Roth and traditional accounts tax the same dollars at different times. A traditional account invests the full amount and pays tax when you withdraw. A Roth account invests only what is left after today’s tax, then the withdrawal is tax-free. If the rate now and the rate later match, the spendable results tie. The decision is about which rate is higher.
The tie is the lesson
Paying tax now shrinks what gets invested. Paying tax later shrinks what you can spend. When the rate is the same and the return is the same, those two effects cancel. A long time until retirement does not, by itself, make Roth better. A lower rate today than the rate you expect later does.
Use your marginal rate, the rate on the dollars you are deciding about, not your overall effective rate. The federal tax estimator shows the marginal bracket. If you expect to be in a lower bracket in retirement, traditional usually leaves more to spend. If you expect a higher bracket later, Roth usually wins.
What can tip a close call
This comparison ignores income limits, required distributions, and the chance that a traditional contribution drops you into a cheaper bracket today. Those can matter more than a small difference in the chart. A match is a separate decision: take the full match first. Match dollars are usually pre-tax even when your own deferral is Roth.
If you do not know the future rate, split contributions. The hedge is allowed. When the two rates you type are equal, this tool will show a tie, which is the honest answer under these assumptions.
The dollar amount is the decision, not a limit
The default annual amount is close to a recent IRA contribution limit. The math is the same for a 401(k) deferral. Enter the pre-tax dollars you are actually choosing how to classify. Traditional receives the full amount. Roth receives it after today’s tax.
The result assumes the money stays invested for the full period and is then withdrawn under retirement rules. Early-withdrawal penalties are not included. Neither are saver’s credits. Use the spendable balances, not the pre-tax traditional balance, when you compare the two.
How to use the roth vs traditional calculator
The comparison uses the same pre-tax money. A traditional account invests the full amount and pays tax on the withdrawal. A Roth account invests only what is left after today’s tax, then withdrawals are tax-free. If you expect a lower rate in retirement, traditional usually leaves more to spend. If you expect a higher rate later, Roth usually wins. If the two rates match, the results tie.
- Enter the pre-tax dollars you could contribute each year.
- Enter your marginal tax rate today and the rate you expect to pay on withdrawals in retirement.
- Set the return and the years the money will stay invested.
- Compare the spendable balances. Traditional is reduced by the retirement tax. Roth is not.
How the math works
Same dollars, different timing
Paying tax now on a Roth shrinks what gets invested. Paying tax later on a traditional account shrinks what you can spend. When the rate is the same and the return is the same, those two effects cancel. The interesting case is when the rates differ.
Marginal rate, not effective rate
Use the rate on the dollars you are deciding about. That is your marginal bracket, not your overall effective tax rate. The federal tax estimator shows the marginal bracket.
What this leaves out
Required distributions, income limits, a match, and the chance that a traditional contribution drops you into a lower bracket today are not in the math. Those can tip a close call.
$7,000 a year, 22% today and 12% in retirement
The defaults invest for 30 years at 7%. The traditional account receives the full $7,000. The Roth receives $7,000 after 22% tax.
The Roth grows to about $555,000, all of it spendable. The traditional account grows to about $712,000 and is worth about $626,000 after a 12% tax. Traditional finishes ahead by about $71,000 because the retirement rate is lower.
Terms worth knowing
- Traditional
- Contributions may be pre-tax. Withdrawals in retirement are taxed as ordinary income.
- Roth
- Contributions are after tax. Qualified withdrawals, including the growth, are tax-free.
- Marginal rate
- The tax rate on the next dollar. Use it for this decision, not your average rate.
- Spendable balance
- What is left after the retirement tax. For a Roth, that is the whole balance.
What to do with the number
If you do not know the future rate, split contributions. The hedge is allowed, and this tool will show a tie when the rates you enter are equal.
A long time until retirement does not, by itself, make Roth better. The rates do that.
Take the full employer match first. Match dollars are usually pre-tax even when your deferral is Roth.
High earners who cannot deduct a traditional IRA, or who expect required distributions they do not need, have extra reasons to look at Roth.
Questions people ask
What this leaves out
The same pre-tax dollars are available each year, with no starting balance.
Traditional withdrawals are taxed at one flat retirement rate.
Roth withdrawals are tax-free.
Contribution limits, income limits, required distributions, and saver’s credits are not applied.
These figures are estimates to help you understand the tradeoff. They are not tax, legal, insurance, or investment advice. A fiduciary can look at the same numbers in the context of the rest of your plan.