Kelly McShane, CFA®, CFP®
Advice & Planning Research

When saving for retirement, it can be easy to focus on how much you’re setting aside. But how you save can be just as important. That's where Roth contributions come in. They don’t give you a tax break today — like you may get with traditional retirement contributions — but they do offer tax-free income and flexibility in retirement. Let's look at why that trade-off can be worth it.

Traditional vs. Roth: the basics

Both traditional and Roth accounts help you save for retirement in a tax-advantaged way. The main difference lies in how and when you pay taxes, but that's not the only distinction that matters.

^{1 A qualified withdrawal occurs when the five-year holding period is satisfied and the distribution is the result of the account holder being 59½ or older, death, disability or a first-time home purchase (up to $10,000 for Roth IRAs only).}

The case for Roth: Paying taxes now could pay off later

While Roth contributions won’t give you a tax break today, they offer several advantages that could make a big difference for your retirement and your legacy.

• Higher effective contribution limit: Each dollar contributed to a Roth account results in greater after-tax income in retirement than a dollar contributed to a traditional account (when invested the same way). This effectively provides Roth accounts with a higher contribution limit.
• Greater certainty of income and taxes: With a Roth contribution, you effectively prepay your retirement taxes, locking in your tax rate at the time of contribution. Eliminating some unknowns can give you greater comfort when planning your retirement income.
• More flexibility to manage taxes and Medicare premiums: Withdrawals are tax-free, so you can strategically tap your Roth account to help meet your spending needs in retirement without increasing your taxable income.
• After-tax inheritance for heirs: If you pass your Roth account to your heirs, their withdrawals are generally tax-free. And because you’re not required to take RMDs during your lifetime, the assets can benefit from potential tax-free growth for longer.

When Roth contributions may make sense for you

Because of its many benefits, we generally believe you should consider allocating at least some retirement assets to a Roth account. But how you approach your Roth contributions will depend on your goals and preferences, current savings mix, time horizon, and current and future tax rates. Roth contributions may be beneficial if: 

• You’re young, early in your career or in a lower tax bracket.
• You have a longer time horizon to retirement, especially if you’re maximizing contributions.
• You expect to be in the same or higher tax bracket in the future, or you’re ineligible to deduct contributions to a traditional IRA.
• You like the idea of tax-free growth and withdrawals and value flexibility (both for yourself and beneficiaries).
• Your existing retirement savings are primarily pretax, and you want more control over your taxable income in retirement.
• You plan to pass these assets to your heirs.

Even if you’re prioritizing Roth contributions, you may still want to consider making contributions to a traditional retirement account in certain situations, including if you expect your tax rate in retirement to be lower than your current rate or you need the up-front tax benefit to take advantage of your full employer match or to stay in a lower tax bracket.

How Edward Jones can help

Whether you’re just starting out or close to retirement, adding Roth contributions to your savings strategy may be a smart move. Your Edward Jones financial advisor can help you decide how Roth contributions fit into your broader retirement strategy. If your income is too high to make direct contributions to a Roth IRA, talk with your financial advisor about other ways to potentially move money into a Roth account.