When saving for retirement, you’ll typically have two choices for how you’ll fund your IRA. With a traditional IRA, you’ll contribute pre-tax dollars that will grow inside the account tax-free and be taxed when the money is withdrawn. A Roth IRA, however, taxes your initial contribution so that you don’t have to pay taxes when you withdraw your savings.
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The difference between these two savings vehicles is simple enough, but figuring out which is better for you isn’t so cut-and-dried. The answer ultimately depends on whether your tax rate in retirement (or whenever you start withdrawing your funds) will be higher than it is currently. While lower- to moderate-income workers may opt for a Roth IRA because they expect to be in a higher tax bracket when they start withdrawing their retirement savings, higher earners may anticipate being in a lower tax bracket in the future, making the traditional IRA the better option.
Also, keep in mind that traditional IRA contributions are tax deductible and reduce a person’s annual tax bill, a benefit the Roth option does not provide. Remember there are income limits for those contributing to Roth IRAs: for tax year 2024, a single person must have a modified adjusted gross income (MAGI) under $146,000 and a married couple filing jointly must have a MAGI under $230,000. For 2025, those limits rise to $150,000 and $236,000, respectively).
To see how a traditional and Roth IRA stack up against each other, we compared two variations across three different tax scenarios. For each, we calculated how much a person is left with 30 years after contributing $6,000 to traditional IRA and a Roth IRA. We assumed an 8% annual rate of return in each scenario, and looked only at federal tax brackets, as state income tax varies. (In each of the scenarios, for simplicity, we assumed a lump-sum withdrawal rather than gradual distributions.)
Scenario 1: Tax Brackets Remain the Same
In our first scenario, we examined the difference between a traditional IRA and a Roth account if a person’s tax rate (22%) is the same at age 60 as it was 30 years earlier. Someone who contributed $6,000 to a traditional IRA at age 30 would see her money compound at a greater rate over the next three decades compared to a Roth IRA. That’s because income tax would reduce the Roth contribution to $4,680, while the full $6,000 could grow within the traditional account.
As a result, the traditional IRA would be worth $60,376 after 30 years, while the Roth IRA would be worth $47,093. However, a person with a traditional IRA would pay nearly $13,000 in taxes at the time she withdraws her money, making her post-tax withdrawal exactly the same as the Roth IRA: $47,093.
