Roth vs. Traditional – Planning Considerations

June 13, 2022

The debate about Roth vs. Traditional IRA funding/contributions is a tale as old as time… well, not really… as the Roth IRA only came about in 1997 thanks to senator William Roth. For a primer, let’s talk about the key difference between the two account types:

Traditional IRA

Roth IRA

You may notice that in the Roth summary I use a term that isn’t commonly discussed when Roth IRAs come about – which is the prepayment of taxes. If you thought Roth IRAs were a free lunch of tax-free growth and tax-free withdrawals, you are mistaken, as the taxes have to come out of your cash flow the year contributions are made, you just likely don’t notice (and truly, because you don’t notice could be the biggest behavioral benefit of funding a Roth). 

What do Roth vs. Traditional IRA growth and balances look like? Well, let's look at this example:

The after-tax balance is the exact same. Why? Because of the initial “prepayment” of taxes from the Roth funding. If you assume that you are in the same tax bracket now as you will be in retirement, I would argue that the traditional IRA is the better way to go as it gives you more optionality in regard to when you pay the tax vs. prepaying it in year one. 

If your tax rate in retirement is lower than your current tax rate, a traditional IRA is the way to go as the bird in hand is worth it. If your tax rate is higher in retirement, then the Roth is the way to go… but…. will your tax rate be higher? 

Tax rates in retirement – Can this be projected with accuracy? 

In short, no. BUT – we can look at current data and historical tax rates to make some educated guesses and plan in a prudent manner. 

Let’s start with the current data:

  1. Are you in the top tax bracket today and thus have a taxable income in excess of $630,000? If so, the traditional IRA/401k is likely the way to go. Why? Because it is highly unlikely that you will continue to make that much in retirement. 
  2. Are you in a tax bracket of 12% or lower, thus having a taxable income of $40k or less (as a single filer) or $80k or less (as a joint filer)? Then the Roth is the way to go, as you are in a very low tax bracket and the likelihood of your bracket falling even lower is doubtful. 
  3. Do you earn somewhere between $40k and $600k? Welcome to the middle, where most filers end up and why this debate rages on. 

Let’s continue with historical tax rates:


As much as higher tax rates are a fear of investors and tax preparers alike, from a historical perspective, the top tax rate has been fairly stable for the past 30 years, and if anything, has dropped over the past ~80 years. While we cannot predict the future, their seems to have been fairly consistent tax rate policies from a historical perspective, and the fear of taxes going up exponentially might be overdone… even if the root cause of keeping taxes low is the cynical nature of politicians wanting to remain in office. 

So – What’s the drawback to contributing to a traditional IRA/401k? Being in a higher tax bracket when you retire. Well.... If you are in a higher tax bracket once retired and over the age of 72….. congratulations, you have won at the game of (financial) life. That’s not a terrible drawback in the least bit, and one I would accept 365 days a year. 

So... when is the right time to make Roth contributions? 

Here are a few no-brainer Roth contributions opportunities:

Fun stuff, right? Want to learn more about refinement of IRA contributions? Schedule a call with us.


This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

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