Retirement
Traditional vs. Roth IRA: Definition, Formula and Example
Traditional and Roth IRAs are U.S. retirement arrangements with different contribution and withdrawal tax treatment.
Scope: U.S. federal IRA concepts; rules checked October 23, 2026. Examples use hypothetical tax rates, not a tax filing calculation.
Other names and related labels: Individual retirement arrangement; IRA tax treatment.
How it works
An eligible traditional IRA contribution may be deductible; distributions attributable to deductible contributions and earnings are generally taxable. Roth contributions are not deductible, while qualified distributions are tax-free. Deductibility, contribution eligibility and withdrawal rules depend on income, coverage, age and tax-year rules.
Simplified comparison: traditional after-tax value = pretax contribution × growth factor × (1 − withdrawal tax rate)
Compare equal pretax cost or equal current take-home cost. Nondeductible basis, conversions, annual limits and early-distribution rules need separate treatment.
The same $1,000 of pretax income
Assume a fully deductible traditional contribution and a 22% tax rate now and at withdrawal.
- Traditional: invest $1,000, double to $2,000, then retain $2,000 × 0.78 = $1,560.
- Roth: pay $220 of tax now, invest $780, then double to $1,560 in a qualified distribution.
Both leave $1,560 under equal tax rates and the same pretax budget.
Both investments hypothetically double over the same holding period. Full deductibility, eligibility and qualified Roth distribution assumed; no fees or penalties.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
Equal contribution amounts are not equal current costs
Putting $1,000 into each account uses different pretax resources when one contribution is deductible. Traditional IRA withdrawals also are not necessarily fully taxable if nondeductible basis exists. Check the relevant tax year instead of relying on an undated limit.
Explore with a calculator
- IRA Calculator
Compare the tool’s traditional/Roth assumptions and stated tax rates.
- Roth IRA Calculator
Project a Roth balance under explicit contribution and return assumptions.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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