Roth vs. Traditional IRA: Which Wins If Your Tax Bracket Stays the Same?

There's a common misconception that if you're in the same tax bracket today as you will be in retirement, a traditional IRA and a Roth IRA work out about the same. On paper, that can look true. In real life, it usually isn't.

Is a Roth IRA better than a traditional IRA if your tax bracket stays the same?

Often, yes. If you're contributing the maximum each year, a Roth IRA generally comes out ahead even when your tax bracket doesn't change. The reason is that both accounts have the same contribution limit, but every dollar in a Roth is already after tax. So the same contribution limit lets you shelter more money from future taxes in a Roth.

How traditional and Roth IRAs are taxed

Traditional IRA: You may get a tax deduction now, the money grows tax deferred, and you pay income taxes when you take it out in retirement.

Roth IRA: You don't get a tax deduction now, the money grows tax free, and qualified withdrawals in retirement are tax free.

The math behind the misconception

Let's say you're in the 22% tax bracket with $7,500 to invest each year.

With a traditional IRA, you contribute the full $7,500 and get a tax deduction today.

The misconception assumes that with a Roth IRA, you'd pay 22% in taxes first ($1,650), leaving you $5,850 to contribute.

Keeping the assumptions simple, after 30 years of contributions with an 8% annual return:

The traditional IRA grows to about $849,624. After paying 22% tax on withdrawals, you'd have about $662,707 to spend.

The Roth IRA, with $5,850 contributions, grows to about $662,707, all of it tax free.

Same result. That's where the "it doesn't matter" idea comes from.

This is a hypothetical illustration that assumes level annual contributions, an 8% average annual return, and a constant 22% tax rate. It is not a guarantee of future results and does not represent any specific investment. Actual returns will vary and may be lower.

But that's not how it actually works

You don't have to reduce your Roth contribution by the tax amount. You can contribute the full $7,500 of after-tax dollars to a Roth IRA, up to the annual limit. Do that for 30 years at the same 8% return, and the Roth grows to about $849,624, with no taxes owed when you take it out.

Now compare that to the traditional IRA's $662,707 after tax. How big the Roth's advantage really is depends on what you do with the $1,650 tax deduction the traditional IRA gives you each year:

If you spend the tax savings, which is what most people realistically do, the Roth comes out ahead by about $187,000 in this example.

If you invest the tax savings in a taxable brokerage account every year, the gap shrinks a lot, because that money is working for you too. The Roth still generally wins, because the brokerage account's growth is taxed and the Roth's isn't.

Either way, if you're maxing out your IRA and your tax bracket stays the same, the Roth comes out ahead.

Other advantages of a Roth IRA

And that's before we even get to the Roth's other advantages:

Roth IRAs don't have required minimum distributions during your lifetime, so you control when and whether you take money out.

You can withdraw your contributions (not earnings) at any time without taxes or penalties.

Qualified withdrawals don't count as taxable income, which can help keep more of your Social Security untaxed and keep Medicare premiums lower in retirement.

Heirs generally inherit Roth money income tax free.

When a traditional IRA might make more sense

A Roth isn't automatically the right answer for everyone. A traditional IRA can make more sense if you expect to be in a meaningfully lower tax bracket in retirement, or if you need the deduction today to free up cash flow.

A couple of rules also affect your options. Your ability to contribute directly to a Roth IRA phases out at higher incomes, and your ability to deduct traditional IRA contributions can phase out if you or your spouse are covered by a retirement plan at work. Both limits are adjusted each year, so check the current numbers on the IRS website.

Don't miss the IRA contribution deadline

Whichever type is right for you, remember that you can make IRA contributions for a given tax year up until the tax filing deadline the following spring, generally April 15. Filing an extension doesn't extend the deadline to contribute.

The takeaway

Being in the same tax bracket now and in retirement doesn't make a Roth and a traditional IRA equal. Because the contribution limit is the same, a Roth lets you shelter more of your money from future taxes. Before deciding which one to use, look at your current bracket, where you expect it to be later, and what you'd actually do with the tax savings.