Roth IRA vs 401(k)
Roth or traditional is about when you pay tax — at the same rate they pay out identically. IRAs and 401(k)s also differ on matches, limits and eligibility.
Real lesson card · Page 1 of 3
Pay tax now, or later?
Setup
You have $6,000 of pre-tax salary to invest, your tax rate is 22% now and 22% in retirement, and the investment will quadruple by then. Roth or traditional?- 1Traditional: invest the full $6,000, it grows to $24,000, then pay 22% on withdrawal: 24,000 × 0.78 = $18,720.WhyPre-tax contributions grow untaxed; the tax bite comes at the end.
- 2Roth: pay 22% first, invest $4,680, it grows to $18,720, withdraw tax-free.WhyAfter-tax contributions are smaller, but nothing is owed later.
- 3Compare: $18,720 versus $18,720 — identical.WhyMultiplication order doesn’t matter: growth × (1 − tax) equals (1 − tax) × growth.
Takeaway
With equal tax rates the accounts are mathematically identical — so the real decision is a bet on whether your rate will be higher now or in retirement.- WhenYour employer matches 401(k) contributionsCapture the full match firstWhyThe match is an immediate, guaranteed return that outweighs the tax-timing question.
- WhenYou’re early in your career in a low tax bracketLean RothWhyPaying tax at today’s low rate beats paying it at a likely-higher future rate.
Myth
One account type is simply better than the other.Reality
Neither tax treatment wins universally — that turns only on your rate now versus in retirement. The account types differ separately: 401(k)s can carry an employer match and higher contribution limits, while Roth IRAs add income-eligibility rules. Check the current IRS limits before deciding.Recall check from the same lesson
If your tax rate were exactly the same now and in retirement, a Roth and a traditional account would leave you with the same money.
Review the explanation
Answer: True. Tax before growth or after growth is just multiplication in a different order — the results are identical; the accounts only diverge when the two tax rates differ.
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A focused session on Roth IRA vs 401k
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