Roth vs Traditional — Same Paycheck Dollars
Why the fair compare is tax now versus tax later on the same pre-tax contribution, not two equal account deposits.
By Greg, Editor at Finance Maxx. Published · Updated
Traditional and Roth use the same contribution slot (401(k) or IRA) but different tax timing.
- Traditional — contribute pre-tax, grow, pay tax at withdrawal
- Roth — pay tax now, contribute what is left, grow tax-free (qualified)
If you compare equal account deposits, Roth almost always “wins” because you paid tax outside the account. That is not a conclusion. The Roth vs traditional compare uses the same pre-tax paycheck dollars: traditional invests the full amount; Roth invests the after-tax remainder.
The rule of thumb that falls out
Roth wins when you expect a higher rate in retirement than today. Traditional wins when you expect a lower rate later. If the two rates match, the after-tax nest eggs match in this model (before state tax, NIIT, or RMDs, which are omitted).
Sketch: $10,000 pre-tax, 24% now, 24% later, same return. Traditional invests $10,000; Roth invests $7,600. After growth, taxing traditional at 24% lands in the same after-tax place as Roth. Raise the future rate to 32% and Roth wins; drop it to 12% and traditional wins.
What this model leaves out
State tax, NIIT, required minimum distributions, Roth conversion brackets, employer match (usually pre-tax even if you elect Roth employee deferrals), and MAGI phase-outs for Roth IRA eligibility. Capture the employer match first; that is not a Roth-versus-traditional question.
Current rate is not your W-2 tax divided by salary
Use marginal ordinary rate (the bracket on the next dollar), not effective rate. If you are in 22% federal and your state is 5%, a 27% “current” input is closer than 12% effective. Future rate is a guess: RMDs, Social Security taxation, and widow(er) filing status can push it up even if you “spend less in retirement.”
If you are in a temporarily low-income year (parental leave, job gap, first year of a business), Roth can be cheap this year even if you expect to be a 24% filer later. The compare is for a single pair of rates, not a career path.
Limits live on This year — retirement. Continue in the max the match playbook.