Retirement Account Fundamentals

The fundamental difference between traditional and Roth retirement accounts is when you pay taxes. Traditional accounts (Traditional IRA, Traditional 401k) offer a tax deduction on contributions—you reduce your taxable income today—but pay income tax on every dollar withdrawn in retirement. Roth accounts (Roth IRA, Roth 401k) offer no deduction today—you contribute after-tax dollars—but all qualified withdrawals in retirement are completely tax-free, including all investment gains. The core decision depends on your expected tax rate: if you expect to be in a higher tax bracket in retirement, Roth is advantageous; if you expect a lower bracket, traditional wins.