Traditional vs Roth IRA

The accounts

Traditional IRA — Contributions may be tax-deductible (phase-outs apply if you or your spouse has a workplace retirement plan). Growth is tax-deferred. All withdrawals in retirement are taxed as ordinary income. Required Minimum Distributions start at age 73.

Roth IRA — Contributions are not deductible. Direct contributions phase out above ~$150,000 MAGI for single filers and ~$236,000 for married filing jointly in 2026. Growth and qualified withdrawals are tax-free. No RMDs during the original owner's lifetime.

Both have the same annual contribution limit: $7,500 in 2026, plus $1,100 catch-up at age 50+.

The core math

The basic trade-off: same total contribution space, different taxation timing. If your tax rate is identical now and in retirement, the two accounts end with exactly the same after-tax value.

Worked example:

• You have $10,000 gross to save, current tax rate 24%.
• Traditional path: contribute $10,000 pre-tax, grow at 7% for 30 years → $76,123. Withdraw at 24% → $57,854 after tax.
• Roth path: pay 24% tax first, leaving $7,600 to contribute. Grow at 7% for 30 years → $57,854. Withdraw tax-free → $57,854.

Identical. The math is symmetric when rates are equal.

When each wins

The decision breaks the symmetry whenever tax rates differ:

Traditional wins when: your current marginal rate is higher than your retirement marginal rate. High earners in their peak earning years, planning to retire with lower income, generally favor Traditional.

Roth wins when: your current marginal rate is lower than your retirement marginal rate. Young people early in their careers, anyone expecting much higher income later, or anyone worried about future tax rate increases generally favor Roth.

Other Roth advantages that aren't captured in the simple math:

• No Required Minimum Distributions during your lifetime.
• Contributions (not earnings) can be withdrawn penalty-free at any time.
• Tax-free inheritance for heirs, who get 10 years to empty the account tax-free.
• Hedge against future tax rate increases.

Other Traditional advantages:

• Tax deduction today may push you into a lower bracket, enabling other benefits (child tax credit phase-outs, ACA subsidies, etc.).
• More effective if retirement income will be low (early retirement, sabbaticals).

The Backdoor Roth

If your income is above the Roth IRA contribution phase-out, you can still get money into a Roth via the "Backdoor Roth":

1. Contribute to a non-deductible Traditional IRA ($7,500 for 2026).
2. Convert the Traditional IRA to Roth immediately.
3. Pay tax only on any growth between contribution and conversion (usually $0 if done promptly).

This works cleanly only if you have no pre-tax money in any Traditional, SEP, or SIMPLE IRA — otherwise the pro-rata rule causes unexpected tax. If you have significant pre-tax IRA balances, consider rolling them into a 401(k) before doing Backdoor Roth.

The Mega Backdoor Roth

Some 401(k) plans allow after-tax (non-Roth) contributions above the $24,500 employee limit, up to the combined $72,000 total. These after-tax contributions can be converted to Roth, either inside the plan or by rolling to a Roth IRA. This is called the Mega Backdoor Roth and can move tens of thousands of dollars into Roth space per year.

Only about a third of 401(k) plans support it. Check your Summary Plan Description.

A reasonable default

Most advisors land on one of these patterns:

• Young, lower earner: favor Roth.
• Mid-career, high earner: favor Traditional 401(k) + Backdoor Roth IRA.
• Near retirement: split contributions between Roth and Traditional to keep optionality.
• Already retired: Roth conversions during low-income years.

There is no universally "right" answer. The 80/20 advice is: contribute enough, and don't agonize too much about which bucket.

How Horizons uses this

Roth and Traditional accounts are tagged separately in Horizons. In retirement, the engine models tax-aware drawdown: withdrawing from Traditional when you're in low brackets (often early retirement, before Social Security starts and before RMDs), and shifting to Roth when Traditional withdrawals would push you into higher brackets. The Roth Conversion page lets you model explicit conversion ladders.