Come on, we need to talk about your retirement. Yeah, I know. Completely exciting material. But trust me, future-you will thank us for making us have this conversation.
So you’ve got these IRA things. Roth. Traditional. Reminds you of choosing between two law firms, doesn’t it? Wrong. You’re actually deciding when you want to get socked in the face by taxes. Now or later. Great choices!
The Basics: What Even Are These Things?
Roth IRAs and traditional IRAs are basically steroid savings accounts. Instead of saving up for your summer trip or that ridiculous espresso machine you completely do not need (but completely deserve), though, you’re saving for when you’re old and wrinkly and hopefully passing the days critiquing the young’uns on whatever replaced TikTok.
The thing is:
Traditional IRA: You put money before taxes. Like, “Hey government, don’t pay attention to the fact that I earned this money this year!” And then when you’re old and taking it out, BOOM. Taxed.
Roth IRA: You put money after taxes. So you’re like, “Tax me now, I guess.” But then, when you’re old and taking it out, the government can’t touch it. Not one penny.
It’s sort of like deciding whether to eat your veggies first or dessert first. But instead, it’s money. And retirement. And not nearly as much fun as either veggies or dessert.
Why Traditional IRAs May Be Your Jam
So maybe you’re thinking, “I need tax deductions NOW because I’m throwing too much money at overpriced coffee and subscription services I didn’t intend to continue paying for.” Okay, that sounds reasonable. Traditional IRAs might be perfect for you if:
- You’re bringing it in big time right now and think you’ll be less ballin’ in retirement. Tax savings now will be more than tax payments later.
- You need to lower your taxable income because taxes are eating you up. sobbing hysterically
- You subscribe to the lifestyle of procrastination and would rather deal with taxes later. Like, REALLY, REALLY later.
I had this friend who was absolutely obsessed with getting old-school IRAs. He’d mention it at parties literally. “Hey, did you know I’m saving about $5,600 in taxes this year due to my traditional IRA contributions?” No one invited him anymore. Don’t be him. But maybe use his retirement strategy.
When Roth IRAs Are Essentially the GOAT
On the other hand, Roth IRAs are actually great if:
- You’re young and not rolling in dough yet. Your tax rate is probably lower than it will be when you’re slaying it at your career peak.
- You’re pretty sure taxes will go up in the future. Which, let’s be real, is about as sure a thing as saying “people will continue to post pictures of their food on social media.”
- You love that sweet, sweet tax-free profit. It’s as if your money are having babies and you don’t have to pay child support.
- You like the independence. With Roth, you have the ability to take out your contributions (but not the interest) whenever you want without penalties. Emergency car repair? Medical bill? Desperate need to get out of the country? Your contributions came through for you.
My neighbor Jane rolled over to a Roth IRA last year. She splurged on a t-shirt that said “I Pay My Taxes Up Front Like a Boss.” Her husband was mortified. Their kids pretend not to know her at school dropoff. But her retirement plan is on point.
The Numbers Game: Let’s Get (a Little) Technical
Okay so this is where the rubber meets the road. Or where the calculator meets the. uh. retirement account? Whatever.
For 2025:
- You can contribute up to $7,000 to either type of account if you’re under age 50
- If you’re 50 or older, you get catch-up contributions of another $1,000
- There are income limits on Roth IRAs (because the government doesn’t want rich people having too much fun)
This is what most individuals do wrong. They fail to consider their current tax rates versus future tax rates.
Suppose you’re in the 24% tax bracket today. If you put $6,000 into a traditional IRA, you’ll save approximately $1,440 in taxes this year. Cool!
But if you retire and you’re in a 32% tax bracket (because you did better with your money than you thought you would, kudos to you!), you’ll pay more taxes when you withdraw it.
On the other hand, if you use a Roth IRA and your tax rate goes down to 15% in retirement, you kinda shot yourself in the foot. You paid more taxes than you needed to.
It’s like trying to predict the weather 30 years from now. Except instead of deciding to pack sunscreen, you’re deciding how to save tens of thousands of dollars in taxes.
The Twist: Why Can’t We Have Both?
This is something they don’t mention in those boring financial pamphlets: you can actually have BOTH types of accounts.
*Mind blown, isn’t it?
It’s diversification of tax, and it’s pretty genius. Part of your money gets taxed today, part tomorrow. You’re hedging your bets like a Wall Street honcho, but minus the cocaine and questionable ethics. (Hopefully.)
My uncle does this. Also, he wears sandals with socks and thinks “doomscrolling” is something you do with actual scrolls, but his retirement strategy is really solid.
How to Actually Decide Because This is Getting Long
Think about your circumstances:
- What’s your tax bracket today?
- Where do you think yours will be when you retire?
- Do you prefer tax deductions today or tax-free income tomorrow?
- Do you enjoy paying taxes? (This is a sneaky question. No one does.)
If you’re young and earning peanuts yet: Roth probably makes more sense. Pay your lower taxes now.
If you’re in your high-earning years: Old school might save you more. Hold off on those high taxes when you’re not in as high a tax bracket.
If you have no freaking clue: Maybe do both! Or meet with a financial advisor who does not try to sell you life insurance the minute you start conversing with him.
Deciding between a Traditional and a Roth IRA is essentially deciding when to owe taxes. It’s not the most thrilling choice you’ll ever have to make. It’s about on par with choosing a dental plan or which type of toilet paper to purchase.
But it’s significant. Like, a lot.
And the “right” choice depends on your specific situation. Your current earnings, your future earnings in the years to come, tax brackets, your goals, whether Mercury is in retrograde or not. (I’m kidding about that last one. Or am I.)
Do what you want, just please ensure that you are actually saving for retirement. Because the only thing worse than paying taxes is being broke and old.
Start now. Future you will be thanking current you. And perhaps then current you can at last go out and purchase that ridiculous espresso machine.