Roth vs traditional IRA breakeven

Roth vs traditional IRA — the math (it's simpler than you think)

The Roth-vs-traditional decision gets over-complicated in most personal-finance articles. The math is actually straightforward: you pay taxes somewhere — either now or later. The right answer depends on whether your tax rate in retirement will be higher or lower than today. This calculator models both scenarios so you can see the gap clearly.

The core mathematical equivalence

Consider a $6,500 pretax dollar. Two paths:

Traditional IRA: contribute all $6,500 pretax. Over 30 years at 7%, it grows to $49,493. Withdraw at a 22% retirement tax bracket: $38,605 net.

Roth IRA: pay 24% tax today, leaving $4,940 after-tax to contribute. Grows to $37,604 over 30 years. Withdraw tax-free: $37,604 net.

Traditional wins by $1,000 in this example, because the retirement bracket (22%) is lower than the current bracket (24%). If the brackets were swapped (current 22%, retirement 24%), Roth would win by the same $1,000.

The true break-even rule

Roth ≥ Traditional if and only if retirement marginal bracket ≥ current marginal bracket.

This assumes: same contribution (in pretax-equivalent dollars), same growth rate, same withdrawal timing. Any asymmetry in tax rates drives the difference.

The case for Roth even when traditional looks better

Several real-world factors tilt the balance toward Roth beyond the pure break-even math:

• Future tax rates are uncertain and likely higher. The 2017 TCJA individual brackets expire at end of 2025 and default back to 10/15/25/28/ 33/35/39.6% from 10/12/22/24/32/35/37%. Planning on today's brackets may be optimistic.
• No RMDs on Roth. Traditional forces withdrawals starting at 73 (or 75 under SECURE 2.0). Roth lets money compound tax-free indefinitely, useful for late-life and estate planning.
• Roth passes better to heirs. Inherited Roth is tax-free to beneficiaries (though must be fully distributed over 10 years under SECURE Act). Inherited traditional is taxed to beneficiaries at their bracket.
• Roth reduces Medicare IRMAA and Social Security taxation in retirement. Traditional withdrawals count as income and can push you into higher Medicare premium tiers and more Social Security taxation. Tax-free Roth withdrawals don't.
• Contribution limit is higher in Roth-equivalent terms. Maxing $7,000 (2024 IRA cap) in a Roth is roughly equivalent to $9,200 pretax at 24% — you can save more effective retirement dollars in Roth than traditional.

The case for traditional

• High current bracket, modest retirement plan. Someone earning $350k at peak career planning to retire to a $80k spending life is in 32–35% now and 12–22% in retirement. Traditional wins clearly.
• State tax arbitrage. Someone living in California (13.3% state tax) planning to retire to Texas or Florida (0%) gets an 8–13% tax-rate reduction just by moving. Traditional captures this.
• Roth-conversion flexibility in gap years. Traditional gives you the option to convert gradually during early-retirement low-income years (55–70), filling up lower brackets with conversions. Roth locks you into current-year tax.

Special case: 401(k) vs IRA

For 401(k) contributions, most plans now offer a Roth option. The same break-even logic applies. However, two wrinkles:

• Employer match is always traditional. Even if your contribution is Roth, employer contributions go into the traditional side. This is pure free money regardless of Roth/traditional choice.
• $23,000 limit is the contribution limit, not a value limit. You can contribute $23,000 to Roth 401(k) — effectively more real-dollar retirement value than $23,000 traditional — because Roth is already after-tax.

Income limits for direct Roth IRA

Roth IRA direct contributions phase out above:

• Single: $146,000–$161,000 (2024)
• Married filing jointly: $230,000–$240,000 (2024)

Above these limits, you use the "backdoor Roth" — contribute to a nondeductible traditional IRA, then convert to Roth. Legal but watch the pro-rata rule if you have other pretax IRA balances.

The practical compromise — do both

Many planners recommend splitting contributions 50/50 between Roth and traditional. This hedges against uncertain future tax rates and gives you flexibility in retirement: withdraw from traditional up to the top of your target bracket, then top off tax-free from Roth. Tax diversification is a real thing.