Roth vs. traditional: what "pre-tax" and "after-tax" actually mean

If one choice confuses new retirees more than any other, it's this: Roth or traditional? The entire decision comes down to one question — when do you pay the tax?

Traditional means pre-tax. You contribute dollars you haven't paid tax on yet (usually as a tax deduction today), the money grows, and you pay income tax when you withdraw it in retirement. A traditional 401(k) and a traditional IRA both work this way.

Roth means after-tax. You contribute dollars you've already paid tax on (no deduction today), the money grows, and qualified withdrawals in retirement are completely tax-free. Roth 401(k)s and Roth IRAs both work this way. (Qualified generally means you're 59½ or older and the account is at least five years old — see the IRS's own rules on Roth IRAs, Topic no. 309, for the full definition.)

The $10,000 example

Say you're in the 22% tax bracket and you have $10,000 of earnings to save. Assume your investments double before you withdraw.

Traditional: You contribute the full $10,000 pre-tax and save $2,200 on this year's tax bill. It grows to $20,000. You withdraw at 22%, pay $4,400 in tax, and keep $15,600.

Roth: You pay $2,200 in tax first and contribute the remaining $7,800. It grows to $15,600. You withdraw it all tax-free and keep $15,600.

Same result. That's not a coincidence — it's the math. If your tax rate is the same when you contribute and when you withdraw, Roth and traditional are identical. The whole game is a bet on whether your tax rate will be higher now or later.

So which should you pick?

• Higher bracket now, lower in retirement? Traditional usually wins — take the deduction while it's valuable.
• Lower bracket now, higher later? Roth usually wins — pay the tax while it's cheap.
• Expecting big required withdrawals later? Traditional accounts force you to start withdrawing at 73 or 75, depending on your birth year (called required minimum distributions, or RMDs), and those withdrawals can push you into a higher bracket. Roth IRAs have no required withdrawals for the original owner — the money can sit and grow tax-free as long as you like.

One more thing people miss: "Roth vs. traditional" and "IRA vs. 401(k)" are two separate choices. Both IRAs and 401(k)s come in Roth and traditional versions (though not every employer's 401(k) offers a Roth option).

What does this mean for your plan?

This one idea is the engine behind Roth conversions — the strategy of moving money from a traditional account to a Roth account in a year your income (and tax rate) is low, paying tax now at a discount to avoid paying more later when RMDs kick in. The years between retirement and when RMDs begin are often the best window you'll ever get.

And Runway's free tier includes a Roth conversion optimizer that finds your best conversion years — no card required.