The Difference Between a Roth IRA & Traditional IRA

I could probably explain the difference between a Roth IRA and a traditional IRA in one sentence (don’t expect me to do that though):

With a Roth, you tax the seed. With a traditional IRA, you tax the tree:

difference between roth ira and traditional ira
All right, there you have it.

We’ll do a little number crunching to fully illustrate the difference between these two retirement vehicles. Check out the article on Roth IRA Basics if you want to get into specific rules and regulations regarding the Roth specifically. If you just want to know the difference between the Roth and traditional, stick around.

With a Roth, you contribute after-tax money. So, if I have taxable income of $50,000 and put $4,000 into my Roth, I still pay taxes on $50,000. With a traditional IRA, your contribution is pre-tax. Given the same situation of $50,000 taxable income, if you put $4,000 into your traditional IRA, you would pay taxes on $46,000 (50,000-4,000). Traditional IRA contributions are deductible. Roth contributions are not.

Let’s get an investment going:

difference betewen roth ira and traditional ira table
All right, so what can actually be invested? Well, if you can only afford to invest $4,000, then, after taxes, your Roth would be funded with $3,000. $1,000 less than your traditional IRA. That’s because the traditional IRA contribution is deductible.

Echo to base. The seed has been planted“. Let’s say we contribute $4,000 before tax each year to our investment. We do this faithfully for 30 years. Let’s also assume we get an 8% return on our investment (after inflation) for both the Roth and traditional IRA. Here’s what our nest egg would’ve grown to given these assumptions:

difference between roth and ira
So the difference between the traditional IRA and Roth IRA nest eggs? You have another $113,283 in your traditional IRA.

Except we haven’t paid Uncle Sam

difference between roth and ira
So am I trying to tell you that it doesn’t matter? It’s all a wash in the end? Hardly. The one key assumption I haven’t talked much about is the tax rate. If you contributed starting at age 35 (start earlier!), until you were age 65, we’re talking about a 30-year spread of future history (?) there. I assumed your tax rate at 35 would be 25 percent. However, who’s to say that Uncle Sam won’t raise the tax rate to 35 percent? Or, what if you’re earning significantly more money during retirement (now wouldn’t that be sweet?), so you’re naturally in a higher tax bracket, maybe 37 percent?

What if Uncle Sam lowered the tax rate to 10%…

You get my point. The tax rate is an unknown variable. I personally choose the Roth IRA for the following reasons: I’m a college student. My tax rate is virtually zero percent. I am fully expecting my tax rate to go up in the future. Also, I sure hope I’m in the highest tax bracket when I retire; that means I’ll be making a ton of money.

The difference between the Roth IRA and traditional IRA lies in your current tax rate, and your expected tax rate upon retirement. Remember, it’s not set in stone which one you’ll use forever. You can contribute and not contribute at will, even doing both simultaneously (subject to certain limits).

1,006 more words to finalize my point.

roth and ira comparison

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About jesse

Jesse is the founder of When he’s not speaking on, writing about, fine-tuning software for, or doing his own budgeting, he enjoys playing the piano, working in the garden, CrossFit, marksmanship, and honing his golf swing. Jesse graduated from Brigham Young University with a Masters of Accountancy degree. Immediately after he obtained his CPA license, he let it lapse so he could work on "You Need A Budget" full-time. Jesse lives in Utah, is married to Julie, and has five children. You can conect with Jesse on Google+ here.

25 thoughts on “The Difference Between a Roth IRA & Traditional IRA

  1. Roth vs Traditional is a relatively simple gamble to define(though the choices will vary from person to person). The gamble-is accepting a plan with two “knowns” a better choice than one with a “known” and an “unknown”. I know my tax rate today. I know that with the Roth my tax rate tomorrow will be zero. With the traditional IRA all I know is that I will be taxed on 100% of the money I withdraw-the rate is completely out of my control.
    For me that makes the Roth an easy choice.
    I use my company plan for the tax benefit today and the Roth for the tax benefit tomorrow. This way I have two buckets of money to choose from. Which one I choose can be decided then based on which bucket will provide the most benefit.

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  3. Dude, if you’re going to do public writing and come off like you know something, clean up your English. Can you find the word “alright” in the dictionary? No, you can’t. Try “all right” instead; two words not one. Then you commit the worst language sin with your “not hardly” sentence. That’s a double negative in case you don’t know. The correct usage of hardly is simply “hardly” as a negative all by itself, without the “not.”

  4. Despite the english and grammatical errors that person couldn’t help pointing out, I get the idea of what you’re explaining here. Thanks for taking the time to do that. You’ve helped me understand this a little more.

  5. Speaking for us everyday, common people who cares about the grammar errors, I was more interested in the subject matter which was easy to understand, thank you.

  6. T B you are “simply” an idiot. The whole point of this demonstration is to educate people about the difference between ROTH IRAs and TRADITIONAL IRAs, not on english. I felt this helped me better understand the way the IRAs work, which is the whole point of clicking on this link. Next time you try and give people lessons on english, think about how ignorant you are for trying to make someone feel dumb when they are simply helping you understand something you are seeking guidance for.

  7. T B, you are an idiot wrapped in a moron. Obviously you do not know everything, that is why you searched and found this link to learn more about IRA savings. Jesse is kind enough to dumb it down. It is ungrateful people like you who just can’t simply say “thank you” for having benefited from others.

    Jesse, THANK YOU and great job! I learned a great deal. I have now contacted a financial advisor to get going on saving…..time is money…lol.

  8. Thank you so very much for this. This helped my wife and I decide what kind of IRA to choose. We are both 25 and want to get a jump on this ASAP but werent sure which is the best for us, but as you put it, “I am a poor college student….I expect my tax rate to go up..” You seriously read my mind.

  9. I think this was a great article so thanks for posting it out in cyberland. To the horse’s ass grading the gramatical content of this article most of us don’t start out “beating up” someone for their grammar by addressing them as “dude”. In financial matters I would rather have someone who makes a few errors, grammar wise, than a few errors with my finances. Did you acutally get anything out of the article or did you print it and take out your red pen and make merry with yourself while grading it?

  10. Very good article and very easy to understand. This article really made me understand the difference between Roth and traditional IRA. Simple spelling mistakes has nothing to do in the financial world as long as you understand the subject matter. Thanks again for the good article.

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  12. Why is that guy bustin your chops over grammatical errors, I think he is jealous of your intellect. There is always somebody out there to try to tear another person down “Yo”

  13. Grammer,shrammer! Using the word “dumb” means the person is deaf not necessarily stupid but applies to the grammer slammer.Best to keep thy head tucked between your legs where it belongs & if anyone needs your advise they won’t ass-k.You are usually the guy hiding in the corner of social gatherings,invited out of pity, who has conversations with himself. Jesse did a great job with nice graphics to boot & thank you.

  14. This was really helpful, too bad my husband did not know this when he invested in the traditional ira; his heart was in the right place though.
    I recently converted the traditional to a roth, and the taxes were high..really high. The other thing was that I had to use another source to pay the taxes;
    they could not be paid from the money in the traditional ira. That was a hard pill to swallow.

    Thank you for making this so understandable. You sound like a smart kid…you go!!! I don’t care about the grammer…in my book you did something really good for all of us who need answers. I’m not so hot in grammer either, but I’m a little smarter because of you.

  15. Great Article and Very Easy to understand. Blow off any negative comments. Like I always say: some people wake up miserable. Great Job.

  16. First, let me thank you for your explaination. Secondly let me say that I understood you perfectly. The person(s) trying to correct your english should get a life. English is not perfect in any way, its derived from many different languages, and make the best of all of them. The people that try an correct others should do it respectfully and as a courtesy, not an insult. If you want to help someone, make suggestion not insults.
    Enough said, I again want to thank you for your time and effort, and overall contribution to the difference of IRA -vs- ROTH.

  17. Thanks for a brief explanation. I tire of hearing the blabber about benefits of IRAs of either kind. Their main benefit it to make you think you have more money than you really do. It all comes down to whether your Income tax rate will be higher in the future than now, or lower. If lower, IRAs are good (‘cept for MinReqdDistribs), if higher , the ROTH.

    Used to be we all thought tax rates in retirement would be lower than while working, but with shifting of tax burden to middle class, rapidly rising medical costs (even if insured), and the failure of the third leg of the retirement stool (private pensions), a sure-fire answer is far from obvious.

    Just don’t get fooled by thinking that the big $$ in your IRAs are really yours… you’ve not paid taxes on them yet.

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