Paying taxes isn't anyone's idea of fun, and it's a big reason why tax-optimized investing tends to be front-of-mind for many aspiring retirees.
Basically, most retirement plans like 401(k)s and 403(b)s involve you putting away income in specialized accounts and that income is not taxed at the time of the contribution. Then, in retirement, you withdraw the money and it's taxed as ordinary income. A Roth IRA works a bit differently: You put income in a specialized account and pay income tax on it up front, but then those funds grow tax-free. Any withdrawal of those funds made while in retirement is not taxed as income.
Which account you choose to set aside retirement income in can potentially result in incredible tax savings after you quit work. Here's why.
How a Roth IRA works in practice
Contributions to a Roth IRA are made after-tax; that is, you've already settled your IRS bill by the time money makes its way into your savings account. From there, Roth IRA money has the potential to grow tax-free forever -- you aren't taxed on any earnings, dividends, capital gains, or withdrawals (assuming you've had your account open for at least five years and you are at least 59-1/2 years old).
There is a particular psychological comfort to knowing that your Roth IRA is entirely yours. Money in a pre-tax 401(k) or other tax-deferred retirement plan grows tax-deferred but will be subject to ordinary income tax (your highest tax rate) when you withdraw it in retirement. This means if you have $100,000 saved in a pre-tax 401(k), you have to mentally prepare for some percentage of the balance to be sent off to the IRS as you deplete the account over time. With a Roth, you face no such issue in nearly all cases (you can withdraw the principal amount you put into a Roth at any time, but all interest, dividends, etc. are subject to tax if withdrawn before age 59-1/2).
Withdrawals from your Roth IRA also don't impact your other income for the year, like Social Security or pension income. This means that Roth IRA withdrawals won't push you into a higher tax bracket or drive up your Medicare premiums. This is all to say that Roth money flies under the radar as it relates to your broader tax picture, which is not only financially beneficial but also psychologically important.
Finally, a Roth IRA isn't subject to the whims of the Federal government as it relates to future tax increases. We already know that income taxes are set to rise in 2026 if the Tax Cuts and Jobs Act stipulations that "sunset" in 2025 are not renewed. There are indications (like the depletion of the Social Security trust fund reserve) that additional income tax measures might be enacted at some point. These increases are by no means guaranteed, but it is something to keep an eye on as you make decisions about retirement allocations.
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Your relative tax rates matter
The basic decision to use a Roth IRA boils down to your relative tax rates. Specifically, this means you'll need to take a hard look at your tax rate now versus what you predict your tax rate will be in retirement. Some people might find themselves in a higher tax bracket during their working career than the one they expect to be in at retirement (especially high earners). These individuals may be better off prioritizing a traditional 401(k) to take advantage of valuable deductions and then opt for a Backdoor Roth IRA if their situation allows.
Others in lower tax brackets during their respective working careers might opt for the Roth instead. If you can make Roth contributions in years where your effective tax rate is 20% or less, you're making a reasonable wager that you might very well be faced with higher taxes in retirement, and this will allow you to hedge against that risk. Roth deposits made in lower-income years are usually phenomenal long-run investments, particularly because you hear from the tax man again on these funds.
A balanced choice in the midst of an uncertain future is to opt for a "tax-diversified" approach, which entails making use of both pre-tax and after-tax retirement accounts. This acknowledges that you might very well be in a higher tax bracket while you're working, but you also want to leave room for the possibility that things might change over time. Like most borderline decisions, going to the extreme in one direction is very often not the right call; a balanced approach leaves room for error on either side of the tax equation.
Consider your personal situation
As with any financial decision, your personal circumstances have to govern your ultimate decision. A high earner is likely better off prioritizing pre-tax accounts during their working career and only considering a Roth IRA if the Backdoor option is available to them. An earner in a lower tax bracket would be smart to prioritize Roth accounts since the value of their current tax deductions is not as great. Overall, it would be smart to consider a balanced approach to retirement investing that considers various possible outcomes in conjunction with your personal risk tolerance.
