Roth IRA vs Traditional IRA: the decision that could cost (or save) you thousands

In 2024, the average household headed by someone aged 65–74 paid over $8,700 in federal income tax on Social Security benefits and retirement account withdrawals alone. For many, the bill was avoidable - or at least smaller - if they had made a different choice decades earlier. That choice is the Roth IRA vs traditional IRA split, and by the time most people realize it matters, the window to do anything about it is closing fast.

A Roth IRA and a traditional IRA are the two main tax-advantaged individual retirement accounts in the United States. The core difference between Roth IRA vs traditional IRA is the direction of the tax break: a traditional IRA gives you a deduction now and taxes you later, while a Roth IRA taxes you now and gives you the growth tax-free later. The decision that looks cheapest in the year you make it often turns out to be the most expensive one by the time you turn 73.

How they actually work

With a traditional IRA, every dollar you contribute reduces your taxable income for that year - as long as you are not covered by a workplace retirement plan, or your income is below the phase-out threshold. If you earn $80,000, are not covered by a workplace plan, and put $7,500 into a traditional IRA, your taxable income drops to $72,500. If you do have a 401(k) at work, the deduction phases out between $79,000 and $89,000 of modified adjusted gross income for single filers in 2025, so at $80,000 the deduction is partial. The money grows untaxed while it sits in the account.

But when you withdraw it in retirement, every dollar - contributions and growth - counts as ordinary income. If your effective tax rate in retirement is 20%, a $400,000 traditional IRA is really a $320,000 account in purchasing power. The IRS also forces you to start withdrawing at age 73. These required minimum distributions push up your taxable income whether you need the money or not.

A Roth IRA works in the opposite direction. You contribute with after-tax dollars, so the $7,500 contribution offers no deduction this year. But once the money is inside the Roth, it grows free of tax, and every qualified withdrawal — contributions and decades of growth — is tax-free. There are no RMDs during your lifetime. If your Roth IRA is worth $400,000 in retirement, it is worth $400,000. The catch is that you must have earned income to contribute, and if your income is too high, the contribution is phased out completely.

The math comparison

Tax bracket is what drives the decision. The rule sounds simple — choose Roth if your future tax rate will be higher, choose traditional if it will be lower — but "future tax rate" is not something anyone can predict with confidence. What you can do is model specific scenarios and look at where the numbers tip.

You cannot compare the two accounts by looking at the account balance alone. Putting $7,500 into a Roth IRA costs $7,500 out of your bank account. Putting $7,500 into a traditional IRA costs you less — because you get a tax deduction that year. At 22%, the refund is $1,650, so your true out-of-pocket cost is $5,850. A fair comparison must either start with the same pre-tax earnings or the same after-tax cash commitment. Otherwise you are comparing a $7,500 investment to a $5,850 investment and pretending they are the same.

Take a 52-year-old married couple filing jointly. Their household income is $165,000, putting them in the 22% federal bracket. They have $400,000 in a traditional IRA. The money they contribute today will sit invested for 15 years before they need to spend it. They expect their retirement income to be around $75,000, putting them in the 12% bracket.

Start with $7,500 in pre-tax earnings. Here is what happens in each account:

**Traditional IRA:** The full $7,500 goes in, untaxed. At 6% annual growth for 15 years, it compounds to about $18,000. Withdrawn in retirement at the 12% bracket, after tax the net is $15,840.

**Roth IRA:** The $7,500 first gets taxed at 22% — only $5,850 lands in the account. After 15 years at 6%, it grows to about $14,040, withdrawn tax-free.

Traditional wins by $1,800 on this single year of contributions. The lower retirement bracket does the work.

The math shifts when the brackets narrow or flip. Suppose the same couple's retirement income stays at $165,000 through part-time work plus RMDs. Now the traditional withdrawal is taxed at 22%: $18,000 becomes $14,040. The Roth also delivers $14,040. It is a tie on the contribution itself, but the Roth pulls ahead for two reasons: you do not have to invest the tax savings separately to keep up (the traditional holder must invest the $1,650 each year to benefit from the deferral), and the Roth has no RMDs forcing money out at the wrong time.

The more complex reality is the RMD trap. By age 73, the IRS requires you to withdraw roughly 1/26.5 of your traditional IRA balance annually. On a $400,000 traditional IRA at 73, the first RMD is about $15,100. Add Social Security and maybe a small pension, and you may not be in the 12% bracket any more. You could be back in 22% — the same rate you paid decades earlier, except now the tax bill comes on a much larger balance. That is where the traditional IRA costs people the money they thought they had saved.

Roth conversions as the bridge

You do not have to pick one account and stick with it forever. A Roth conversion lets you move money from a traditional IRA into a Roth IRA, paying tax on the converted amount in the year you do it.

This makes sense in specific windows. The sweet spot is usually the years between retirement and RMD age — when your income has dropped but the IRS has not yet forced you to start withdrawing. In those years you can convert chunks of your traditional IRA at a low tax rate, permanently moving that money into tax-free Roth space. Each conversion raises your taxable income for that year, which is the main Roth conversion tax implication to watch — the trick is to stay within a bracket you can afford.

A concrete example: consider a couple that retires at 55. Their income drops to $75,000. They convert $21,000 per year — staying within the 12% bracket (the 2025 ceiling for married filing jointly is $96,950, so $75,000 + $21,000 = $96,000). They pay 12% on each converted dollar. By age 68, they have moved $275,000 into Roth space. That $275,000, plus its growth, will never be taxed again. The Roth Conversion Ladder Planner shows exactly how this plays out year by year, factoring in your real income, your real balance, and where each conversion lands relative to the bracket edges.

The alternative — doing nothing and waiting for RMDs — often means paying a higher rate on a larger balance later. The numbers are what matter.

Once you understand the Roth vs. traditional choice, the next step is usually figuring out how much to convert each year — our Roth Conversion Sweet Spot post covers that scheduling problem.

FAQ

Can I have both a Roth IRA and a traditional IRA?

Yes, as long as your total contributions do not exceed the annual limit — $7,500 for 2026, plus a $1,100 catch-up if you are 50 or older. Many people build traditional balances early in their career, then switch to Roth or use conversions later.

What if tax rates do not rise?

This is the argument for staying in traditional if you expect your retirement income to be lower than your peak earning years. The problem is that your own rate can rise even if the federal brackets do not, because RMDs add income you cannot refuse. A lower bracket in your sixties does not guarantee a lower bracket in your seventies.

Should I convert to a Roth IRA?

If you are in a low-income window — typically the years between retirement and age 73 — the tax math often says yes. Convert enough to fill your current bracket without jumping into the next one. The goal is to pay tax at a rate lower than what your RMDs will force later.

Should I convert everything at once?

Almost never. Converting your entire $400,000 traditional IRA in one year would push most of it into the 24% or 32% bracket. You end up paying more tax than necessary. Most conversions work best as a multi-year ladder, staying inside a bracket you are comfortable with.

What about the state tax?

If you live in a high-tax state and plan to retire in a low-tax or no-tax state, the math favors traditional contributions now. Reverse the geography, and Roth makes more sense. The federal analysis is only half the picture.

Try the Roth Conversion Ladder Planner

If you want to see how conversions would work with your actual numbers — your age, your balance, your income trajectory — the Roth Conversion Ladder Planner runs the year-by-year tax math for you. It shows where each conversion amount lands in the brackets, what your RMDs will look like at 73, and whether a multi-year ladder leaves you with more spendable money than doing nothing.

Sources

• IRS - Retirement topics - IRA contribution limits
• IRS, Publication 590-A - Contributions to Individual Retirement Arrangements (IRAs)
• IRS, Retirement plan and IRA required minimum distributions FAQs

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