Roth or traditional: it comes down to tax rates
With a traditional 401(k) or IRA you skip tax on the money going in and pay income tax on everything coming out. With a Roth you pay tax now and withdraw everything, growth included, tax-free. If your tax rate is the same both times, the math is a wash. The winner is whichever lets you pay tax at the lower rate.
- Expect a higher rate later? Roth usually wins — common early in a career, or if you expect higher tax rates in the future.
- Expect a lower rate in retirement? Traditional usually wins — common for peak earners whose retirement withdrawals will fill the lower brackets.
- Maxing out your contributions? A Roth effectively shelters more money, because the same dollar limit holds after-tax dollars. That’s why Roth edges ahead at equal rates in the default comparison: the traditional’s tax savings have to sit in a taxable account.
How the comparison works
Roth = C × F · Traditional = C × F × (1 − tlater) + invested tax savings after tax
C is the yearly contribution and F the growth factor for contributions made at the start of each year. The tax savings (C × tnow each year) grow at the same return, with gains taxed at your capital-gains rate. Break-even values are found by bisection. See the methodology. This compares federal-style tax treatment only; it ignores contribution limits, employer matches (which go in pre-tax either way) and required minimum distributions.