Choosing Between Roth and Traditional Accounts Using Scenario Modeling

How can scenario modeling help you choose between Roth and Traditional accounts?

Scenario modeling turns the question of Roth vs Traditional from a guess into a testable set of outcomes. By building side‑by‑side projections for both account types, you can see how today’s tax savings (Traditional) versus tomorrow’s tax‑free withdrawals (Roth) affect the dollars you actually keep in retirement.

Why modeling matters

Taxes, investment returns, and life expectancy interact in ways that aren’t intuitive. A Traditional account’s immediate tax deduction looks attractive on a paycheck, but a Roth’s tax-free withdrawals can produce more net income if you expect higher future tax rates, longer lifespans, or large investment gains. Modeling lets you hold all other variables constant and change one assumption at a time—your expected retirement tax rate, a market shock, or a phased retirement—to see where the advantage lies.

I use scenario modeling in practice to help clients move beyond rule‑of‑thumb advice. A one‑size recommendation (“Roth is better for young people”) can fail once you add employer match rules, state taxes, or plans to convert a Traditional balance to Roth during a low‑income year.

Core inputs for reliable scenario models

A good model requires realistic, clearly stated inputs. At minimum include:

• Current marginal tax rate (federal and state). Understand it as the tax on your next dollar, not your effective rate.
• Expected retirement marginal tax rate (estimate a range—low, mid, high).
• Time horizon (years until retirement) and expected lifespan.
• Current balances and annual contribution amounts (and employer match rules for workplace plans).
• Expected investment return (use conservative, base, and aggressive cases).
• Treatment of Required Minimum Distributions (RMDs) and Social Security or pension income.
• Rules around conversions, backdoor Roth, and Roth contribution eligibility.

Note: tax and RMD rules change over time. As of 2025, Required Minimum Distributions generally begin at age 73 for most savers; details and future changes are on the IRS site (see IRS: Required Minimum Distributions).

Authoritative sources: IRS pages on Roth IRAs and RMDs are essential reference material (see IRS – Roth IRAs and Retirement Topics – RMDs).

Building a simple scenario (step‑by‑step)

1. Create two columns: Traditional and Roth.
2. Enter identical contribution amounts each year for both (pre‑tax for Traditional; after‑tax for Roth). If you want a fair apples‑to‑apples comparison, adjust Traditional contributions by the tax savings to reflect what you’d actually invest after receiving a deduction.
3. Apply the assumed annual return to each year’s balance.
4. At retirement, model withdrawals and tax consequences: Roth withdrawals are tax‑free if qualified; Traditional withdrawals are taxed as ordinary income.
5. Include RMDs for Traditional accounts and withdrawals needed for cash flow.
6. Repeat the run with different retirement tax‑rate assumptions and return scenarios.

Example (illustrative):

• Two savers contribute $6,000 annually for 30 years to each account type (assume returns, taxes, and other inputs for the scenario). The Traditional saver gets a tax deduction today; the Roth saver pays taxes now but withdraws tax‑free later. Modeling three tax‑rate outcomes at retirement (lower, same, higher) shows which account wins in each case. Real calculations depend on exact assumptions; use a spreadsheet or a trusted retirement calculator.

Common scenarios and what modeling usually shows

• Low current tax, higher future tax: Roth often wins. Paying tax now at a low rate and harvesting tax‑free growth later is powerful, especially with long time horizons and compounding.
• High current tax, similar or lower future tax: Traditional may make more sense because you get immediate relief when tax rates are high.
• Mixed approach: Many households benefit from contributing to both types over time to diversify tax risk—the model will typically show that a split allocation reduces sensitivity to tax‑rate forecasting errors.
• High‑income earners blocked from direct Roth contributions: Modeling can show the value of a backdoor Roth (and the impact of the pro‑rata rule). See our guide: Backdoor Roth Simplified: Step‑by‑Step Examples for practical steps and pitfalls.

When to model Roth conversions

Model partial or staged Roth conversions when you expect low‑income years (career breaks, sabbaticals, early retirement partial years) or when tax law changes lower your tax bill in specific years. A common strategy is to convert enough Traditional balance each year to fill the next tax‑bracket gap—minimizing conversion taxes while building tax‑free buckets in a Roth.

See our detailed walkthrough: Roth Conversion Roadmap: When and How to Convert for Retirement for timing and tax strategies.

Important technical and tax considerations to include

• Marginal vs effective tax rates: Use marginal rates for conversion decisions, but keep effective rates in mind for lifetime tax burden.
• State taxes: If you move between states (high to low tax), model the state tax shift; it can change the preferred account type.
• RMDs and estate planning: Traditional accounts impose RMDs and leave taxable inheritances; Roth IRAs have no lifetime RMDs for the original owner, which can be valuable when leaving tax‑free assets to heirs.
• Social Security and Medicare IRMAA: Large Traditional distributions increase adjusted gross income and could raise Medicare Part B/D premiums or Social Security taxation—model these interactions.
• Pro‑rata rule: IRA basis and non‑deductible contributions affect backdoor Roth conversions; modeling should include potential tax due on conversion across all IRAs.

Practical tips I use with clients

• Run at least three cases: conservative, base, and optimistic. Don’t rely on a single forecast.
• Start with a long time horizon and then run a scenario for near‑term retirement if retirement is likely soon.
• If uncertain about future tax policy, prioritize flexibility: a tax‑diversified portfolio (some pre‑tax, some Roth, some taxable investments) is robust.
• Document assumptions and revisit annually or when life events occur (promotion, relocation, job change, inheritance).

Common mistakes to avoid

• Comparing gross balances instead of after‑tax balances. Net after‑tax dollars matter, not headline account totals.
• Forgetting to include state income tax or Medicare premium effects when modeling conversions or large withdrawals.
• Assuming conversion taxes won’t affect other plans. Large conversions can push income into higher brackets and reduce eligibility for credits and deductions.
• Ignoring employer plans: workplace 401(k) rules, matching, and Roth 401(k) features change the calculus. Always model employer match first (it’s free money) and integrate it into overall savings.

Tools and next steps

• Use a spreadsheet with separate sheets for each scenario, or a retirement calculator that supports tax modeling.
• Consider software that models cash‑flow, taxes, and RMDs across decades.
• Work with a CPA or fee‑only financial planner for complex situations (estate planning, high wealth, variable business income). In my practice, multi‑run models that include Social Security claiming strategies and Medicare impacts often change the recommended Roth vs Traditional mix.

Quick checklist before you act

• Confirm current IRA/Roth eligibility and contribution limits for the tax year (IRS updates these annually).
• Estimate your marginal tax rate today and plausible ranges in retirement.
• Determine whether you’ll be subject to state income tax in retirement.
• Run at least three scenarios and compare after‑tax retirement income and tax bills in each.
• If considering conversions, model the tax‑year impact and potential Medicare/credit consequences.

Common questions answer summary

• Can you convert a Traditional IRA to a Roth? Yes; conversions are allowed and taxable in the year of conversion (see IRS: Roth conversions). Conversions can be staged across low‑income years.
• What about early withdrawals from Roths? Qualified Roth distributions are tax‑free if rules are met; contributions can usually be withdrawn penalty‑free. See IRS guidance on Roth IRAs.

Professional disclaimer: This article is educational and not personalized tax or investment advice. Tax laws and contribution limits change; consult a qualified CPA or CFP® for advice tailored to your situation.

Authoritative references

• IRS — Roth IRAs: https://www.irs.gov/retirement-plans/roth-iras
• IRS — Required Minimum Distributions (RMDs): https://www.irs.gov/retirement-plans/retirement-topics-required-minimum-distributions-rmds

Related guides on FinHelp.io

• Backdoor Roth Simplified: Step‑by‑Step Examples — https://finhelp.io/glossary/backdoor-roth-simplified-step-by-step-examples/
• How to Choose Between Traditional and Roth Retirement Accounts — https://finhelp.io/glossary/how-to-choose-between-traditional-and-roth-retirement-accounts/