Every retirement account decision is fundamentally a bet on your future tax rate versus your current tax rate. Traditional accounts (401(k), traditional IRA) reduce your taxes now and tax you when you withdraw in retirement. Roth accounts (Roth 401(k), Roth IRA) tax you now and let you withdraw tax-free in retirement. The right choice depends on where you expect to be taxed more heavily -- now or later.
Traditional 401(k) and IRA
Contributions are pre-tax (401k) or tax-deductible (traditional IRA, subject to income limits). You reduce your taxable income today. The money grows tax-deferred. When you withdraw in retirement, withdrawals are taxed as ordinary income.
Best when: you are in a high tax bracket now and expect to be in a lower bracket in retirement. Also best when you need the current-year tax savings to afford the contributions in the first place.
Required Minimum Distributions (RMDs) start at age 73 -- you must begin withdrawing a minimum amount annually, which can push you into higher brackets in retirement if you have significant balances.
Roth 401(k) and Roth IRA
Contributions are after-tax -- you contribute money you have already paid income tax on. The money grows tax-free. Qualified withdrawals in retirement are completely tax-free. No RMDs during your lifetime for Roth IRAs (Roth 401(k)s do have RMDs unless rolled to a Roth IRA).
Best when: you are in a lower bracket now than you expect in retirement (common early in career), you expect tax rates to rise broadly, or you want tax-free income in retirement to manage your Medicare premiums or Social Security taxability.
Roth IRA income limits: contributions phase out above $150,000 (single) or $236,000 (married filing jointly) in modified AGI in 2026. High earners can use the backdoor Roth strategy -- contribute to a non-deductible traditional IRA, then convert to Roth.
2026 Contribution Limits
| Account | 2026 Limit | Age 50+ Catch-Up |
|---|---|---|
| 401(k) / 403(b) / 457 | $23,500 | +$7,500 ($31,000 total) |
| IRA (Traditional or Roth) | $7,000 | +$1,000 ($8,000 total) |
| SEP-IRA (self-employed) | 25% of comp, max $70,000 | N/A |
| SIMPLE IRA | $16,500 | +$3,500 ($20,000 total) |
The "Both" Strategy
For most workers, contributing to both traditional and Roth accounts is the optimal approach -- tax diversification for retirement. Having money in accounts taxed differently gives you flexibility in retirement to draw from whichever source minimizes your tax bill in any given year. For example, if you need extra income for a large expense, drawing from a Roth account does not push you into a higher bracket or affect your Medicare premiums.
The Roth Conversion Opportunity
If you have traditional IRA or 401(k) balances and experience a low-income year, converting some of that balance to Roth at a lower tax rate can be highly beneficial long-term. The conversion is taxed as ordinary income -- but paying 12% now on money that would otherwise be taxed at 22%+ in retirement is valuable. Use our Roth IRA Conversion Tax calculator to estimate the tax cost of a conversion at any amount.
How Each Retirement Account Type Is Taxed
The tax treatment of retirement accounts is one of the most important — and misunderstood — topics in personal finance. The choice between traditional and Roth accounts isn't just about preference; it's a bet on whether your tax rate will be higher now or in retirement. Getting this right can be worth tens of thousands of dollars over a career.
Traditional 401(k) and Traditional IRA
Contributions reduce your taxable income today. A $23,500 traditional 401(k) contribution in the 22% bracket saves $5,170 in federal income tax in the current year. However, every dollar you withdraw in retirement is taxed as ordinary income at whatever rates apply then. Required Minimum Distributions begin at age 73. Traditional accounts make the most sense when you expect your tax rate in retirement to be lower than your current marginal rate — true for most people during peak earning years.
Roth 401(k) and Roth IRA
Roth contributions are made with after-tax dollars — no deduction now. But qualified withdrawals in retirement are completely tax-free, including all growth. Roth accounts have no RMDs during the owner's lifetime, making them excellent for estate planning and tax flexibility in retirement. They make the most sense when you're in a lower bracket now and expect higher rates later.
Roth Conversions
A Roth conversion moves money from a traditional IRA into a Roth account. The converted amount is added to your taxable income in the year of conversion. The strategy is most powerful when your current rate is low — the years between retirement and age 73 when RMDs begin are often the best window. Converting in those years reduces future RMDs and locks in lower rates on money that would otherwise compound in a fully taxable account.
2025 Contribution Limits
- 401(k) / 403(b): $23,500 employee contribution ($31,000 if age 50+)
- IRA (Traditional or Roth): $7,000 ($8,000 if age 50+)
- SEP-IRA: 25% of net self-employment income, up to $70,000
- HSA: $4,300 self-only / $8,550 family
See our 2025 contribution limits guide for full details, and use our income tax calculator to model how a traditional vs. Roth contribution changes your estimated tax this year.