Should you pick a Roth or traditional retirement account?

With a traditional account you skip tax on the money now and pay tax when you take it out in retirement. With a Roth you pay tax now and take the money out tax-free later, so the better pick depends on whether you expect your tax rate to be higher now or in retirement.

Traditional means tax later

Money goes in before income tax (or you deduct it), grows without yearly tax, and is taxed as income when you withdraw it in retirement.

Roth means tax now

Money goes in after income tax. It grows without yearly tax, and qualified withdrawals in retirement are tax-free, growth included.

Same tax rate, same result

If your tax rate is the same when you put money in and when you take it out, both choices leave you with the same spending money. The choice only matters when your rate changes.

Get the full employer match first

If your employer matches 401(k) contributions, put in at least enough to get every matching dollar, in either Roth or traditional. A match is extra pay you lose if you skip it.

Limits are set each year

Right now you can put up to $7,500 into IRAs and $24,500 into a 401(k). People 50 and over can add catch-up amounts of $1,100 for an IRA and $8,000 for a 401(k).

The one difference that matters

Roth and traditional accounts can hold the same investments, like an index fund. The only real difference is when you pay income tax on the money.

With a traditional 401(k), your contribution comes out of your paycheck before income tax, so your taxable pay goes down today. With a traditional IRA, you may be able to deduct the contribution on your tax return. Either way, every dollar you withdraw in retirement is taxed as income.

With a Roth 401(k) or Roth IRA, you get no tax break today. In return, qualified withdrawals in retirement are tax-free, including all the growth. A withdrawal is qualified once you are 59½ and the account has been open at least 5 years, with a few other exceptions.

How to choose between them

Ask yourself whether your tax rate is likely to be lower now or in retirement. If you are early in your career and in a low tax bracket, Roth often makes sense, because you lock in today's low rate on the money. If you are in a high bracket now and expect lower income in retirement, traditional often comes out ahead.

Nobody knows future tax rates, and your income can change a lot over 30 years. Many people split the difference by using both kinds of account. Having some money taxed and some tax-free gives you choices about which to draw from in retirement.

Contribution limits

The current IRA limit is $7,500 in total across all your IRAs, Roth and traditional combined. If you are 50 or older, you can add another $1,100. You need earned income at least equal to what you put in.

The 401(k) limit for your own contributions is $24,500, again combined across Roth and traditional. The catch-up for people 50 and over is $8,000, and people aged 60 to 63 can put in a larger catch-up of $11,250 if their plan allows it. Starting in 2026, if your FICA wages from that employer last year were over $150,000, your catch-up dollars must go in as Roth. Employer matching money does not count toward your own limit.

Roth IRA income limits

Not everyone can put money straight into a Roth IRA. If your income is above a certain level, the amount you can contribute shrinks, and above a higher level it drops to zero. The cutoffs depend on your filing status and change every year, so check the IRS page on Roth IRA contribution amounts for the current figures.

Roth 401(k) accounts do not have these income limits. If your plan offers a Roth option, you can use it at any income. A traditional IRA has no income limit for contributing, but whether you can deduct it depends on your income and whether you or your spouse has a workplace plan.

Getting money out early

These accounts are built for retirement, and taking money out before 59½ usually means income tax plus a 10% additional tax on the taxable part. There are exceptions, so check the IRS rules before you withdraw.

A Roth IRA has one useful difference. The money you put in (not the growth) can be taken out at any time without tax or penalty, because you already paid tax on it. That does not make it an emergency fund, but it is less locked up than a traditional account.

The order to fill accounts

A common order is: contribute to your 401(k) up to the full employer match, then fund an IRA, then go back and add more to the 401(k). Matching money usually goes into the traditional side even if you choose Roth for your own money, though some plans now let you pick.

If you still carry credit card debt at 20% or more, paying it down usually beats investing past the match. A sure 20% saved in interest is hard for any investment to beat.