Should You Contribute to a Traditional or Roth Retirement Account?

How to Decide Between an IRA or 401(k) – and What That Means for Your Taxes

When it comes to retirement savings, choosing between a traditional and a Roth retirement account can feel overwhelming. But this choice could affect your lifetime tax bill, your spending flexibility, and even your peace of mind in retirement.

Whether you’re contributing to a 401(k) through your job, setting up a Roth IRA as a freelancer, or managing multiple accounts, it’s essential to understand how these accounts work—and which one best suits your tax situation and financial habits.

Here’s a breakdown of how to choose the right retirement account for your future.

🔹 Tip 1: Know Your Options

If you work for a large employer, you might be able to contribute to:

• A traditional 401(k) or 403(b)
  
  
• A Roth 401(k) or 403(b)
  
  
• Or even both
  
  

If you’re self-employed or your employer doesn’t offer a retirement plan, your options likely include:

• A traditional IRA
  
  
• A Roth IRA
  
  
• Or both (if you meet income limits)
  
  

These accounts differ in structure, but most follow the same tax principles based on whether they’re traditional (pre-tax) or Roth (after-tax).

🔹 Tip 2: Understand the Tax Difference

Traditional accounts allow you to contribute money before it’s taxed, which reduces your taxable income now. 

You’ll pay taxes later when you withdraw the money in retirement. This can help lower your tax bill in the year you make the contribution.

Roth accounts, on the other hand, are funded with after-tax money. You don’t get a tax break now, but your money grows tax-free, and you can withdraw it in retirement without paying taxes—if certain conditions are met.

So, you're essentially choosing between paying taxes now or later.

🔹 Tip 3: Consider Your Future Tax Rate

This is the big question:
Will your tax rate be higher or lower when you retire?

If you expect your income (and tax bracket) to rise in the future, a Roth account may be the smarter choice. You’ll pay taxes now while your rate is lower and avoid paying higher taxes on withdrawals in retirement.

If you expect your income to drop in retirement, a traditional account may offer more savings—because you'll pay a lower tax rate on your withdrawals.

📌 Not sure? Many financial experts recommend diversifying by contributing to both types of accounts. That way, you have tax flexibility when it's time to withdraw.

🔹 Tip 4: Think About Access and Flexibility

Need access to your savings before retirement? Life happens, and sometimes you need funds before age 59½.

• Roth IRAs allow you to withdraw your contributions (not earnings) anytime, tax- and penalty-free.
  
  
• Traditional IRAs and 401(k)s usually come with penalties if you withdraw early.
  
  

Also, Roth IRAs don’t require minimum distributions (RMDs)—so you can let your savings grow tax-free for as long as you want. In contrast, traditional IRAs and 401(k)s require withdrawals starting at age 73.

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🔹 Tip 5: Match Your Account to Your Money Habits

How you handle money can also influence your choice.

• If you're a spender and tend to use all your take-home pay, a Roth account might be better. Paying taxes now means you won’t face surprise bills in retirement—and you won’t accidentally spend your tax refund instead of saving it.
  
  
• If you're a disciplined saver, a traditional account could work well. You’ll save on taxes today and invest the difference in another account. But remember—investing those tax savings is key. If you spend them, the benefit is lost.
  
  

Let’s break it down further with a real-world illustration.

🔹 Tip 6: A Hypothetical Comparison

Imagine three savers—Sara, Brian, and Sam. They each contribute $5,000 per year to a retirement account, earning a consistent 7% annual return, and plan to retire in 30 years. All are in a 24% tax bracket now and expect to stay in the same bracket in retirement.

• Brian uses a traditional IRA but spends his tax refund. After taxes, his account is worth $28,927.
  
  
• Sara also uses a traditional IRA but invests her tax refund in a brokerage account. Her total savings come to $35,819.
  
  
• Sam contributes to a Roth IRA. He pays taxes upfront but never has to worry about taxes again. His account ends up at $38,061—more than either of the others.

💡 Key takeaway: Roth accounts may offer the biggest benefit for those who spend their tax refunds—or want simplicity and tax-free growth in the future.

🔹 Tip 7: Be Aware of Income Limits

While anyone can contribute to a traditional IRA, the ability to deduct those contributions depends on your income and whether you have access to a workplace plan.

Roth IRA contributions are phased out at higher income levels. However, Roth 401(k)s don’t have income limits—if your employer offers one, you can contribute no matter how much you earn.

🔹 Final Advice: Don’t Guess Alone

Choosing the right retirement account isn’t always black and white. Your tax rate, income level, savings habits, and even access to employer-sponsored plans all play a role.✅ The best move? Talk to a tax professional who understands your personal situation—and can help you create a plan that fits your short-term and long-term financial goals.

At Resoly, we help people not only resolve tax problems but make smarter financial decisions that prevent IRS issues in the first place.

📌 Ready to Take Control of Your Taxes and Retirement?

Visit www.resoly.com to explore how our tools and experts can help you manage your taxes, get relief from IRS stress, and build a better financial future—starting today.

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