety net feature of Roths for some. Traditional IRAs are very rigid and early withdrawals are generally painful.
Age and RMD Concerns
If you’re younger, you have a long time for Roth earnings to compound tax-free, which amplifies the benefit of tax-free withdrawals. If you’re older and nearing retirement, the immediate deduction of a Traditional might be more valuable if you’ll soon start withdrawals in a lower bracket. Also, if you hate the idea of forced RMDs (maybe you don’t need the money at 73 and prefer to let it grow or leave it to heirs), Roth is attractive since it has no RMD for the original owner.
Income Eligibility
High earner and not eligible for Roth contributions? Then your choice might already be made for now – you can do Traditional (deductible or non-deductible depending on circumstances) and perhaps consider conversions or backdoor Roth strategies as needed. On the flip side, if you have a retirement plan at work and your income is high, your Traditional IRA contribution might not be deductible either (making it effectively like a Roth without the later tax benefit). In such cases, Roth IRA (if you can) often makes more sense than a non-deductible Traditional – why take taxable withdrawals later if you didn’t get a deduction upfront? (This is a nuanced area: consult a financial advisor if you’re in this boat.)
IRA Decision Guide
Interactive — tap to follow your pathLeaning Roth IRA Tax-free later
- Tax-free qualified withdrawals in retirement.
- No RMDs for the original owner, helpful for legacy planning.
- Access to contributions anytime if life throws a curveball.
Leaning Traditional IRA Tax break now
- Potential current-year deduction can improve cash flow.
- Useful if you expect a lower tax rate in retirement.
- Simple “set it and defer it” structure until withdrawals.
Balanced Outcome Either / Mix
- Both Roth and Traditional can fit — consider splitting contributions.
- Tax diversification gives flexibility for future tax scenarios.
- Fine-tune with an advisor based on income, benefits, and timeline.
Roth Not Directly Available Workarounds exist
- Consider a backdoor Roth (non-deductible Traditional → conversion) if appropriate.
- If not converting, deductible Traditional may still help if eligible; avoid building large non-deductible balances without a plan.
- An advisor can map the cleanest path given income and plan coverage.
Why Not Both?
Many people actually opt to diversify their tax treatment by having both pre-tax (Traditional) and after-tax (Roth) savings, to hedge their bets and greater tax diversification in retirement. For example, you might contribute to a Traditional 401(k) at work and a Roth IRA on the side, creating a mix of taxable and tax-free income in retirement. This can provide flexibility: you could withdraw from the Roth in years you want to avoid bumping into a higher tax bracket, for instance. Tax planning in retirement could become much easier when you have multiple “buckets” to pull from.
Finally, remember that the decision isn’t always irrevocable, and you might be able to change strategy over time. For example, you might contribute to a Roth when young and switch to Traditional in peak earning years. Others convert some Traditional IRA money to Roth in years when their income dips (for example, if you retire early or have a sabbatical year, doing a Roth conversion at a low tax rate might be a savvy tax move).
Making the Decision
Choosing between a Traditional vs. Roth IRA is a pivotal decision for your financial future, but it doesn’t have to be made in isolation. Many people come to us with this very question. The good news is that with some guidance, you can make an informed choice tailored to your situation.
A financial advisor can help analyze your tax picture now and projected later, consider any legislative changes, and even run scenarios. More importantly, working with an advisor helps you integrate the IRA decision into your broader retirement plan. It’s not just about taxes, but also your savings rate, investment strategy, retirement goals, and the million other things that make up your unique situation.
If you’re still on the fence or want personalized advice, feel free to reach out for a complimentary consultation. We’re here to help you weigh these factors in light of the current low-tax environment and the potential for changes ahead.
