Retirement planning can feel like walking a tightrope. Balancing today’s tax strategies against tomorrow’s needs. I’ve seen countless clients wrestle with one question: Which is better: Traditional IRA or Roth IRA?

As someone building assets or if you have significant assets, this decision isn’t as simple as picking one based on a quick online search. It’s about understanding where you are now financially, where you’re headed, and how to minimize Uncle Sam’s slice of your financial pie. 

Let’s dive into what you need to consider and why the answer might be different for you than your neighbor or even your younger self.

The Basics: Traditional IRA vs. Roth IRA

Before we get into strategy, let’s break down what a Traditional and Roth IRA are at their core:

Traditional IRA

• Contributions: Tax-deductible (in most cases). Not tax deductible if you are participating in a workplace retirement plan. For example, 401K, 403B, or similar workplace retirement plan.
• Growth: Tax-deferred (you don’t pay taxes as it grows). 
• Withdrawals: Taxable when taken out in retirement. And penalty may apply if making an early withdrawal.

In simple terms, you get the tax break today and pay taxes later.

Roth IRA

• Contributions: Made with after-tax dollars (no deduction today).
• Growth: Tax-free.
• Withdrawals: Tax-free in retirement. Assuming you met the 5 year account establishment requirement.

Here, you pay the taxes upfront and enjoy tax-free income later.

Now that we’re clear on the basics, let’s talk about what this means for you. Trust me, this decision comes down to more than just tax brackets—it’s about understanding where you are today and where you want to be tomorrow.

Why Your Income Level Changes the conversation

Current vs. Future Tax Brackets

A few years ago, I sat down with a client in their mid-50s who was in the highest tax bracket. They were making great money and saving for retirement above the 15% rule of thumb. 

Putting it all into workplace retirement plans and Traditional IRAs to lower their taxable income. It made sense at the time. The couple were enjoying immediate tax breaks. 

But when we looked closer at their long-term plan, the picture changed. They were saving big now but were likely to be in a high tax bracket even in retirement because of multiple income streams that were planned to last into their retirement years and for their lives. 

Combined the couple had pensions, rental income, Social Security, and were looking at Required Minimum Distributions (RMDs) from their Traditional IRA and rollover retirement accounts. 

That’s when we discussed the Roth IRA and the possibility of doing some strategic Roth conversions.

A Small lesson here: If you’re in a high tax bracket now but expect to stay in a high bracket in retirement, a Roth IRA can be a better option than a traditional ira. You’ll pay taxes now while you’re working and likely won’t need to touch the money for years, letting it grow tax-free. 

Then, when you’re retired and need that income, you won’t owe taxes on withdrawals. Or not have to take required minimum distributions if you do not need the money at that time.

Income Limits

High earners often run into issues with Roth IRAs because of contribution limits. In 2024, for example, if your Modified Adjusted Gross Income (MAGI) exceeds $161,000 (for singles) or $240,000 (for couples), you can’t directly contribute to a Roth IRA. 

But don’t worry; there’s a workaround called a Backdoor Roth IRA.

Much of the information online can be confusing and frustrating by these limits. However, once we walked through the Backdoor Roth process, a legal strategy for high-income earners to convert a Traditional IRA into a Roth IRA. 

We are able to determine which is better, traditional ira or roth ira. If you’re in the same boat, it’s worth us discussing this strategy. 

You can still take advantage of tax-free growth in a Roth IRA, even if you can’t contribute directly.

Strategic Tax Planning: Think Beyond Today when considering which is better traditional ira or roth

Traditional IRA: Short-Term Tax Savings

One of the biggest advantages of a Traditional IRA is the immediate tax deduction. If you’re in your peak earning years, this can lower your taxable income significantly.

Let’s say you’re 50 and earning $300,000 a year. You do not have a workplace retirement plan, and you contribute the maximum amount ($8,000 for those 50 and older in 2024) to your Traditional IRA. 

That contribution is deducted from your taxable income, with a potential significant tax savings this year. Deductible contributions to an IRA is an above the line deduction. 

As an above the line deduction this means that you can take this deduction no matter if you itemize or take the standard deduction.

But there’s a catch to this immediate tax savings. You’ll pay taxes on those withdrawals when you’re retired. 

If you’re still in a high tax bracket in your 60s or 70s, you’ll owe a significant portion of those savings to the IRS.

Roth IRA: Long-Term Tax-Free Withdrawals

The Roth IRA offers no immediate tax benefit, but the payoff can be huge in retirement. Since you’ve already paid taxes on the contributions, every dollar you withdraw in retirement is yours to keep—no matter how much your investments have grown.

This can be especially valuable for high earners who anticipate having multiple sources of income in retirement. Imagine not having to worry about RMDs or how every dollar you take from your account will impact your tax bracket. 

It’s a powerful feeling, knowing you can take income without giving a chunk of it to the IRS.

Roth Conversions: Timing Is Everything

A lot of high-net-worth individuals I work with eventually realize that Roth conversions can be a game-changer. The key is doing them at the right time.

One couple I advised waited until they were in a lower-income year (after selling their business but before starting Social Security) to convert a portion of their Traditional IRA to a Roth IRA. This allowed them to avoid a hefty tax bill during their high-earning years and set them up for tax-free income down the road.

If you’re still earning a great deal but foresee a lower-income year (perhaps due to a career change or semi-retirement), that might be in the perfect window to convert some of your IRA funds.

Estate Planning and Legacy Goals

For those thinking beyond their own retirement and considering how to pass wealth on to heirs, Roth IRAs can offer another advantage.

Unlike a Traditional IRA, which requires you to start taking RMDs at age 73 (for those born in 1951 or later), a Roth IRA doesn’t have that rule. This makes it an excellent vehicle for those who want to maximize what they leave behind for their children or grandchildren.

I work with several clients who do not need their Roth IRA money to live on. They let it grow, and their heirs are set to inherit the accounts from them. All while those assets are growing tax free.  

This strategy can make a massive difference in the wealth you pass to beneficiaries, especially if your beneficiaries are in their peak earning years.

Balancing Both IRAs for Flexibility

For many high earners, the answer to the Traditional vs. Roth IRA question is: Why not both?

By contributing to or converting funds into both types of accounts, you create flexibility. You can pull from your Traditional IRA in years when your income is lower, and rely on your Roth IRA in years when you want to avoid pushing yourself into a higher tax bracket. 

This strategy, often referred to as tax diversification, can give you the freedom to choose which account to withdraw from based on your tax situation in any given year.

And this works best if properly planned ahead of time. Therefore, allowing the ability to be flexible when determining which is better, traditional ira or roth ira.

Next Steps: It’s About Your Unique Situation

So, which is better, Traditional or Roth? It really depends on your current tax situation, your expectations for future income, and your estate planning goals.

If you have high income now, and expect to be in a lower tax bracket during retirement, a Traditional IRA may be the way to go. If your opinion is that taxes will rise in the future, or you want tax-free income later, a Roth IRA could be the better choice. 

Often, the best strategy is a mix of both, along with careful planning for Roth conversions at the right time.

All in all, the best approach is one that aligns with your overall financial plan. Your future is too important to leave to chance. Let’s make sure your retirement accounts are working for you, and not the other way around.

Interested in learning more or having a conversation on how a traditional ira or roth ira can benefit you? Schedule a call here. Select an option that best fits what you would like to achieve, and book a time on my calendar.