Traditional IRA vs. Roth IRA: Which Should You Choose?

If you have ever wondered whether you should invest that $7,000 in a Traditional IRA or a Roth IRA, here is the only thing you need to know. I'm Tyler, a former financial advisor and portfolio manager, and now I create financial content for free to help you make better choices.

Investment Scenario

Let’s say you want to invest $10,000. Let’s also assume your current tax rate is 30%.

1. Traditional IRA

If you invest that money through a Traditional IRA and your investments return 5% over the next 30 years, that account would ultimately be worth $43,219.

2. Roth IRA

Now, if you invest that $10,000 in a Roth IRA and take that 30% tax hit up front, in 30 years, you’d have $30,254, assuming the same 5% return.

3. Tax Implications

If in 30 years, your effective tax rate is still 30%, the post-tax amount in each account will be, you ready? Identical.

However, if your effective tax rate ends up being above 30%, the Roth would have made more sense. Conversely, if your effective tax rate ends up being below 30%, the Traditional would have made more sense.

Conclusion

In short, a Roth IRA makes more sense if you think you will be in a higher tax bracket when you eventually use the money. A Traditional IRA makes more sense if you think you will be in a lower tax bracket when you access the funds.

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