PakFinanceGuidesThe core trade-off
Traditional IRA: deduct contributions now, pay tax on withdrawals later. Roth IRA: pay tax now, withdrawals tax-free later. With the same pre-tax dollars, whichever faces the lower tax rate wins. Expect higher taxes in retirement? Roth. Expect lower? Traditional.
Worked example
Invest 7,000 pre-tax yearly for 30 years at 7%: it grows about 7.6x. Traditional, taxed 15% at withdrawal: about 45,293 after tax. Roth, taxed 22% now: about 41,563 tax-free. Traditional wins by roughly 3,730 — because the retirement rate is lower.
Beyond the maths
Roth has extras: no required minimum distributions, tax-free inheritance for heirs, and flexibility to withdraw contributions penalty-free. Traditional wins on the deduction today, which matters if you need the tax break now. Many savers split contributions — hedging beats guessing.
Frequently asked questions
What is the IRA contribution limit for 2026?
7,000 per year (8,000 if 50 or older), across all your IRAs combined. Income limits apply to deductibility and Roth eligibility.
Can I contribute to both Roth and Traditional?
Yes — the limit is combined across both. Splitting hedges against uncertain future tax rates.
What if I expect higher taxes later?
Roth usually wins. Locking in today's lower rate beats paying tomorrow's higher one.
Do employer 401(k)s have Roth options?
Many do — Roth 401(k) contributions follow the same pay-now-or-later logic with much higher limits.