Traditional and Roth Individual Retirement Accounts (IRA) are both great ways to save for retirement because they provide tax advantages for investors.  There are a few differences between Traditional and Roth IRAs, but the primary difference between is how and when you pay taxes.

Traditional IRAs allow you to take a tax deduction for contributions in the current year, deferring taxes until funds are withdrawn in retirement.  Roth IRAs allow you to contribute funds you’ve already paid taxes on to an account that will never be taxed again (so long as certain withdrawal rules are met).

So which type of account will provide more tax advantage in the long-run, and therefore more financial value?

To determine which type of IRA provides more value, we must understand how the accounts are taxed.

U.S. tax structure

The United States has a progressive income tax structure.  This means that higher levels of income are taxed at progressively higher tax rates.  However, everyone pays the same rate at each level of the tax bracket, the rates just increase at higher levels.  For example, see the 2019 tax brackets below.

Tax rateSingle – taxable incomeMarried filing jointly – taxable income
10%$0 to $9,700$0 to $19,400
12%$9,701 to $39,475$19,401 to 78,950
22%$39,476 to $84,200$78,951 to $166,400
24%$84,201 to $160,725$166,401 to $321,450
32%$160,726 to $204,100$321,451 to $408,200
35%$204,101 to $510,300$408,201 to $612,350

The difference between marginal and effective tax rates

When speaking of taxes, it is common to refer to the marginal tax rates as shown in the table above.  Marginal tax rates are the rate paid on the last dollar of income earned. However, the effective tax rate is the rate that individuals actually pay in taxes as a percentage of earned income. Effective tax rates are always lower than the marginal tax rate.

For example, a single tax filer earning around $60,000 annually has a 22% marginal tax rate.  However, this individual does not pay 22% of their earnings in taxes. They pay 10% on the first $9,700, 12% on the amount over $9,700 but below $39,475, and 22% on the amount over $39,475.  In total their taxes would be $9,059 which is a 15% effective tax rate.

How IRAs are taxed

When an individual contributes to a Roth IRA instead of a traditional IRA, they are choosing to pay taxes now rather than in the future.  Said differently, they are forgoing the opportunity to deduct the contribution against their current year’s taxes. Naturally this deduction would reduce their taxable income, but specifically it would reduce the taxes they pay at the marginal rate.  Continuing the example above, this deduction would reduce taxes by 22% of the contribution to the traditional IRA.

But with a traditional IRA taxes must be paid in retirement when funds are withdrawn.  These funds will be taxed as income according to the tax brackets in effect in the year of withdrawal.  Of course, no one knows today what the future tax rates in the U.S. will be in 10-40 years from now.

Future tax rates

Knowing whether tax rates would increase, decrease, or stay the same would immediately indicate whether traditional or Roth IRAs would provide more value.  If tax rates increase by a lot then Roth IRAs may be a better choice, but it tax rates increase slightly, stay fairly flat, or decrease then traditional IRAs would be a better choice.

Due to the recent tax cut and U.S. government deficits, some think that tax rates have nowhere to go but up, which may be a good assumption.  However, even without knowing exactly where tax rates will go we can estimate potential scenarios to evaluate which circumstances would lead to one type of account being more beneficial than the other.

Scenario #1: Tax rates stay flat

Continuing our example from above, if current marginal tax rates stay the same, then withdrawals from a traditional IRA would be taxed at an effective tax rate of 15%.  This assumes the individual would withdraw the future inflation adjusted equivalent of $60,000 in today’s dollars and tax brackets would increase with inflation.

If the individual withdraws less than their current salary in retirement, which is a common occurrence as some expenses (such as home mortgages) are reduced in retirement, then the effective tax rate would be even less than 15%.

Because of the way the U.S. taxes work, most of tax-deferred funds traditional IRA funds will be withdrawn at lower tax rates than the marginal rate.  Here is a summary example of this would work for a single individual tax filer as well as a married couple filing jointly.

Single individualMarried couple filing jointly
Taxable income$60,000$100,000
Tax bracket (top rate)22%22%
Effective tax rate15%14%

Conclusion: If tax rates stay flat, traditional IRAs provide more value than Roth IRAs.

Scenario #2: Tax rates increase… but how much would taxes have to go up by to make Roth IRAs worth it?

If tax rates do increase, how much would they have to increase by in order to make a Roth IRA be more advantaged than a traditional IRA?  Continuing our example, let’s assume that the lowest two tiers of the tax brackets do not change (10 and 12%). These brackets are most likely to not increase as they would disproportionately affect low income individuals.

The marginal rate for the third bracket would have to increase from 22% to more than 42% in order for the effective tax rate of the traditional IRA to exceed the marginal tax rate paid to fund the Roth (22%).  This works in similar fashion with a married couple filing jointly in the table below. But their tax rate would have to increase from 22% to over 60% to make the effective tax rate of the traditional IRA exceed the marginal rate paid to fund the Roth (22%)

Single individualMarried couple filing jointly
Taxable income$60,000$100,000
Current tax bracket (top rate)22%22%
Current effective tax rate15%14%
Future tax bracket rate required to make future effective tax rate equal/exceed current tax bracket42%+60%+
Future effective tax rate22%22%

Factors that could make Roth IRAs more attractive

There are some factors that could make Roth IRAs able to provide more value than traditional IRAs:

  • Tax rates increase dramatically, including at the lower end of the bracket
  • You plan to withdraw much more money annually in retirement than your earnings where while working (putting you in a higher tax bracket)
  • You spend your working years in a state with no income taxes and then move to a high-income tax state for retirement


Without knowing the future tax rates in the U.S. it is impossible to know whether a traditional or Roth IRA is more tax advantaged than the other with certainty.  Additionally there are other variables such as how much one will need to withdraw per year in retirement. However, it appears likely that traditional IRAs will provide more value than Roth IRAs.  This is because traditional IRAs are taxed at effective tax rates whereas Roth IRAs are taxed at marginal rates.

Traditional IRAs provide more value than Roth IRAs because they are taxed at effective tax rates instead of marginal tax rates Share on X

This concept also holds true with 401k plans that have “Roth” contribution options as an alternative to the traditional pre-tax 401k contribution option.  The pre-tax contribution option should provide more value in the long-term due to the fact that you are gaining a valuable tax deduction in favor of paying an effective tax rate later.

I will also note that there are some additional considerations when deciding between traditional and Roth IRAs.  In particular, Roth IRAs have a nice feature that allows you to withdraw contributions (but not earnings) at any time without penalties or taxes.  In full disclosure, I do have a Roth IRA, which I contributed to years ago before I realized the trade-off I was making in paying marginal tax rates instead of a lower effective tax rate in the future.  Although if I could do it again I would have contributed to a traditional IRA instead of the Roth, it is reassuring to know that the option to withdraw contributions is there.

Traditional vs Roth IRA: Why traditional IRAs provide more value

4 thoughts on “Traditional vs Roth IRA: Why traditional IRAs provide more value

  • January 30, 2019 at 9:55 am

    I understand the concept of what you’re suggesting. I’m not sure the math adds up. How did you arrive at those 42% and 60% numbers?

    The other thing to consider is RMDs. Depending on other sources of retirement income, RMDs can cause Social Security to be taxed at up to 85%. RMDs may also put retirees into a higher tax bracket. As you know, there is no option to ignore RMDs.

    In your limited example, your argument may be valid. There are many more things to consider in retirement planning than the actual tax on the IRA.

    Tax-free income from Roth IRAs in retirement don’t create the potential problems that traditional IRAs do because there are no RMDs.

    • January 30, 2019 at 11:52 pm

      Hi Fred, thanks for reading! I solved for the 42% and 60% marginal rates by holding the first two tax brackets constant, and solving for rates that made the effective rate equal or exceed the marginal rate that would have been paid on a Roth contribution.

      What is social security; are millennials eligible for that? Just kidding ?. You have a point on the SS impact related to RMDs, there’s can be some nasty SS taxes but there are so many unknowns around SS that I didn’t want to get into it.

      And agree, RMDs can certainly put one into a higher tax bracket. But the point I would add is that if we’re talking about pure IRA contributions over a working lifetime (not including 401k rollovers into IRAs) it can be pretty hard to accumulate a large enough portfolio that the RMDs would be that drastic of a change to the tax brackets. Good retirement planning points, and thanks for stopping by!

      • April 22, 2019 at 3:03 pm

        Loved the article! Gave me a lot to think about!

        I’m on board with everything you wrote, but wonder if you broadened the scope from just IRA to 401ks would the argument still stand? My concern is similar to Fred’s comments in that the combined 401k RMD for my spouse and my 401k RMD will be staggering, especially on top of joint pensions and social security (maybe?). As you pointed out, the dollar amounts in a pure IRA are somewhat inconsequential over a lifetime, but a 401k RMD impacts everything from medicare premiums, the Obamacare tax, etc. Just struggling with a strategy to deal with it when the time comes.

  • April 11, 2019 at 8:54 pm

    This article is SO thorough, well-done!

    It’s not that there are traditional IRA naysayers per se, but I find that one of the most common pieces of advice related to IRAs in the personal finance world is: get a Roth. Very interesting to read a detailed breakdown of the tax rates and benefits on the traditional IRA side. It’s not a one-size-fits-all situation, of course, but this article brings a lot of new insight.


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