For most of us, securing the opportunity to retire means investing a portion of our income in an IRA, 401(k), or both, for many years. These retirement accounts provide a tax break—you don’t pay taxes on your deposits (which can give your savings more growth potential). But later, you’ll have to pay income tax when you withdraw from these accounts after you retire.
In 1997, the Taxpayer Relief Act opened the way for Roth IRAs and Roth 401(k)s. What’s “Roth,” you ask? Simply put, Roth is just another option for your retirement accounts that lets you give up your tax break now for a tax break later. With Roth accounts, you go ahead and pay taxes on the income you deposit—but then you don’t have to pay anything when you make withdrawals after you retire (after age 59 ½).1
Even though some experts swear Roth is the way to go, many people may not even realize it’s an option with their current plan. And even if you’ve heard of it, you may not know which is best. Whichever camp you’re in, let’s break down the pros and cons of Roth accounts so you can decide which is best for you and your future self.
“When you go online and you look at that number, does it bother you that it’s going to be taxed at some point? Or do you like looking at the number knowing that it’s going to be all yours when you retire with no taxes taken out?”
For starters, this is more important
So you’re curious about different retirement strategies—and that’s awesome. But Brian Ford, head of financial wellness at Truist, says many people who ask about Roth versus traditional retirement accounts don’t realize what’s more important: that you start saving as much as you can—as early as you can—for retirement. Simply maxing out or increasing your retirement contributions, he says, will have a bigger impact for you in the long run than choosing between Roth or traditional accounts.
“I get this question all the time,” he says. “But when people ask me about Roth versus traditional, I first ask them if they’re maxing out their tax-advantaged retirement accounts. If they’re not, I let them know, look, you should put more brain power into that.”
It can be hard giving up more of your take-home pay now when retirement seems so far away—but figuring out how to save as much as you can is more important than deciding between Roth or traditional retirement savings. And while maxing out retirement accounts each year may not be a realistic option for those of us juggling multiple financial priorities, you can still make progress while crushing other financial goals. Start small with your savings—ensure you’re at least contributing as much as your employer will match. Automate your contributions so you don’t have to think about it each month. And come up with a strategy to tackle debt or any other obligations that are keeping you from investing more for your retirement.
Read more: How to save more while paying down debt
Which is best for you? (Hint: Probably whichever feels best)
Now, back to the main question. Friendly reminder: With Roth, you basically give up a tax break in the present in exchange for not having to pay taxes in the future. But is Roth better than the traditional option? While some argue income taxes may be higher in the future, no one (that we know) can actually predict the future—so there’s no way to say for sure whether you’ll pay a higher or lower tax rate later than you would now.
“There is not a right answer,” Ford says. “Some people don’t like to hear that, but the reason why is that we don’t know what the tax rates are going to be 20 or 30 years from now. If we knew that, the math would be very clear.”
Ultimately, you do have to pay taxes at some point. But generally speaking, Ford says you should base your decision about Roth versus traditional accounts on what makes you feel the best.
“When you go online and you look at that number, does it bother you that it’s going to be taxed at some point? Or do you like looking at the number knowing that it’s going to be all yours when you retire with no taxes taken out?” Ford asks.
So, do you want to pay your taxes now and know that the amount you’ve saved is fully there for you down the road?
Or, do you want to see that number go as high as it can—knowing that you’ll pay income taxes on it later—and just deal with that down the road?
“You can’t go wrong either way,” Ford says. “The difference between Roth and traditional, it’s not that big of a deal. What is a big deal is the fact that you’re going to put money into one of these things—pick one of them and do it and max it out.”
Read more: 5 key retirement planning tips from real retirees
Can you do both?
Absolutely. There are no penalties for hedging your bets, so to speak, and contributing to both.
If you really want to be a financial nerd, keep in mind that Roth contributions count toward your taxable income for the year. Because of this, Ford says he knows some high earners who will adjust how much they’re contributing to each based on what their taxable income for the year is.
“Some people say, ‘Look, I made a little more money this year and it’s going to bump me up into this new bracket.’ And they’re like, ‘Boom, traditional—I want to save on those taxes now,’” Ford says. “And they can go back and forth depending on where they’re at with their income and what taxes are doing that year and so forth.”
In any given year, depending on your situation, you could potentially keep yourself in a lower tax bracket by contributing more to a traditional account instead of Roth. But that strategy is pretty niche—what’s most important for you and your future well-being is that you simply save (whether in one, the other, or both)!