One of the most important tax-planning questions that working taxpayers face is whether to do Roth or traditional individual retirement account (IRA) contributions. Nowadays, this choice is available for all kinds of retirement plans, including 401(k)s, 403(b)s, and IRAs. But how do you know which to pick? Well, general wisdom might suggest that a Roth IRA is a safe bet for those in the lowest marginal tax brackets (10% to 12%). You’re prepaying tax at a historically low rate, and all future withdrawals will be tax free; that’s hard to beat! On the other hand, you may want to contribute to a traditional tax-deferred retirement account if you’re in the top few tax brackets (32% to 37%). You’re saving a much bigger chunk on deferral at that income level, with the potential to pay the tax on those dollars at a later date (and in a lower bracket).

The Middle Bracket Dilemma

The decision is often most difficult to make for those earning enough to be placed firmly in the middle brackets of 22% to 24%. To make an informed decision in this situation, there are two aspects to consider. First, how do you expect tax policy to change between now and the time of your withdrawals? This one is impossible to answer with certainty, as you may be going decades into the future. Second, how do you expect your personal income tax situation to change between now and the time of withdrawal? It is much more realistic for you to be able to estimate this with some degree of accuracy.

The Retirement Tax “Bomb”

One might assume that taxable income will always be lower in retirement than during working years, but this isn’t necessarily true. We find that clients who are excellent savers and have built significant nest eggs often face the potential for higher taxes in retirement. Several factors contribute to this, including required minimum distributions (RMDs) on your 401(k)/403(b)/Thrift Savings Plan/IRA; income-related monthly adjustment amount Medicare premiums increase; pensions; annuities; Social Security benefits; and investment income. Deferring taxes on all retirement savings throughout your career can create a “tax bomb” in retirement that can be mitigated by effective financial planning.

Taking full advantage of retirement accounts is a critical component of any retirement savings strategy, often achieved through contributions to 401(k)s and IRAs. In 2025, the maximum contribution limits for these accounts are $23,500 and $7,000, respectively, with additional “catch-up” contributions available for those over age 50. If you’re deferring the maximum contributions today at a 24% tax savings rate, it’s essential to consider how those dollars will grow by the time you begin taking RMDs. Also, what will your annual Social Security benefit be? Adding these together can help you assess whether you might enter a higher tax bracket in retirement. If the numbers suggest a tax bracket increase, consider contributing to a Roth account instead.

However, tax bracket management isn’t the only consideration. Since Roth contributions do not lower current taxable income, they can inadvertently reduce eligibility for certain tax credits and deductions, such as the Child Tax Credit and the qualified business income deduction. Evaluating how Roth contributions fit into your overall tax strategy is essential, especially if these credits and deductions significantly reduce your current tax liability.

Can I still benefit from a Roth conversion?

For many people, the Roth option wasn’t available for much of their working lives. If this describes your situation, you may have most of your retirement savings in a tax-deferred 401(k) or IRA, leading to potentially massive RMDs. One strategy to mitigate this is partial Roth conversions. If it is sensible for your current income level, you can transfer assets from a traditional account to a Roth account. The converted amount will be included as income in the current year, but all subsequent growth will be tax free and excluded from RMD calculations. However, if you are age 63 or older, you also need to be aware of how your adjusted gross income will impact your future Medicare premiums.

At the end of the day, deciding between Roth and traditional IRA contributions depends heavily on individual circumstances. While there are simple rules of thumb, they are rarely a perfect solution. Consider where your current earnings stand relative to your career goals and aspirations. Do you envision taking a sabbatical, switching careers, or starting a business? Each of these scenarios presents opportunities to fine-tune your tax planning and retain more of your lifetime earnings—even if taxes are not top of mind in the moment.

Working with a financial planner can be invaluable in identifying strategies and opportunities you may overlook. If you think you could benefit from assistance with your annual tax planning, please feel free to reach out to our team.