Money guide · Retirement accounts and planning
Roth vs. traditional IRA: taxes and tradeoffs
Compare Roth and traditional IRAs by contribution treatment, withdrawal rules, eligibility, and after-tax scenarios.
How it works
A traditional IRA deduction can depend on income and workplace plan coverage. Roth contribution eligibility can also depend on income. Contributions, earnings, conversions, and distributions have different rules. Consult the IRS for the relevant tax year; this guide intentionally does not substitute a fixed limit for annually updated eligibility information.
A worked example
Suppose you compare $1,000 of pretax resources at an illustrative 20% tax rate today. An eligible deductible traditional contribution could place $1,000 in the account, while an after-tax Roth contribution would start at $800. If both double and the traditional withdrawal is taxed at 20%, each yields $1,600 after tax in this simplified model. Different future tax rates change the comparison.
What to compare
Consider current eligibility, current versus expected future tax treatment, available cash, fees, and investment choices. Include the benefit of any traditional deduction rather than comparing equal account balances as if they had equal cost. Confirm what counts as a qualified Roth distribution and whether early withdrawals create consequences for the particular money being withdrawn.
A common mistake to avoid
Do not assume “Roth” means every withdrawal is immediately free of all tax or restrictions. Nor is a traditional contribution always deductible. General labels conceal rule differences. A conversion can generate taxable income, so it needs its own analysis rather than being treated as a simple account rename.
Is a traditional IRA contribution always deductible?
No. Deductibility can depend on workplace coverage, income, filing status, and other rules. Check the current IRS guidance for your situation.
Sources and further reading
Connect this to inflation
Inflation changes the spending power of money over time. Read the related inflation explainer, or adjust a retirement goal for inflation using your own assumptions.