Are you feeling overwhelmed by Roth IRA vs Traditional IRA tradeoffs? Then add terms like Deductible, Non-Deductible, MAGI, RMDs, phaseouts—it can feel like you need a tax degree just to choose an account. Who wants to pay thousands more in taxes over your lifetime? I illustrate several situations which leads to my non conventional advice answer.
Traditional Tax Thinking Roth IRA Vs Traditional IRA
I disagree with the conventional thinking about :
- If you expect a higher tax rate in retirement? Roth wins.
- If you expect a lower tax rate in retirement? A tax deductible, traditional IRA wins.
- Expect about the same? They’re roughly a wash if you invest the Traditional tax savings (the refund or reduced withholding) rather than spending it. If you don’t reinvest that savings, Roth tends to come out ahead.
This expectation of lower tax rate doesn’t consider what lifestyle you want to enjoy. Increased lifestyle requires more income. Higher income most often means higher taxes.
Furthermore, this thinking is too simplistic and does not consider the effect that withdrawing funds from Traditional accounts can trigger the Medicare surcharge. That formally is called the Income Related Medicare Allow Adjustment (IRMAA) discussed later.
Additionally, traditional thinking does not consider savings aka contribution phaseouts:
Roth IRA vs Traditional IRA Savings Phaseouts
In my prior article, Roth IRA Vs Brokerage Account Clarity For Retirement Savings, I illustrated with
• Single filer: $149,000 Modified Adjusted Gross Income (MAGI)
• Married filing jointly (MFJ): $235,000 MAGI
I chose these incomes number to stay within the Roth IRA eligibility phaseout. Unfortunately, this exceeds the deductible Traditional IRA phaseout for the Single Filer.
The Married Filing Jointly for Traditional IRA phaseout is more complicated. Notice that if one spouse is covered by a workplace plan, the Traditional IRA has significant savings restrictions. Simplistically this means that if you have a 401(k), IRA based plan like SIMPLE or a pension plan, your deductibility is restricted. There is no such caveat with the Roth IRA phase-out.
Notice in the table above, the phaseout for the MFJ Roth IRA MAGI is the same for the Traditional IRA, if only one spouse is covered. The uncovered spouse has a choice. That choice should be made with knowledge of how that can affect Medicare’s IRMAA and Social Security. I discuss this in my article on Roth Conversions. In this case, the covered spouse can still make a Roth IRA.
Roth IRA vs Traditional IRA Key Structural Differences
Traditional IRA
- Savings are generally pre-tax (if you qualify for the deduction). In this case, you are usually saving from your checkbook money that has already been taxed. The government adjusts the tax through the process of filing your tax return.
- Tax on your savings and investment earnings and assessed when your withdraw the money. This is typically referred to as tax-deferred.
- Deductibility phaseouts apply if you (or your spouse) are covered by a workplace plan; otherwise, you may still get a full or partial deduction.
- Withdrawals are taxed as ordinary income in retirement, over age 59 ½.
- Required minimum distributions (RMD) begin at age 73 under current law.
Roth IRA
- Savings are made after-tax. I refer to this as checkbook money, as generally people are funding them from their checking account. Growth and withdrawals are tax-free if all the rules are met.
- Income limits can phase out Roth savings. (2025 limits apply and adjust over time.)
- The “5-year rule” applies to earnings: to be fully qualified, you generally need a Roth held at least five tax years and be 59½ or meet another qualifying reason.
- No RMDs during the original owner’s lifetime.
- Flexibility: You can withdraw your savings (not earnings) at any time, tax- and penalty-free.
Roth IRA vs Traditional IRA Early-withdrawal rules
Sometimes life throws you curveballs, and you need access to all available funds.
- Roth IRA: Savings come out first—tax- and penalty-free. Earnings withdrawn before 59½ and before meeting the 5-year rule can be taxed and face a 10% penalty (exceptions exist).
- Traditional IRA: Early withdrawals are generally taxed as ordinary income and face a 10% penalty if taken before 59½ (exceptions exist).
Medicare & Social Security Unintended consequences
- Traditional IRA withdrawals increase adjusted gross income (AGI)/IRMAA MAGI, potentially triggering Medicare premium surcharges and increasing the taxable portion of Social Security benefits.
- Qualified Roth withdrawals don’t show up in AGI, which can help you stay under key IRMAA thresholds.
Roth IRA Vs Traditional IRA Illustrated
To keep the comparison clean, I model the same savers under 2025 rules with income inflating 3% per year until age 70:
- Married filing jointly: $235,000 MAGI (Illinois residents)
- Savings: Statutory IRA maximums each year ($7,000 under 50; $8,000 at 50+) per person
- Return: 7% nominal per year
- Eligibility: Assume both are eligible for a Roth savings and a deductible Traditional IRA (for apples-to-apples), and that any Traditional tax savings are reinvested.
I did not model the Single Filer because of the low income phaseouts highlighted earlier.
I also show what happens if you start at 35, 45, or 55, plus:
- An early-withdrawal case after 10 years, and
- 5% withdrawal scenarios at ages 70, 75, 80, 85, and 90.
Accumulation Roth IRA Vs Traditional IRA
The table shows that from a growth standpoint. The account balances look the same. There is no highlighting of the affect of taxation issues hiding within.
Roth IRA Vs Traditional IRA Early Withdrawal
Roth IRA
Notice that if you want to pull out the entire balance and are at the 24% tax rate, you will pay a much large amount than with a Roth account. If you started at 35 and are withdrawing at 45, you will only net $63,832 with tax and penalty
Traditional IRA
With the Roth, you will net 87,632, about $24,000 more. With the Roth, You can always pull your savings tax- and penalty-free. That means that if you only pulled $70,000 you would not pay anything. That is not the case with the Traditional IRA.
Only the earnings risk tax and a 10% penalty if you’re under 59½ and the distribution isn’t qualified. If unexpected life events happen, this flexibility can be both a money saver and a lifesaver.
Roth IRA Vs Traditional IRA Retirement Withdrawals
This table shows withdrawals assuming savings start at age 35 and stop at 69 ($7,000 under 50; $8,000 at 50+), 7% annual return, and a flat 22% federal tax rate for Traditional IRA withdrawals. Roth withdrawals are treated as qualified and tax-free because both the five-year holding and age 59 ½ qualifications have been met.
What is unknown is wither the Traditional IRA withdrawals will increase Social Security taxes and Medicare surcharges. The Roth IRA avoids both.
Final Thoughts on Roth IRA Vs Traditional IRA
If you’re like most people, you focus on your account balance not how much is made up of your savings or your investment earnings. That said, For early-access needs, Roth tends to be far more forgiving than Traditional.
The Roth in this example provides more in net withdrawals. It can also spike your Social Security tax and trigger Medicare surcharges. While tax rates may be lower in the future, is that a risk you’d like to accept. Even if they are, will a spike in Social Security and Medicare surcharge overcome it? During your working years you have more flexibility than in retirement to navigate around taxes and savings.
If this Roth IRA Vs Traditional IRA article has you wishing you had more Roth dollars, check out my article on Roth conversions.
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