Which One Will Maximize Your Money?

At a Glance

Here are three key ideas to help you decide when to pay taxes, how to stay flexible, and how to time conversions wisely.

• Think in terms of lifetime taxes, not this year's refund.. A Roth IRA trades a small tax bill today for the chance to avoid bigger ones later. A traditional IRA defers the bill but doesn't erase it—you're just deciding when to pay.

• Control is the real benefit, not just tax savings. Having both Roth and traditional accounts gives you flexibility to manage your income in retirement. That control can help you stay in your chosen tax bracket, avoid Medicare surcharges, and keep more of your Social Security benefits.

• Use strategy, not luck, to pick your timing. You can shift money between account types through conversions, or use a backdoor Roth if you earn too much to contribute directly. Many people convert right away, but waiting for a low-income year or a move to a no-tax state can make it even smarter.

Deciding between a Roth and traditional IRA is a choice every investor makes at some point, from beginners investing their first dollar to those with millions already invested.

As an investor, your goal is to invest in a way that gives you the highest after-tax return on your money.

You can do that in one of two ways:

• Asset Allocation: The types of investments you choose — stocks, bonds, cash, mutual funds, and so on.
• Asset Location: The types of accounts you invest in — such as a traditional or Roth IRA, 401(k), Health Savings Account (HSA), or taxable brokerage account.

Choosing between a traditional and Roth IRA is a question of asset location.

Neither type of IRA is inherently better than the other. The best choice depends on your individual financial situation and tax outlook.

One common rule of thumb is that if your tax rate is higher now than it will be in retirement, a traditional IRA may make more sense. But to get the right answer, there's more to consider.

And it's worth taking the time to get it right — recent updates under the SECURE 2.0 Act and the IRS adjustments for 2025 and 2026 have changed contribution limits, catch-up rules, and required minimum distribution ages.

Choosing the right account today can have a sizable impact on your future retirement savings.

• In this article, we'll go over:
• The difference between Roth and traditional IRAs
• How to understand your marginal tax rate
• What to know about required minimum distributions
• How asset location impacts your after-tax returns
• General guidelines for choosing between a Roth and traditional IRA
• When it makes sense to use both

Understanding the Key Differences Between Roth and Traditional IRAs

The primary difference between a traditional and Roth IRA is the taxation benefits.

• Traditional IRA: Contributions are tax-deductible, and taxes are deferred until withdrawn.
• Roth IRA: Contributions are not deductible, but withdrawals are tax-free.

But that's just the beginning.

Here's what else you need to know, which may impact your decision.

Section Notes:

• What is a qualified withdrawal? If you're over the age of 59½, you may withdraw any amount from a traditional IRA penalty-free. You can withdraw from a Roth IRA penalty-free after the age of 59½, as long as the account has been open for five years. 

Factor #1: Marginal Tax Rate vs. Tax Bracket

When choosing between a traditional and Roth IRA, one of the most important steps is comparing your current and future tax rates.

Your goal is simple: pay taxes when your overall rate is likely to be lowest.

That's why you'll often hear this rule of thumb:

• If your tax rate today is lower than it will be in retirement, a Roth IRA may make sense.
• If your tax rate today is higher than it will be in retirement, a traditional IRA may be better.

This general advice is sound but overly simplistic.

The key is to understand what “your tax rate” actually means.

Most people look only at their tax bracket, but what really matters is your marginal tax rate, which is the rate applied to the next dollar of income.

In reality, your effective tax rate (the average rate you actually pay) is usually much lower than your marginal rate, but marginal rates determine the tax impact of new contributions or withdrawals.

For example, suppose your federal tax bracket is 24% and your state rate is 5%. Forgetting to include state taxes is a common mistake.

Assuming you take the standard deduction and have no phaseouts or credits, each additional dollar of income would face roughly a 29% marginal tax rate.

To estimate yours, use any major tax software or an online marginal rate calculator. You don't need to file the return. Just increase your income by $1,000 and note how much your total tax liability rises. Divide that change by $1,000 to find your true marginal rate. If you're considering a traditional IRA contribution, reduce income by $1,000 instead and observe the difference.

This simple test often reveals surprises. Tax credits, Social Security taxation, Medicare premium surcharges, and income phaseouts can all create “hidden” marginal rates that are higher than your official bracket.

Section Notes:

• Be careful not to over-save in tax-deferred accounts. Retirement income streams, required minimum distributions, and Social Security benefits can all stack, pushing you into a higher effective tax rate later.
• If you plan to pass on IRA assets, consider the beneficiary's likely marginal rate as well. Under the SECURE Act, most non-spouse beneficiaries must withdraw inherited IRA funds within 10 years, which can create significant tax compression.

Factor #2: IRA Required Minimum Distributions

Comparing current and future marginal tax rates is the primary factor in choosing the IRA with the highest after-tax return, but taxes aren't the only consideration.

Traditional IRAs are subject to required minimum distributions (RMDs), while Roth IRAs are not.

RMDs require you to withdraw a certain amount from your traditional IRA each year once you reach a specific age. Under current law, RMDs begin at age 73, and for those born in 1960 or later, the starting age increases to 75.

RMDs don't create an additional tax; they simply force you to recognize income that has been tax-deferred over the years.

The challenge is that these withdrawals can increase your taxable income and potentially push other income—such as Social Security benefits or investment gains—into a higher tax bracket.

This loss of flexibility can be a disadvantage if you plan to keep working into your 70s or if you want to leave assets to your heirs.

To manage this, many investors use Roth conversions in their 60s to gradually move funds out of tax-deferred accounts before RMDs begin.

Another option is making qualified charitable distributions (QCDs) after age 70½, which allows you to satisfy your RMD by giving directly to a charity without increasing your taxable income.

Factor #3: The Difference in Roth and Traditional IRA Contribution Limits

Roth and traditional IRAs share the same annual contribution limits, but the IRS adjusts these limits periodically for inflation.

• For 2025, you can contribute up to $7,000, or $8,000 if you're age 50 or older.
• For 2026, the limits are expected to rise to $7,500, or $8,600 if you're age 50 or older.

What's important to understand is that a dollar contributed to a Roth IRA isn't worth the same as a dollar contributed to a traditional IRA.

With a traditional IRA, you're deferring taxes, not avoiding them. If you expect to pay 15% tax on your withdrawals in retirement, 15% of that account effectively belongs to the IRS.

With a Roth IRA, your contributions are made with after-tax dollars, and qualified withdrawals are entirely tax-free. In other words, the Roth contribution limit is effectively worth more, because 100% of the account is yours to keep.

This distinction matters most if you're maxing out contributions across accounts or deciding between tax-deferred and after-tax investing.

All else being equal, investing the full amount in a Roth IRA gives you more after-tax value than splitting funds between a traditional IRA and a taxable account.

Factor #4: What You Hold in Each Account Matters

Because withdrawals from a Roth IRA are tax-free, many investors prefer to hold higher-growth assets there—such as stocks, equity index funds, crypto IRASs or alternative investments they believe have strong long-term potential.

If those assets grow faster than expected, the entire gain can be withdrawn tax-free later.

In contrast, traditional IRAs are often better suited for more stable or income-producing assets like bonds, bond funds, or cash reserves.

Those investments tend to have lower expected returns, so deferring taxes on their smaller gains is less critical. When withdrawals are eventually taxed, the overall impact is smaller.

There's no single right formula—it depends on your portfolio mix and risk tolerance.

But thinking about which assets live in which accounts can improve your overall tax efficiency, just like choosing the right account type in the first place.

Pulling It All Together: How to Apply These Factors

By now, we've covered the main factors that drive whether a Roth or traditional IRA provides the better after-tax outcome:

• Your current and future marginal tax rates
• The impact of required minimum distributions (RMDs)
• How contribution limits affect the real after-tax value of your savings

The next step is to apply those principles to real-world situations. The right choice isn't just about your tax rate today—it's about your overall lifetime tax plan.

In practice, most people fall into one of three categories:

1. Those who benefit from paying taxes now (favoring a Roth IRA).
2. Those who benefit from deferring taxes until later (favoring a traditional IRA).
3. Those who benefit from using both, building flexibility and control for retirement.

Let's look at each of these in more detail.

When a Roth IRA Makes More Sense

Paying taxes now can make sense when doing so gives you more long-term control over your future tax situation. A few examples include:

• Your current marginal tax rate is relatively low, around 15% or below.
• You expect your tax bracket to rise in the future as income grows or as tax laws change.
• You anticipate similar or higher tax rates after age 73, when required minimum distributions begin.
• You've already maxed out other tax-deferred accounts and want to build after-tax savings for more flexibility.

The main advantage of a Roth IRA isn't just tax-free growth—it's control.

Having Roth assets in retirement lets you manage withdrawals strategically to stay within your preferred tax bracket.

Tip for new investors: Roth IRAs also offer liquidity. You can withdraw contributions (but not earnings) at any time without taxes or penalties. For someone just getting started, this feature can serve as a secondary emergency fund while you build long-term savings.

When a Traditional IRA Makes More Sense

Deferring taxes can be beneficial when you expect your future tax rate—or your beneficiary's—to be lower.

Common examples include:

• You're in a high tax bracket today but expect lower income in retirement.
• You plan to move from a state with high income taxes to one with no state income tax.
• You anticipate a temporary low-income year that could create an opportunity for a Roth conversion at a lower rate.

The key advantage of a traditional IRA is the immediate tax deduction.

For higher earners, those upfront savings can be invested elsewhere and compound over time. Later, during years when your income is lower, you can convert some of those traditional funds to a Roth IRA at a reduced rate—lowering your lifetime tax bill.

Even if you earn too much to contribute directly to a Roth IRA, you can still get money into one through a strategy called the backdoor Roth.

It works by putting money into a traditional IRA first, then converting it to a Roth later.

The timing of your conversion matters. Many people convert right away, but you don't have to. You can wait for a lower-tax year—like if you take time off work, move to a state with no income tax, or see a dip in income. This gives you more control over when you pay taxes.

However, there's one catch: the IRS pro-rata rule. When you convert, the agency looks at all your traditional IRA balances combined and taxes a proportional share of your conversion based on how much pre-tax money you hold.

If you have a $90,000 pre-tax traditional IRA and convert $10,000, about 90% of that conversion gets taxed as ordinary income—even if you're only converting after-tax dollars.

To avoid this, roll any old 401(k)s or pre-tax IRAs into your employer's 401(k) plan before attempting a backdoor Roth (if your plan allows it). This eliminates the pro-rata problem and adds flexibility later, since you'll have both tax-deferred and tax-free money to draw from in retirement.

When It Makes Sense to Use Both

If you're decades away from retirement, predicting future tax rates is impossible. Tax laws change, and so will your income and financial goals.

Holding both Roth and traditional IRA assets is a way to build tax diversification—giving you flexibility to choose which account to draw from depending on future tax conditions.

For example, you could:

• Withdraw from your traditional IRA in years when your income is lower.
• Tap your Roth IRA when you want to keep taxable income below a certain threshold, such as for Medicare premium limits or Social Security taxation.

In this way, a mix of both accounts gives you optionality and control, which is often more valuable than trying to predict exact future rates.