Traditional vs. Roth: Should you take your tax break now, or later?
Picking up where the standard guidance leaves off
There can be endless decisions to make when investing. Chief among them: Whether to save for retirement through a traditional IRA and/or 401(k), or the Roth variety.
- With traditional accounts, you typically invest with pre-tax money, then pay taxes on withdrawals later in retirement. This lowers your taxes today and frees up more money to invest.
- With Roth accounts, you contribute money that's already been taxed, then enjoy tax-free withdrawals once you turn 59½, with no required minimum distributions.
When it comes to which is better, here’s the advice you’ll often hear:
Traditionals make more sense if your current tax bracket is higher than where you expect it to be in retirement. And vice versa with Roths.
It's a start, but not always helpful in practice. Tax brackets can be confusing, for one, and nobody knows what they'll look like decades from now.
People's incomes also ebb and flow with age, as do their tax brackets.
Luckily, data from the U.S. Bureau of Labor Statistics can help us eyeball these shifts and plot out when each account type tends to shine brightest.
The upward and downward slopes of spending
When we look at American's average spending by age, we see it often peaks in middle age and declines as we approach our traditional retirement years.
Connecting the dots, this means that traditional contributions often make more sense during the middle portion of workers’ careers. They’re likely earning and paying more in taxes than they will in retirement, so it makes sense to shift some of that tax obligation to a lower bracket down the road.
For those with lower incomes, pairing those tax-deductible deposits with the standard deduction can also help squeeze more of their taxable income into the 12% tax bracket. The next bracket takes a big step up to 22%.
As one’s income rises, however, another wrinkle may come into play.
The IRA income limit exception
If your income grows to a certain point (see the table below), you’ll face one of those so-called “champagne problems”: the tax deductions of a traditional IRA will begin to phase out, meaning it’s Roth or nothing if you want at least a partial tax break.
Earn even more, and your Roth access will eventually dry up too, although there’s a handy “backdoor” option that’s worth checking out. A 401(k), as a side note, has no income restrictions for either contribution type.
2025 IRA income limits
| Traditional IRA* | Modified Adjusted Gross Income (MAGI) | Roth IRA | Modified Adjusted Gross Income (MAGI) |
|---|---|---|---|
| Full tax deduction | $0-$79,000 (single) | Full contribution | $0-$149,999 (single) |
| $0-$126,000 (married) | $0-$235,999 (married) | ||
| Partial tax deduction | $79,001-$88,999 (single) | Partial contribution | $150,000-$164,999 (single) |
| $126,001-$145,999 (married) | $236,000-$245,999 (married) | ||
| No tax deduction** | $89,000 and up (single) | No contribution | $165,000 and up (single) |
| $146,000 and up (married) | $246,000 and up (married) |
*If covered by a retirement plan at work
**Anyone is eligible to make taxable contributions to a traditional IRA
Source: IRS
This is why blanket statements like “Roths are better” don’t hold much water. The decision boils down to your personal income situation, and that’s subject to change. With Betterment, however, our Forecaster tool does much of the work for you.
Simply scroll down to its “How to save” section, and we’ll use your self-reported financial information to suggest not only the optimal order of retirement account types, but whether traditional or Roth contributions make more sense based on your projected future tax bracket. Just be sure to update your info as needed (raises, marital status, etc.) for the most accurate estimates.
Now or later? Now that’s one less call to make
The traditional vs Roth debate will likely rage on for years. But between content like this, and tools like Forecaster, we do our best to help you quickly clear this common investing hurdle.
If your income is trending anything like the averages above, traditional deposits may make more sense, but the advantage will be slight, and it never hurts to hedge. Having both Roth and traditional funds gives you more flexibility when managing your income in retirement. Plus, you can spend less time stressing over the two, and more time building momentum toward your goal.
Sign up for your personalized traditional vs. Roth advice.
