Roth vs Traditional 401(k) and IRA: Which Is Better?

Both accounts grow tax-free while invested. The difference is when you pay income tax: traditional contributions are deducted now and taxed on withdrawal; Roth contributions are taxed now and withdrawn tax-free.

The simple rule

If your tax rate in retirement will be higher than today, Roth wins. If it will be lower, traditional wins. If equal, they come out the same.

Reasons to favour Roth

• You are early in your career in a low bracket.
• You want tax diversification and no required minimum distributions (Roth IRA).
• You expect tax rates to rise.

Reasons to favour traditional

• You are in a high bracket now (24%+).
• You plan to retire in a lower-tax state or with modest income.

Model it with the Roth IRA calculator and 401(k) calculator.