Traditional or Roth Deposits?
Published August 18, 2025

THE ONE MINUTE TAKEAWAY

Choosing between Traditional and Roth retirement contributions comes down to when you want to pay taxes now or later. Traditional (pre-tax) contributions lower your taxable income today but are taxed when withdrawn in retirement, while Roth (after-tax) contributions are taxed upfront but allow for tax-free withdrawals. If you expect to be in a higher tax bracket in retirement or want predictable, tax-free income later, Roth may be the better choice. However, combining both types can offer flexibility. Consider your age, income, and future earnings, and consult a financial advisor to determine what’s best for your situation.

Traditional or Roth Deposits: Which Is Right for You?

When planning for retirement, one of the most important decisions you’ll make is whether to contribute to a Traditional (pre-tax) or Roth (after-tax) account. Both offer unique tax advantages that can help grow your savings over time but choosing the right one depends on your personal financial goals and situation.

Tax-Advantaged Retirement Accounts

Retirement plan accounts are designed to help you build long-term savings. One key benefit of these accounts is that they come with tax advantages, making it easier to accumulate funds over time.

Two Types of Tax Advantages

There are two primary types of contributions: Traditional, also known as pre-tax, and Roth, which are made after taxes are taken out. Many employer-sponsored retirement plans allow you to contribute to either or even both.

How Traditional (Pre-Tax) Contributions Work

Traditional contributions are deducted from your paycheck before taxes are taken out. This means the money you contribute lowers your taxable income today, and any investment earnings grow tax deferred. However, when you withdraw funds in retirement, you’ll owe federal income tax on both the original contributions and any earnings.

How Roth Contributions Work

Roth contributions, on the other hand, are made with money that has already been taxed. Because you’ve already paid taxes on the contribution, withdrawals in retirement both your original investment and the earnings are tax-free.

The Key Difference Between Traditional and Roth

The main difference between Traditional and Roth accounts lies in when you receive the tax benefit.

  • With Traditional, you save on taxes now but pay them in retirement.
  • With Roth, you pay taxes now and enjoy tax-free withdrawals later.

The Roth 5-Year Rule

Keep in mind that Roth contributions come with a five-year waiting period before you can take your first qualified withdrawal. This clock starts on the first day of the calendar year in which you make your initial Roth contribution.

Which Contribution Type Is Right for You?

Whether you choose Traditional or Roth, annual IRS contribution limits are the same. You can contribute up to the IRS maximum each year, and if you’re age 50 or older, you’re eligible to make additional catch-up contributions. Deciding between Traditional and Roth depends on your current and expected future tax bracket. If you expect to be in a higher tax bracket during retirement, Roth contributions may be more beneficial.

Things to Consider

Ask yourself:

  • Are you early in your career or just starting to save?
  • Is your current income unusually low?
  • Do you expect your income to rise in the future?
  • Do you prefer tax certainty now over potential savings later?

If you answered yes to any of these, a Roth contribution might make sense. However, it may also be wise to diversify by contributing to both Traditional and Roth accounts.

It may also be beneficial to consult with a financial advisor to ensure your investment choices align with your personal financial goals.

Looking for a Financial Advisor?
Find Your Match

Related Posts