Most people who write about retirement savings boil the Roth vs. Traditional choice down to something like “high earners pick Traditional, low earners pick Roth.” That sounds simple, but real planning isn’t that simple.
The real issue is tax rates now versus tax rates in retirement, and those can fluctuate based on income earned during a career, state taxes, where you choose to retire, Social Security, required distributions, and Medicare surcharges.
Rather than simply repeating the rule of thumb, this article will show you how it really works in real numbers and touch on some important factors that may not have been explained well elsewhere.
The Basic Framework Everyone Gets Wrong
Conventional advice often says “choose Traditional if you’re in a high tax bracket now,” meaning you get a deduction today. Such an argument, however, ignores the operation of marginal tax brackets. The Internal Revenue Service (IRS) levies tax in blocks: you pay 12% on some income, then 22% on the next chunk of income, and then 24%, then 37% on the rest of the income.
The real question isn’t “what bracket am I in now?” but “will my rate of taxation be greater or less when I retire? To an individual with a marginal rate of 22% earning $80,000 today, taxable income is lower today when he/she contributes to a traditional IRA (Individual Retirement Account).
But if in retirement they withdraw $60,000 and their bracket is also 22% or higher, the tax benefit may vanish. If retirement income pushes taxable income up, the Roth option could make more sense.
What Actually Determines Your Retirement Tax Rate
The issue of what you will pay in retirement is not only about the Social Security payments. A maximum of 85% of such benefits are taxable based on your level of income, and therefore raise the level of taxable income and may push you into higher brackets.
At age 73, the IRS requires you to begin Required Minimum Distributions from traditional retirement accounts. They are computed based on your account balance and your life expectancy. For example, a Traditional IRA worth $1,000,000 at age 73 may require a withdrawal of $38,000 in the first year, all of which will be subject to taxation.
Pension income also contributes to taxable dollars, and most retirees work part-time, which may also increase taxable income. On top of this, there are the Income-Related Monthly Adjustment Amounts, which are charged in case your income exceeds a certain limit in relation to Medicare.
In 2026, you will have to pay more in Medicare Part B and Part D, regardless of whether you are single or a couple, as long as your income is above $109,000 and $218,000, respectively.
In conclusion, during retirement, an average retiree will have the same income or even more than during his or her working life, even though most people think that their tax bracket will reduce during the retirement period.
The Career Trajectory Factor
Your career path matters more than a quick rule of thumb.
In the early career stage, from 22 to 30 years old, the income level and tax rate tend to be lower, around 10% or 12%. Using a Roth IRA is a good idea since you are taxed at a low tax bracket, and then your money accumulates over the decades without the tax cut. Assuming that you contribute $6500 annually from age 25 to age 35, it could increase to a value of over $500,000 at the age of 65, and this might all be tax-free.
If you are mid-career, between 35 and 50 years old, your income can be at its peak, and your income tax bracket will be 24%-32%. Investing in a Traditional IRA or 401(k) plan is a good idea as it will save you on taxes when you require them the most.
Late career, ages 50 to 65, depending on the timing of retirement. If you plan to retire early, a Roth can act as a tax-free bridge to cover years before Social Security or Required Minimum Distributions kick in. On the other hand, Traditional catch up contributions if you’re 50 or older can deliver significant current tax savings if you remain in high brackets.
The State Tax Wildcard
Federal taxes are only part of the story. State income taxes affect the value of Traditional deductions. A resident of California, where top rates reach about 9.3%, would save roughly $605 in state tax on a $6,500 Traditional contribution just from the state deduction alone.
If you retire to a state with no income tax, like Florida or Texas, that Traditional deduction loses value in retirement, making Roth more attractive. State taxes vary widely and can change the decision for people retiring to different places.
The Real Advanced Considerations
Roth conversions are another piece you might hear about. These involve moving money from a Traditional to a Roth account and paying tax now. Conversions done in years when your income is unusually low, for example, after a job change or before Required Minimum Distributions begin, may lower your lifetime tax bill.
Holding both Traditional and Roth assets gives flexibility to manage taxable income through retirement years. This can help you stay below Medicare surcharge thresholds or avoid moving into a higher marginal bracket in a given year.
The Practical Decision Table
Here’s a practical way to think through the choice using familiar numbers:
Traditional IRA or 401(k) may make sense if you’re in a 24% or higher bracket now, expect to retire in a low tax state, and have modest other income, so future tax rates may be lower.
Roth IRA or 401(k) could be a good choice when you are in the 12% or 22% bracket currently, or you simply wish to have untaxed legacy options. Both accounts are flexible, and this can be of great importance, especially when you wish to dictate the amount of tax burden per year as your life and markets evolve.
Conclusion and Action Steps
There’s no universal “right” answer. What matters is your own tax story across your working life and into retirement. Waiting for the perfect choice can paralyze people into saving less, which is the worst possible outcome.
Work through these steps to clarify your decision:
Understanding how taxes affect your retirement journey is about more than rules of thumb. It’s about knowing where you are now, where you expect to be later, and building flexibility into your plan so you’re prepared for different outcomes.
image credit: Author
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
