401k, IRA, Roth: which account wins?
Key takeaways
04 · ideas- Traditional 401k: tax break now, pay taxes later
- Roth IRA: pay taxes now, never pay again on growth
- Annual contribution limits: $23,000 (401k), $7,000 (IRA) — adjust for inflation yearly
- The Roth wins if your future tax rate is higher than today
Basic level
The essentials · 1 min
Retirement accounts are tax-advantaged wrappers that reduce how much you pay in taxes. There are two main types:
Traditional (401k / Traditional IRA): You invest pre-tax dollars. You don't pay income tax on the money now — it reduces your taxable income. When you withdraw in retirement, you pay income taxes then.
Roth (Roth 401k / Roth IRA): You invest after-tax dollars. No tax break now. But all future growth — and all withdrawals in retirement — are completely tax-free.
The simple rule: If you'll be in a higher tax bracket in retirement → choose Roth. If you'll be in a lower bracket → choose Traditional.
Most people earning a moderate income today who expect to earn more later should lean Roth. Most high earners who expect lower retirement income should lean Traditional.
Intermediate level
How it applies · 2 min
**US-specific accounts:** References to 401(k), IRA, Roth, and similar accounts are specific to the US tax system. Equivalent vehicles vary by country. The underlying mathematical concepts apply universally.
Current contribution limits
| Account | Current limit | Catch-up (50+) |
|---|---|---|
| 401k (employee) | $23,000 | +$7,500 |
| IRA (Traditional or Roth) | $7,000 | +$1,000 |
| HSA (health savings) | $4,150 single / $8,300 family | +$1,000 |
Roth IRA income limits: Single filers phaseout $146,000–$161,000; married $230,000–$240,000. Above these limits, you can't contribute directly to a Roth IRA — but the "backdoor Roth" strategy (contribute to traditional, then convert) remains legal.
The break-even math
Assume $10,000 invested, 30 years at 7%, then withdrawn.
Traditional: $10,000 pre-tax → grows to $76,123 → taxed at 22% withdrawal = $59,376 net
Roth: $10,000 after 22% tax = $7,800 invested → grows to $59,376 → tax-free = $59,376 net
They're mathematically identical if your tax rate is the same in both periods. The Roth wins if future rates are higher; Traditional wins if lower.
The "tax diversification" approach
Many advisors recommend having both types:- Traditional 401k at work (employer match is often worth it regardless)
- Roth IRA separately (for flexibility and tax-free growth)
- Taxable brokerage (for amounts above retirement account limits)
This gives you control: in low-income years, withdraw more from Traditional. In high-income years (e.g., part-time work), withdraw from Roth to avoid bracket creep.
Required Minimum Distributions (RMDs)
Traditional accounts require you to start withdrawing at age 73 (current rules). Roth IRAs have no RMDs during the owner's lifetime. This matters if you don't need the money — RMDs can push you into higher brackets or affect Medicare premiums.
Advanced level
The math, step by step · 1 min
Quantifying the Roth vs. Traditional decision
Let T_w = tax rate at working/contribution time, T_r = tax rate at retirement/withdrawal.
For C contributed:- Traditional after-tax value: $C(1+r)^t(1-T_r)$
- Roth after-tax value: $C(1-T_w)(1+r)^t$
Roth wins when: C(1-T_w)(1+r)^t > C(1+r)^t(1-T_r)
Simplifying: T_r > T_w
The effective rate matters, not the marginal rate. If you'll have $50,000 of taxable income in retirement (Social Security + RMDs), your effective rate might be 12–15%, even if the marginal rate on the last dollar is 22%.
State tax considerations: Some states don't tax retirement income. Moving from a high-tax state for work to a no-income-tax state for retirement makes Traditional even more attractive (high deduction rate, zero withdrawal rate).
The Roth advantage for estates: Roth accounts pass to heirs who can then take tax-free distributions (subject to 10-year rule for non-spouses). Traditional accounts pass with the full tax liability embedded. For estate planning purposes, Roth is superior.
Mega backdoor Roth: After-tax 401k contributions (limit: $69,000 total including employer match) can be converted to Roth within the plan. This allows high earners to get an extra ~$30,000+ into Roth annually. Not all 401k plans allow this — check your plan documents.