WalletPrep worksheet · Investing

Should you pick a Roth or traditional retirement account?

Name ____________________ Date __________

Key ideas

Roth is taxed now, traditional later. Roth: no break today, tax-free withdrawals in retirement. Traditional: tax break today, withdrawals taxed as income.
Equal tax rates give equal results. In the example, a 22% rate now and later leaves $31,654 either way. At 12% later, traditional leaves $35,712.
Contribution limits reset each year. The 2026 IRA limit is $7,500 and the 401(k) limit is $24,500, each combined across Roth and traditional.

Vocabulary

401(k): A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
IRA: Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
Tax bracket: A range of income taxed at a certain rate. US federal income tax has 7 brackets, from 10% to 37%.
Employer match: Money your employer adds to your retirement plan when you contribute, up to a set percentage of your pay.
Index fund: A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.
Traditional IRA: An IRA where contributions may be tax-deductible now, and withdrawals in retirement are taxed as income.

Work it out

Jordan, 32, is in the 22% tax bracket and has $5,000 of pay for retirement. Jordan assumes 7% a year for 30 years, only an assumption, and compares what is left to spend.

Pay set aside for retirement
Income tax now at 22% (Roth only)
Roth contribution
Roth after 30 years, tax-free
Traditional after 30 years ($5,000 in)
Tax at 22% when withdrawn
Traditional after tax, same rate
Traditional after 30 years ($5,000 in)
Tax at 12% when withdrawn
Traditional after tax, lower rate

Check yourself

You are in the 12% bracket now and expect a higher rate in retirement. Which usually makes more sense?
- A. Roth
- B. Traditional
- C. Neither, wait until your income rises
You put $4,000 of pay toward a Roth and your tax rate is 25%. How much goes into the account?
- A. $1,000
- B. $3,000
- C. $4,000
- D. $5,000
Your employer matches 401(k) contributions. What should you do first?
- A. Max out a Roth IRA
- B. Wait until you know your retirement tax rate
- C. Contribute enough to get the full match

Your turn

Log in to your workplace retirement plan and find two things: your employer's match formula and whether a Roth option exists. If you are not putting in enough to get the full match, raise your contribution to that level now.

Answer key

Should you pick a Roth or traditional retirement account?

Work it out

Pay set aside for retirement$5,000
Income tax now at 22% (Roth only)− $1,100
Roth contribution= $3,900
Roth after 30 years, tax-free$31,654
Traditional after 30 years ($5,000 in)$40,582
Tax at 22% when withdrawn− $8,928
Traditional after tax, same rate= $31,654
Traditional after 30 years ($5,000 in)$40,582
Tax at 12% when withdrawn− $4,870
Traditional after tax, lower rate= $35,712

Roth: tax comes first, $5,000 × 22% = $1,100, so $3,900 goes in. It grows to about $31,654, all tax-free.
Traditional: the full $5,000 grows to about $40,582. At 22% in retirement, $8,928 of tax leaves $31,654, the same as Roth.
At 12% in retirement the tax is $4,870, leaving $35,712. Traditional wins by $4,058. A higher later rate would favor Roth.

Check yourself

A. Roth With a Roth you pay tax at today's lower rate, and qualified withdrawals later are tax-free.
B. $3,000 Tax first: $4,000 × 25% = $1,000, so $4,000 − $1,000 = $3,000 goes in.
C. Contribute enough to get the full match The match is extra pay. Get all of it first, in Roth or traditional, then decide where the next dollar goes.