Traditional or Roth: Which Retirement Account Is Right for You?
Understanding Your Choices
Individual Retirement Accounts (IRAs), along with many 401(k)s and 403(b)s, are offered in two main varieties: traditional and Roth. While you might already know the basics—traditional IRAs offer tax-deductible contributions but taxed withdrawals, and Roth IRAs require after-tax contributions but provide tax-free withdrawals—deciding which option fits your personal situation is less straightforward. This question is especially relevant for creative professionals, who often have variable incomes and less predictable career paths but want to plan thoughtfully for their retirement.
At a fundamental level, if your tax rate stays the same throughout your life and you withdraw all the funds during your lifetime, it mathematically doesn’t matter whether you choose a Roth or a traditional IRA. You either pay taxes now and enjoy tax-free growth, or grow your money tax-deferred and pay taxes when you withdraw.
For example:
Sally contributes $1,000 pre-tax to a traditional IRA at a steady 20% tax rate. If her investment doubles to $2,000, she’ll owe $400 in taxes upon withdrawal, ending with $1,600. Alternatively, if she pays taxes up front on $1,000, contributing $800 to a Roth IRA, and the investment doubles, she will also have $1,600—tax-free—to withdraw later[1][4].
So, the real advantage depends on factors like:
- How your tax rate changes over time
- Your eligibility to contribute to a Roth or deduct traditional contributions, which depends on your income level and Modified Adjusted Gross Income (MAGI)
- The Required Minimum Distribution (RMD) rules, which apply to traditional accounts but not Roths
- Rules around inherited IRAs and estate considerations
- The potential estate tax benefits for very high-net-worth individuals[1][3]
Where to start:
If you’re in a relatively low tax bracket today—say the 22% marginal rate—contributing to a Roth IRA usually makes sense. This is because your income and tax rate are likely to rise in the future, and U.S. tax rates may also increase amid rising Federal budget deficits and debt. Roth contributions are limited by income thresholds—for singles in 2025, the phase-out begins at $150,000 MAGI—and traditional IRA deductibility phases out starting at about $79,000 if covered by a workplace plan[1].
For those in higher tax brackets, 401(k) or 403(b) contributions come into focus. While many default to traditional, pre-tax contributions, this may not always be optimal. Contrary to historic assumptions that retirement tax rates are lower, your tax rate in retirement may be equal to or higher than it is now—for example, if you retire in the same state (especially high-tax states like New York) and have substantial tax-deferred savings over $2 million[1][3].
High-net-worth individuals often benefit from making Roth contributions for several reasons:
- Future retirement tax rates may be the same or higher than current ones.
- Roth accounts are not subject to RMDs, giving you greater control over taxable income in retirement.
- Roth accounts can provide tax-free growth you can pass on to heirs[1][4].
Summary Table: Traditional vs. Roth
Feature | Traditional IRA | Roth IRA |
|---|---|---|
Tax treatment of contributions | Tax-deductible (subject to income limits) | Contributions made with after-tax dollars |
Tax on withdrawals | Taxed as ordinary income | Qualified withdrawals are tax-free |
Income eligibility | No income limits to contribute, but deductibility phases out based on income and employer plan participation | Income limits apply (2025 phase-out for singles: $150,000–$165,000 MAGI) |
Required Minimum Distributions | Must begin at age 73 or 75 | No RMDs during owner's lifetime |
Withdrawal flexibility | Penalties for early withdrawals with certain exceptions | Contributions can be withdrawn anytime tax- and penalty-free |
Estate planning | Taxable to heirs | Potential for tax-free growth benefits for heirs |
Final Thoughts
The choice between a traditional and Roth IRA depends largely on your current tax situation, expected tax rates in retirement, income eligibility, and estate planning goals. Many investors benefit from holding both types for tax diversification. For creative professionals with variable incomes, a tailored approach—even consulting a financial advisor—is recommended to align your retirement savings with your unique career and financial circumstances[2][3][4].
Resources
References
[4] Vanguard. "Roth, traditional, or both?"