JagInsights › Lessons › Roth accounts
Roth versus traditional, in one difference
Both accounts can grow without a yearly tax bill on the gains. The fork is whether you pay income tax on the way in or on the way out.
Traditional contributions can lower taxable wages now. Roth contributions are after-tax now, and a qualified withdrawal later can be tax-free. Caps, income limits, and waiting rules are set by the IRS and change.
When the tax is paid
Traditional: the contribution can reduce taxable income this year. Withdrawals in retirement are often taxed as ordinary income. Roth: you already paid income tax on the dollars you put in. If the withdrawal is qualified, the growth is not taxed a second time.
Qualified has rules: age, how long the account has been open, and the type of account. This lesson does not quote this year's numbers. The IRS pages do.
IRA versus 401(k)
A Roth IRA has income limits that change. A Roth 401(k) through work generally does not use the same IRA income test. Contribution caps differ too. Mixing the two names is how people miss a limit.
A backdoor Roth is a conversion after a non-deductible traditional IRA contribution. It has a pro-rata rule if other pre-tax IRA money exists. That is a tax-pro conversation, not a button on this site.
This page does not pick for you
People early in a career sometimes prefer Roth because today's tax rate is lower than a later one. People in a high bracket sometimes prefer traditional for the deduction now. Same rate later is roughly a tie. None of that is a verdict about your return.
Having some of each is a way to keep options in retirement. Missing an employer match while you debate Roth versus traditional is missing pay that only shows up inside the plan.
Questions people ask
Can I take Roth money out anytime?
Roth IRA contributions can often come out without tax. Earnings have waiting rules. A Roth 401(k) is a different set of distribution rules.
Is there an income limit?
Roth IRAs have one that changes. Roth 401(k) contributions through work generally do not use that IRA test.
Should I pick Roth or traditional?
It depends on today's tax rate versus a later one, and on the rest of the budget. This is education, not a recommendation.
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