Roth or traditional 401(k)? Table by tax rate now and later

The usual answer is: traditional if your tax rate will be lower in retirement, Roth if it will be higher. That's exactly right in one case, and a little off in the other. Here's one example, worked through with the sample file of our Roth vs traditional calculator. Every figure comes from the same model, checked year by year. The saver is an example: use your own numbers.

The example

A 30-year-old puts $7,000 a year into a 401(k), raising it 2% a year, until 65. Investments return 7% a year. Tax rate now: 22%; in retirement: 15%.

There are two fair ways to compare. Same contribution: $7,000 goes into either account (for example because you contribute the maximum), and with traditional you also invest the tax you saved in a taxable account, whose growth is taxed at 15%. Same take-home cost: your pay goes down by the same amount either way, so the Roth contribution is smaller: $7,000 × (1 − 22%) = $5,460.

Same contribution: traditional leaves $59,640 more

At 65	Traditional	Roth
You put in	$349,961	$349,961
Balance	$1,299,768	$1,299,768
Tax on withdrawals at 15%	−$194,965	$0
Taxable account from the tax saved, after tax on its growth	$254,605	–
Left to spend	$1,359,409	$1,299,768

Roth would win if the retirement tax rate were above 19.6%, not 22%. The Roth shelters more money from tax: the same $7,000 grows tax-free, while traditional's tax savings grow in an account that is taxed.

Who wins, by tax rate (same contribution)

Roth minus traditional at 65; positive = Roth leaves more.

Rate now ↓ / in retirement →	10%	12%	15%	22%	24%	32%	Roth wins above
12%	−$8,899	$17,097	$56,090	$147,073	$173,069	$277,050	10.7%
22%	−$124,629	−$98,633	−$59,640	$31,344	$57,339	$161,320	19.6%
24%	−$147,775	−$121,779	−$82,786	$8,198	$34,193	$138,175	21.4%
32%	−$240,358	−$214,363	−$175,370	−$84,386	−$58,391	$45,591	28.5%

Same take-home cost: the break-even is exactly your rate now

Rate now ↓ / in retirement →	10%	12%	15%	22%	24%	32%
12%	−$25,995	$0	$38,993	$129,977	$155,972	$259,954
22%	−$155,972	−$129,977	−$90,984	$0	$25,995	$129,977
24%	−$181,968	−$155,972	−$116,979	−$25,995	$0	$103,981
32%	−$285,949	−$259,954	−$220,961	−$129,977	−$103,981	$0

With the same take-home cost and the same rate now and later, both leave exactly the same: paying tax before or after growth multiplies by the same numbers in a different order. Here the rule of thumb is exact.

Age changes the size, not the break-even much

Starting at 25 instead of 30, traditional leads by $84,712 (break-even 19.4%); starting at 40, by $28,388 (20.0%); at 50, by $11,827 (20.6%), all with 22% now and 15% later, same contribution. And if the taxable account paid no tax on its growth, the break-even would go back to 22%.

What the table leaves out

An employer match is usually traditional money even when your own contributions are Roth (plans may now offer a Roth match, but it's optional). Required minimum distributions, how Social Security is taxed, moving to a state with a different income tax, and Roth income limits (for IRAs) can all tip the answer. Nobody knows their retirement tax rate for sure, which is why some people split contributions between both. The free Roth vs traditional calculator is pre-filled with this example; the spreadsheet adds the year-by-year balances for both accounts. Not tax advice.