How to Decide Between Roth and Traditional Contributions Each Year

Quick answer

Decide by comparing your current marginal tax rate to the rate you expect in retirement, then layer in practical factors: employer matches, income limits, liquidity, state taxes, and the value of tax diversification. Make this comparison annually because your pay, filing status, and tax laws can change.

Why this matters

The tax treatment of retirement contributions changes the timing of your tax bill — now (Roth) or later (Traditional). The difference compounds over decades, so a small annual decision can become a meaningful lifetime tax difference. In my practice I see clients switch year to year as careers accelerate, pay fluctuates, or large one‑time items (like a bonus or a Roth conversion) change their taxable income.

A step-by-step decision process (use this each year)

1. Confirm eligibility and limits

• Check the current year’s contribution limits and income phase-outs on the IRS site (IRS Publication 590-A) before deciding. Limits and MAGI phase-outs change annually. See IRS Retirement Plans (irs.gov/retirement-plans) for the latest numbers.

1. Calculate your marginal federal tax rate for the year

• Use your expected taxable income this year after deductions and adjustments. Include one‑time items (bonuses, stock sales, Roth conversions). Your marginal rate (the rate on your next dollar) is what matters for contribution decisions.

1. Estimate your expected marginal tax rate in retirement

• Consider pension income, Social Security, required minimum distributions (RMDs) from pre-tax accounts, and other income sources. If you’ll be in a higher or similar rate later, Roth is generally attractive. If you expect a lower rate, Traditional may be preferable.

1. Factor in state taxes

• State income tax differences between now and retirement can flip the decision. If you live in a high-tax state now and expect to retire in a no- or low-tax state, Traditional contributions gain value.

1. Consider liquidity and flexibility

• Roths allow penalty- and tax-free withdrawal of contributions (not earnings) and no RMDs for original owners, which gives flexibility before and during retirement. Traditional accounts usually require RMDs and taxable withdrawals.

1. Look at employer plans and the match

• If your workplace offers a match, contribute enough to get the match first (matching funds are effectively pre-tax even if you contribute Roth in the plan), then use the Roth vs Traditional decision for the remainder.

1. Use tax-diversification tactics

• Maintaining some balance between Roth and Traditional sources gives you flexibility for managing taxable income in retirement and optimizing Medicare premiums and Social Security taxation.

1. Recalculate if you expect a low-income year

• Lower-income years can be ideal for Roth conversions or Roth contributions because you’ll pay tax at a lower marginal rate.

Practical examples (hypotheticals)

Example A — Early-career saver

• You’re in a low marginal tax bracket (for example, 12%) but expect higher earnings later. Roth contributions make sense: pay tax now at a low rate and enjoy tax-free growth and withdrawals.

Example B — High earner near retirement

• You’re in a high bracket now and expect lower income in retirement. Traditional contributions reduce current taxable income and may lower taxes overall.

Illustrative math (simple):

• Roth: contribute $6,000 after tax if your marginal rate is 24% you pay $1,440 in tax now; the $6,000 grows tax-free.
• Traditional: contribute $6,000 pre-tax today; you save $1,440 in tax now, but if you withdraw the full balance later when your marginal rate is 12% you’ll pay $720 tax on that withdrawal. If your retirement rate is lower than today, Traditional wins in this scenario.
• This illustrates the core idea: Roth wins when your future marginal rate >= current rate; Traditional wins when future rate < current rate.

Important rules, limits, and misunderstandings

• Annual contribution limits and income phase-outs change. Before making contributions or a backdoor Roth, verify the current limits on the IRS site (IRS Publication 590-A) or consult a tax advisor. (IRS: Retirement Plans)
• High earners who exceed Roth IRA income limits can often use a backdoor Roth IRA strategy; see our Backdoor Roth IRA guide for steps and the Pro-Rata rule implications: Roth conversions and backdoor rules.
• RMDs: Traditional IRAs and pre-tax workplace accounts are subject to required minimum distributions for original owners; Roth IRAs are not for the original owner. RMD ages updated by recent legislation — confirm current RMD ages and rules on the IRS site.

When to choose Roth each year (practical signals)

• Your marginal tax rate this year is unusually low (early-career, parental leave, job loss, business startup year).
• You expect to be in the same or higher tax bracket in retirement.
• You value tax-free flexibility and want to minimize RMD exposure.
• You’re planning Roth conversions in a low-income year.

When to choose Traditional each year (practical signals)

• You need to reduce taxable income now to save on current taxes or qualify for credits/deductions.
• You expect a materially lower tax rate in retirement.
• You are close to IRMAA thresholds (Medicare Part B/D income-related adjustments) and want to reduce current provisional income.

Combining both: the hybrid approach

Most clients benefit from tax diversification: contribute to both Traditional and Roth (if eligible). This provides flexibility to withdraw from the most tax-efficient bucket each year in retirement — especially useful for managing Medicare premiums, Social Security taxation, and sudden income needs.

Roth conversions and backdoor Roths

If you can’t contribute directly to a Roth because of income limits, consider a backdoor Roth (contribute to a non-deductible Traditional IRA, then convert). Be careful with the pro‑rata rule if you own other pre‑tax IRAs. For multi-step decisions and timing, review our guides: Choosing Between Roth and Traditional Accounts Using Scenario Modeling and Pro-Rata Rule for Backdoor Roth IRA Conversions.

Related FinHelp articles:

• Roth IRA vs. Traditional IRA: https://finhelp.io/glossary/roth-ira-vs-traditional-ira/
• Backdoor Roth IRA: https://finhelp.io/glossary/backdoor-roth-ira/
• Converting a Traditional IRA to Roth: https://finhelp.io/glossary/converting-a-traditional-ira-to-roth-timing-and-tax-strategies/

Checklist to use before you decide each year

• [ ] Verify current-year contribution limits and Roth income phase-outs (IRS Publication 590-A).
• [ ] Estimate your current marginal federal and state tax rates.
• [ ] Forecast retirement income sources and likely marginal rate.
• [ ] Review employer plan match rules and whether the plan allows Roth contributions.
• [ ] Consider Roth conversions if you have a low-income year.
• [ ] Revisit tax-diversification target (e.g., 30–50% Roth depending on goals).

Common mistakes I see

• Assuming a one-time decision fits all years. Your best choice can change with promotions, job changes, marriage, or tax-law changes.
• Ignoring state taxes and RMD timing.
• Misusing the backdoor Roth without accounting for the pro‑rata rule.

Professional tips

• Run a simple scenario model (now vs. retirement marginal rates) every year rather than relying on a rule of thumb.
• If unsure, split your contributions between Roth and Traditional — a 60/40 or 50/50 split provides flexibility.
• Use low-income years to do partial Roth conversions and ‘fill’ lower tax brackets.

Final notes and disclaimer

This article explains common factors to weigh when choosing Roth vs Traditional contributions. It is educational and not individualized tax advice. For precise, personalized recommendations, consult a CPA or a qualified financial planner, and verify current contribution limits, income phase-outs, and RMD rules on the IRS website (irs.gov).

Author experience: In my 15+ years advising clients, year-by-year review and tax-diversification have been the two simplest changes that improve long-term outcomes.

Authoritative sources

• IRS — Retirement Plans and IRAs: https://www.irs.gov/retirement-plans
• IRS Publication 590-A and 590-B (contributions and distributions) — check the current year’s versions at irs.gov