When it comes to choosing which type of tax-advantaged account is better, many personal finance pundits favor traditional retirement accounts over Roth accounts. Their logic is simple and sound: You probably make significantly more money now, during your peak working years, than you’ll be making in retirement, when you’re living off your savings.

But when you think a bit harder, and factor in the many variables around how investments are taxed, it’s hard to name a clear winner. In a world of volatile markets where the tax code has a tendency to shift depending on which party is in power, it may be time to reframe how we think about traditional versus Roth accounts.

The case for traditional accounts

With traditional accounts, you contribute money tax-free, thus lowering your taxable income for the present year. Instead, you pay taxes on the money you withdraw in retirement. With Roth accounts, you contribute money after-tax, but you withdraw the money tax-free in retirement. In both cases, the money grows tax-free, meaning that trading and rebalancing investments in your accounts won’t trigger a taxable event if the money stays in the account.

(Need a refresh on the difference between traditional and Roth retirement accounts? Read our introductory primer.)

When you contribute to a traditional IRA or 401(k), you lower your tax rate for the year. Presumably, your income level is higher during your working years than it will be in retirement, and since our income tax system is progressive, it stands to reason that lowering your taxable income during your high-earning years yields greater tax savings than lowering your taxable income in retirement.

If you’re in a lower tax bracket when you retire, you might be less concerned with finding tax savings than you are now, and the savings themselves might be smaller.

There are a few assumptions in this logic, though, that could up-end the reasoning. First, it assumes that tax rates and brackets will stay roughly the same as they are now. That is by no means guaranteed. Second, it doesn’t consider how well your investments performed.

The case for Roth accounts

Investments grow tax-free in both traditional and Roth accounts, but in a traditional account, you pay income tax on those earnings when you withdraw them. Remember: The ordinary income tax rate is higher than the capital gains tax rate.

If the money in your traditional retirement account is primarily from returns (versus principal investment), you could end up paying more tax overall than if you had invested your money in a taxable brokerage account. Depending on how much money you saved by not paying taxes on the initial contributions, you may have been better off not even using a tax-advantaged account. Of course, with taxable accounts, buying and selling investments along the way could change the narrative quickly, as you’d end up paying capital gains taxes each time, which could hurt overall growth.

If you aren’t sure how to solve for these competing considerations, Roth accounts provide a great alternative. In a Roth account, you still benefit from tax-free growth, but you pay no tax on the withdrawals. In other words, you don’t pay capital gains or ordinary income tax on any investment growth. That could amount to significant savings—potentially offsetting  the income taxes you paid on any initial contributions.

There are numerous scenarios where Roth accounts offer a clear tax advantage over traditional accounts.

Thinking beyond taxes: Rules and variables

Of course, we’re looking simply at how these accounts are taxed -there’s a lot more to consider.

For instance, most people get started with retirement planning by using an employer-sponsored retirement account like a 401(k). These function as traditional retirement accounts, but they come with perks that a traditional IRA might not. Most notably, many companies offer an employer match to encourage their workers to save for retirement.

An employer match paid to a 401(k) can boost your overall salary without boosting your taxable income. Additionally, the employer matches don’t count toward your annual contribution limit. Historically, these perks prioritized traditional 401(k) accounts, and many employers didn’t even offer a Roth 401(k) option. That’s changing.

A growing number of employers are offering Roth 401(k)s to their employees, giving employees access to a different type of tax-advantaged retirement account. The government recently (in 2022) updated legislation to allow employers to pay their employee match into Roth 401(k)s as well, expanding the potential perks.

Government regulations are just one piece of the puzzle, however. Your employer still designs the retirement plan, and they may not offer a Roth 401(k) or matching Roth contributions even though the government allows both.

Roth IRAs follow the same annual contribution limits as regular IRAs—which are much lower than contribution limits for employer-sponsored accounts. Roth accounts come with additional restrictions, however—you can’t contribute directly to a Roth account if your income tops a certain level (the IRS updates these levels each year).

If you earn too much to contribute directly to a Roth account, you may be able to make backdoor contributions using Roth conversions. Once a year, you may be able to convert funds from a traditional account to a Roth account. If you do this, you pay income tax on any funds you convert—so both your principal contribution and any investment returns will be subject to ordinary income tax for that calendar year.

The logistics on that approach can be challenging but worth it, and a financial advisor can help. But they’re not the only way to access a Roth account.

How an advisor can help

In general, the past few years have changed the game when it comes to “rule of thumb” logic around retirement planning. Whether it’s expanded access to Roth accounts, the growing popularity of tax-advantaged ETFs, or the increased rhetoric around potential changes to tax code, the lines have blurred around which account you “should” use to optimize your retirement savings.

A financial advisor can help you stay on top of the changing landscape and can leverage experience, best practices, and a wide range of software to help you evaluate different options and choose the accounts and strategies that make the most sense for you.

If you have questions about your own approach to retirement savings and tax-advantaged accounts, set up a time to discuss with our team.

NOTE: For the most recent guidelines on IRS contribution limits, phase out income levels, and more, visit IRS.gov.