Building Wealth
Lesson 2 of 43 min65 XP
Building Wealth
Roth vs Traditional: pay tax now or pay tax later?
It mostly comes down to whether your tax rate will be higher today or in retirement.
Last reviewed: · Reviewed by the Money Scale editorial team
Traditional 401(k) / IRA
- •Contributions are pre-tax (lower your taxable income today).
- •Money grows tax-free.
- •You pay income tax when you withdraw in retirement.
Roth 401(k) / IRA
- •Contributions are post-tax (no tax break today).
- •Money grows tax-free.
- •Withdrawals in retirement are 100% tax-free (including all gains).
Quick rule
If you expect to earn MORE in retirement than now (early career, low bracket): Roth. If you expect to earn LESS in retirement than now (peak career, high bracket): Traditional. If unsure: split.
$7,000 / yr
2025 IRA contribution limit
$8,000 if you're 50+. 401(k) limit is $23,500 ($31,000 if 50+).
Takeaway
Most early-career workers benefit from Roth. Most high-earners benefit from Traditional. Many people do a mix and call it tax diversification.
Quick check · 65 XP
When is a Roth IRA generally most attractive?
Sources
IRS — Roth comparison chart