What This Article Answers
This article compares Roth and Traditional IRAs using identical investments to show how taxes affect long-term outcomes.
Assumptions
- Monthly contribution: $500
- Annual return: 7%
- Time horizon: 30 years
- Marginal tax rate now: 24%
- Effective tax rate in retirement: 22%
The Outcome
Despite the upfront tax cost, the Roth IRA ends with slightly more usable money under these assumptions.
Breakdown
| Account Type | Contributions | Taxes Paid | After-Tax Value |
|---|---|---|---|
| Traditional IRA | $180,000 | ~$120,000 (withdrawal) | ~$720,000 |
| Roth IRA | $180,000 | ~$43,000 (upfront) | ~$760,000 |
Why This Happens
Traditional accounts defer taxes but expose all growth to future taxation. Roth accounts lock in tax treatment early, protecting decades of compounding from future tax rates.
Variations to Consider
- Higher retirement tax rates
- Lower-income years for Roth conversions
- State taxes
- Required minimum distributions
Key Takeaways
- Taxes change outcomes more than returns
- Roth protects growth, not just contributions
- The “better” choice depends on tax timing