Deciding between a Roth and Traditional retirement account can feel overwhelming, but it all boils down to one simple question, when do you want to pay taxes? These two account types aren’t a one-size-fits-all scenario; they’re tools designed to suit different financial situations. The key is understanding how they work and which one aligns with your current and future goals.

This guide will walk you through the key differences, benefits, and considerations of Roth and Traditional accounts so you can make an informed decision about your financial future.

The “When Do You Want to Pay Taxes?” Question

Pay Now vs. Pay Later

The fundamental difference between Roth and Traditional accounts is timing. With a Roth account, you pay taxes today on contributions, but your withdrawals in retirement are tax-free (as long as they’re qualified). On the other hand, Traditional accounts allow you to save pre-tax dollars and avoid paying taxes now, but you’ll defer taxes on withdrawals later. 

Think of it like buying coffee: Would you rather pay upfront and forget about it or break the cost into smaller installments that you pay later? Both can work, it just depends on when you’d rather deal with the cost. 

Nerd Note: Did you know that Roth IRA contributions are especially popular among younger savers due to their lower tax rates during early career stages?

Why Your Tax Rate Is the Dealbreaker

The Marginal Tax Rate Explained

At the heart of the debate lies your marginal tax rate, the rate paid on your last earned dollar. If you’re currently in a high tax bracket but anticipate being in a lower bracket during retirement, a Traditional account may save you money by deferring taxes to the future. 

Conversely, if your income is relatively low today and you expect it to increase over time, locking in today’s lower tax rates with Roth contributions may make more sense.

Future Federal Tax Rate Projections

Here’s where things get tricky, future tax rates are unpredictable. For example, the Trump Tax Cuts and Jobs Act is set to sunset in 2026, which will raise today’s tax brackets. While it’s impossible to predict with certainty, understanding today’s tax rules gives you a framework to make smart decisions. We are currently in a historically low tax rate environment, with a growing eye for decreasing government expenses and increasing revenue to better right the government deficit, those betting on the direction of tax rates benefit from knowing this context. 

Nerd Note: Did you know that U.S. tax rates have swung as high as 94% during World War II? It’s proof positive that tax rates can, and do, change dramatically over time.

Your Earnings and Lifestyle Matter, Too

Low Earners? Roth Might Be the Winner

If you’re early in your career or in a lower tax bracket, now is your chance to go big on Roth contributions. Paying taxes today means your future withdrawals will come without any tax burden, a perk that could save you thousands in retirement. Paying tax at 0-12% tax is a relatively low level and warrants considering the Roth account, rather than deferring.

Climbing the Income Ladder? Consider the Traditional

Those enjoying high earnings today at the height of their earnings may benefit more from Traditional contributions, deferring taxes until later. This strategy can also pair well with Roth conversions to pay taxes during retirement when your tax bracket is likely lower. 

Nerd Note: Fun fact, historically, Americans’ peak earning years fall between ages 45–54. Planning your strategy during this critical window can make a huge difference.

Having a Foot in Both Camps

Hedge Against Uncertainty

What if you’re unsure about future tax rates and your career? Consider a mixture of both to diversify your tax exposure. By contributing to both Roth and Traditional accounts, you balance risk and build flexibility into your financial future, it’s like diversifying your investment portfolio. 

It’s hard to predict the future of tax rates but contributing to both Roth and Traditional accounts gives you options and peace of mind.

Roth Conversions in Retirement

Retirees or those in a particularly low income year should consider Roth conversions. If you have lower taxable income later in life, you can transfer/”convert” some funds from Traditional to Roth IRA accounts, spreading out tax liability and maximizing tax-free growth. 

Nerd Note: Roth accounts don’t require minimum distributions (RMD’s) like Traditional accounts, after all, Uncle Sam has no more juice to squeeze from that. Traditional account RMD’s begin at 72 but quickly rise to 75 and force distributions (and tax) to be paid each year. This starts at roughly 4% of the account balance and increases as you age.

Some Common Myths Debunked

“Roth Contributions Have Tax-Free Growth Forever”

This is mostly true, but there’s a catch, if today’s tax rate is higher than your future rate, you might end up overpaying. For example, paying 32% in taxes on a Roth contribution today when you could withdraw at just 24% in a Traditional account later could mean unnecessary tax costs.

“Tax Rates Will Always Go Up”

While this is a common assumption, history tells a different story. For instance, tax rates fluctuated significantly throughout the 20th century, reaching their peak during WWII and declining in the decades since. Future tax legislation could bring changes that work in your favor. 

Nerd Note: The Trump Tax Cuts dramatically reduced rates in 2018, but they are temporary, highlighting how tax policies often cycle over time.

“If Everything Stays The Same, Roth Still Makes The Most Sense”

This is most clear looking at a real life example: If you pay 22% tax on $10,000 today to contribute to a Roth account, which is $2,200, you are left with $7,800 left to grow. Let’s now say this money triples by the time you withdraw, where it is now worth $23,400. If you had instead contributed to a traditional account, no tax would have been paid in the beginning allow the account to triple to $30,000, assuming the same tax of 22%, you are left with an equivalent withdrawal after tax of $23,400.

Putting It all Together

By working with an advisor that is using a professional planning software, we help families map out not only what their tax looks like today, but also how that might change in 10, 20, even 40+ years from now as a baseline to help minimize their lifetime tax bill. Below are the baseline lifetime total tax amounts, and how that is projected to change over time based on their current assets and future income:

What we see is there is a notable drop in tax when the family retires, that ratchets back up at age 75 when required distributions take place in 2065. After only 6 years of taking RMD’s, this then pushes their annual tax bill to be over their highest earning years! Too many families I have worked with are unaware of this, and why I love to work to get in front of this well in advance.  

Tax Types over Time

If you have been investing, you surely are aware of the importance of diversifying across different investments, but what about type’s of account types? Below is a projection of the same family illustrated above, with the portion of Roth assets in orange, Traditional in baby blue, and non-retirement investments in dark blue.

This is a healthy distribution between accounts that is flexible for a changing future tax environment. 

Nerd Note: On the opposite side, when I have worked with families who have been slow to plan, the baby blue section (traditional) often has been a larger portion. Many have been surprised to know how much withdrawal is needed to pay for both the home renovation AND taxes on the never taxes income.

Key Takeaways and Final Thought

Choosing between Roth and Traditional retirement accounts isn’t about following trends, it’s about tailoring your strategy to your unique financial situation. Here are the key factors to weigh:

• Evaluate your current versus future marginal tax rate.
• Consider your current asset makeup and the future unpaid tax liability.
• Consider your career stage, lifestyle, and earnings trajectory.
• Diversify your approach if you’re unsure about what the future holds.

Deciding where to save isn’t just about taxes, it’s about your goals, values, and where you see yourself in the future. 

Not sure which path is right for you? Speak with one of our experienced financial advisors at HealthyInsights to help run your numbers to determine what may make the most sense for you. We’ll help you craft a personalized retirement plan that builds the life you dream of, without betting the ranch on rates.