The real differences between traditional & Roth IRAs


Written by:


When saving for retirement, you’ll typically have two choices for how you’ll fund your IRA. With a traditional IRA, you’ll contribute pre-tax dollars that will grow inside the account tax-free and be taxed when the money is withdrawn. A Roth IRA, however, taxes your initial contribution so that you don’t have to pay taxes when you withdraw your savings.

A financial advisor can help you manage your savings and plan for retirement. Find a local advisor today.

The difference between these two savings vehicles is simple enough, but figuring out which is better for you isn’t so cut-and-dried. The answer ultimately depends on whether your tax rate in retirement (or whenever you start withdrawing your funds) will be higher than it is currently. While lower- to moderate-income workers may opt for a Roth IRA because they expect to be in a higher tax bracket when they start withdrawing their retirement savings, higher earners may anticipate being in a lower tax bracket in the future, making the traditional IRA the better option.


SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.





Also, keep in mind that traditional IRA contributions are tax deductible and reduce a person’s annual tax bill, a benefit the Roth option does not provide. (It is important to remember that there are income limits for those contributing to Roth IRAs: for tax year 2021, a single person must have a Modified Adjusted Gross Income (MAGI) under $140,000 and a married couple filing jointly must have a MAGI under $208,000. For 2022, those limits rise to $144,000 and $214,000, respectively).

To see how a traditional and Roth IRA stack up against each other, we compared two variations across three different tax scenarios. For each, we calculated how much a person is left with 30 years after contributing $6,000 to traditional IRA and a Roth IRA. We assumed an 8% annual rate of return in each scenario, and looked only at federal tax brackets, as state income tax varies. (In each of the scenarios, for simplicity, we assumed a lump-sum withdrawal rather than gradual distributions.)

Scenario 1: Tax Brackets Remain the Same

In our first scenario, we examined the difference between a traditional IRA and a Roth account if a person’s tax rate (22%) is the same at age 60 as it was 30 years earlier. Someone who contributed $6,000 to a traditional IRA at age 30 would see her money compound at a greater rate over the next three decades compared to a Roth IRA. That’s because income tax would reduce the Roth contribution to $4,680, while the full $6,000 could grow within the traditional account.

As a result, the traditional IRA would be worth $60,376 after 30 years, while the Roth IRA would be worth $47,093. However, a person with a traditional IRA would pay nearly $13,000 in taxes at the time she withdraws her money, making her post-tax withdrawal exactly the same as the Roth IRA: $47,093.

The bottom line? If your tax rate is the same at the time of withdrawal as it was when you contributed to your IRA, it won’t matter which option you choose.

Scenario 2: Higher Tax Bracket at 60

What if a person’s wages grow exponentially between ages 30 and 60? Someone who was in the 22% tax bracket when she was 30 may be in the 32% tax bracket three decades later. This is when a Roth IRA really pays off.

Income taxes will take a substantial bite out of the person’s traditional IRA at age 60, whittling the account down to $41,056. However, had the same person used a Roth account, her tax bill would have already been paid, allowing her to withdraw all $47,093. By using a Roth account, the person would come out roughly $6,000 ahead.

Scenario 3: Lower Tax Bracket at Age 60

Not everyone ends up in a higher tax bracket by age 60, though. Perhaps someone who was in the 24% bracket at age 30 is no longer working full time at 60, placing her in the 22% bracket. With a Roth IRA, the person would contribute $4,560 to her account after taxes at age 30 and watch her nest egg grow to $45,886. However, she would end up with slightly more money by age 60 had she contributed to a traditional IRA 30 years earlier. After paying taxes, the person would be left with $47,093 in their traditional IRA, making it a marginally better option.

Bottom Line

When comparing a traditional IRA and Roth IRA, a person’s initial and future tax rates will determine which option is more advantageous. While our three scenarios illustrate how different tax rates can affect a person’s eventual withdrawal, it’s important to understand that our simulations are based on several assumptions that may not apply to everyone’s financial situation, including specific tax brackets.

Not only are tax rates subject to potentially change in the future, our analysis doesn’t consider state income taxes, which may play a significant role in whether a person opts for one account over the other. In the end, choosing between a traditional and Roth IRA is a complicated financial decision best made with the help of a financial advisor.

Retirement Planning Tips

  • From Social Security and alternative income streams to medical expenses and long-term care, there’s a lot to consider when creating a plan for retirement. A financial advisor can help guide you through this complicated process. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Is the 4% Rule out of date? The 4% Rule has guided the withdrawal strategies of countless retirees since its development in the 1990s. However, new research from Morningstar suggests retirees who are hoping to stretch their nest egg 30 years should start by withdrawing 3.3% instead of 4%.

This article originally appeared on SmartAsset and was syndicated by

More from MediaFeed:

12 books every beginning investor should read


Everyone knows the value of investing, but how do you get started with it? Indeed, to a person who has just recently stepped into the world of finance, it can all feel quite daunting.


Fortunately, plenty of great books have been written by experts to help interested individuals quickly learn the art of investment. If you want help narrowing down which ones to pick up first and read, below are my recommendations of the 12 best investing books for beginners.




Widely considered as the bible of investing, The Intelligent Investor: The Definitive Book on Value Investing is frequently hailed by experts as one of the best investment books ever written.


Written by economist and investor, Benjamin Graham, of whose disciples includes Warren Buffett and Irvin Kahn, the book introduces you to the basics of value investing. In the book, you are presented with such important concepts as behavioral economics, position trading, contrarian investing, and market fundamental analysis.


First published in 1949, the fact that the book’s content has managed to remain as relevant today as it was then, speaks volume to the timeless wisdom of the “father of value investing” and “greatest investment advisor of the twentieth century.”

The book’s revised edition is annotated by Jason Zweig, an acclaimed finance journalist, as well as Warren Buffet, an investing icon who no introduction.


Between 1977 and 1990, as fund manager of Magellan Fund, Peter Lynch managed an incredible annual average return of +29.72%. The fund, which originally had just $18 million in managed assets, grew to a whopping $14 billion by the time Lynch retired from his position.


In his aptly named work, Beating the Street, Lynch explains his investment strategies step-by-step and offers advice on how to select the right individual stocks and mutual funds for your portfolio. Through his writing, Lynch stresses his belief that an individual has a better chance to exploit market opportunities than Wall Street (which would be hotly debated by index investors).


For any amateur investor thinking that they cannot make it big in today’s financial environment, reading this book can remind them of how wrong that thought really is!

It’s also a great read for long-term, index investors to get the contrarian view to their own strategy.


Warren Buffett can easily be considered one of the most successful investors in modern history. The Essays of Warren Buffett: Lessons for Corporate America is a masterfully curated collection of Buffet’s shareholder letters (from Berkshire Hathaway) and other writings.


Through the book, the reader gets insight into Buffet’s take on various topics, including corporate governance, finance, and investing.


For beginners, it is a prime resource for learning the investment principles that helped make Warren Buffett the success he is today as well as get an inside glimpse into the workings of modern corporate finance.


Part autobiography, part how-to guide, in Principles: Life and Work, Ray Dalio, “the Steve Jobs of investing,” shares with his readers the lessons he learned from his highly successful investment career.


Starting his investment firm out of his two-bedroom apartment in NYC, Dalio, in 40 years’ time, managed to grow it into one of the most important private companies in the United States. It has made more money for clients than any other hedge fund in history.


Reading the book, you are introduced to the author’s set of unique principles that helped make his business such a huge success. The advice he offers in his work, of which there are hundreds, is truly invaluable. Dalio is offering you not only the means to better decision making and investing but also how to be more effective in leadership and management.


A cult classic, Rich Dad Poor Dad is one of the best books for young investors and those interested in real estate. It narrates the important life lessons the author learned growing up with two dads – the poor dad (his real father) and the rich dad (his best friend’s wealthy father).


The book highlights the importance of having a ‘rich’ mindset, stressing the value of acquiring financial literacy, making investments that generate cash flow, and ultimately, setting for yourself the goal of complete financial independence so you can get out of the “race of corporate America.”


Instead of working for money, have the money work for you.


A close friend of Warren Buffet, the creator of the first index fund and founder of The Vanguard Group, John Bogle, in his bestselling piece, provides powerful insights and perspectives on how to get more out of your investment.


In a very easy to understand writing, the book details Bogle’s most pioneering techniques and strategies when it comes to investing, highlighting how even in a lose-lose situation, you can still turn the odds in your favor (or vice versa if you are not careful).


Endorsed by some of the best financial minds, reading this book will bring much needed common sense into your investing, allowing you to capture the most gains with the least risk of destroying your existing capital. This is done, of course, by creating a diversified investment portfolio of primarily index funds and exchange-traded funds (ETFs),


The Little Book of Common Sense Investing is one of our all-time favorite personal finance books at Just Start Investing, and one that we (and Bogleheads) recommend you read next.


Written during the time of the Great Depression, this bestselling work from one of America’s most beloved motivational authors is as relevant today to beginner investors as it was at the right of publishing. The book explains, with detailed insight, the psychology of success and examines how personal beliefs and perspectives influence one’s success in life.


For the detracting reader who thinks the title is a bit corny, Hill’s work isn’t some feel-good pseudo-science mumbo jumbo but one based on more than 20 years of research and interviewing some of America’s wealthiest figures.


From his extensive study, he drew a list of 13 principles needed for success, which he succinctly details inside his book, Think and Grow Rich.


The authoritative book by Burton Malkiel, A Random Walk Down Wall Street: The Time-tested Strategy for Successful Investing, is often recommended by many as the first book new investors should purchase before starting a portfolio.


By reading this book, you learn to talk the talk and walk the walk of investing. You get introduced to the various investment terms and what they mean (like, asset allocation), what investing strategies to use, how to make more accurate market predictions, what common mistakes to avoid, and more.


Malkiel’s book doesn’t offer any get rich quick schemes and gimmicks, but rather, details tried and tested methods that help you ensure your long term investment success.


Written by renowned psychologist and Nobel Prize recipient in Economics, Daniel Kahneman, Thinking, Fast and Slow explores how one’s thought process impacts investment success.


Our thinking is explained as being composed of two systems – system one that is fast, initiative and emotion, and system two, which is more deliberate and rational. The book goes on to stress how reliance on system one can lead to suboptimal decision making and what techniques we can employ to guard ourselves against its shortcomings.


Written in a lively, conversation style, with his book, Kahn brilliantly manages to take what are extremely complex concepts and presents them to the reader in an easily comprehensible manner.


While the focus of the book is on investing, Kahn also explores how biased thinking impacts outcomes in our business and everyday lives.


Despite the bold statement, this book probably does live up to its name and is one of my favorites of the best investing books for beginners.


For over four decades, Tobias’s guide has been a favorite for those looking to upgrade their knowledge of finance and overall fiscal responsibility. Don’t worry about it being outdated’ as it has been revised to reflect the present condition of the financial market environment.


Using language that is concise, witty, and filled with humor, the author does an excellent job explaining otherwise boring financial concepts and information to the layman without losing their interest. If you are starting from absolute zero, this is a great book to pick to quickly learn the basics of finance and investment.


It’s not exactly meant for those who already have graduated beyond the fundamentals, but there are enough gems and clever tips in the book to still make it a worthwhile read.


“Wealth, truly considered, has at least as much to do with psychological as financial wellbeing”, this what Daniel Crosby’s bestselling work stresses on the reader.

The Behavioral Investor is another psychological work that delves into how our emotions can lead to us make terrible investments and sets forth highly practical solutions to building wealth.


The book is divided into three parts – part one introduces the influence of externalities on our choices. Part two discusses the four main psychological factors that impact investor behavior. Lastly, part 3 provides a framework on how to overcome those shortcomings and improve both your returns and overall behavior.


Last on the list of the best investing books for beginners is a grossly underrated book, The Coffeehouse Investor by Bill Schultheis. It’s a great read for those who feel intimidated by the stock market.


The book highlights the wisdom of simplifying your investment decisions. Not only does this actually translate to you getting better stock market returns, but it also means that you now have more time for your other passions.


It’s a short read of only 224 pages, written in a quite frank yet engaging style. For the novice investor dreaming of making it big overnight, this book serves as an excellent reminder of why that’s impractical and provides simple yet effective advice on what you should do to improve your returns.


Of all investment types, books are probably ones that pay off with the highest returns.

Market returns may vary, new sectors may emerge and old ones may decline, valuable commodities today may become worthless tomorrow, but knowledge gained from books is something that provides you with consistent returns for the rest of your life.


Which other books do you think we should add to our list of the best investing books for beginners? Tell us in the comments below.


This article originally appeared on Just Start Investing and was syndicated by


Featured Image Credit: designer491 / istockphoto.