Roth vs. Traditional IRA: A Full Lifecycle Analysis

In our previous posts, we established two important ideas:

1. The Tax Rate Reality - The conventional wisdom of comparing your current tax bracket to your expected bracket in retirement is incomplete. What matters is your current marginal rate vs. your future effective rate. Because of the standard deduction and progressive brackets, the effective rate in retirement is almost certainly lower than your marginal rate today.

2. The ACA Subsidy Opportunity - For early retirees, having Traditional IRA funds is a powerful tool. By engineering specific amounts of taxable income, you can qualify for Premium Tax Credits (ACA subsidies) that can eliminate healthcare costs entirely before Medicare kicks in at 65.

Both of those analyses looked at narrower questions. Today, we put it all together. We modeled the complete wealth lifecycle—accumulation, conversion, and spending through death—across a range of incomes, savings rates, and retirement ages.

This post focuses on the relative performance of Traditional vs. Roth as the primary savings vehicle. It does not consider other factors such as estate planning, or the SEPP rules for early distribution. The key variable is which account type produces more sustainable annual retirement spending.

The Moving Target of Tax Efficiency

The standard rule of thumb is simple: expect a higher tax bracket in retirement? Use a Roth. Expect a lower bracket? Use Traditional. On the surface, avoiding a 22% tax today while paying only 15% on withdrawals in retirement seems like a clear win for Traditional. And it often is — but more factors are at play than a single bracket comparison suggests.

Factors that work in Roth's favor:

1. ACA Subsidies: Higher Traditional withdrawals (MAGI) can destroy thousands of dollars in health insurance subsidies before age 65, effectively acting as a steep shadow tax.
2. Social Security Taxation: The "Tax Torpedo" — each extra dollar of Traditional income can make $0.85 of Social Security taxable, compounding the marginal rate.
3. IRMAA Surcharges: High MAGI can trigger Medicare Part B and Part D premium surcharges that act as steep, cliff-like cost penalties.
4. No Lifetime RMDs: Unlike Traditional IRAs, Roth IRAs do not have Required Minimum Distributions (RMDs) during the owner's lifetime, allowing tax-free compounding indefinitely.
5. Estate Planning: Heirs inherit Roth IRAs tax-free. Traditional IRA heirs must pay income taxes on inherited distributions, often during their own peak earning years due to the 10-year depletion rule.

Factors that work in Traditional's favor:

1. Accumulation-Phase Deductions: The deduction directly reduces taxable income today, at your peak marginal rate. Roth contributions offer no comparable offset.
2. Depletion-Phase Deductions: In retirement, the standard deduction, senior add-on, and progressive brackets mean that the effective withdrawal rate is almost always lower than the marginal rate you paid during accumulation.
3. Strategic Gap-Year Conversions: Early retirees can have years with very low taxable income before Social Security begins. Traditional balances enable Roth conversions at the lowest possible tax cost during these windows.

The Simulation

Given this complexity, no single factor determines the outcome. The simulation below is an attempt to capture all of these effects simultaneously — not just the bracket comparison — and measure what actually matters: how much can you sustainably spend?

We are modeling the entire lifecycle, from the first dollar saved to the last dollar spent, and include compounding returns, taxes (including Social Security taxation and IRMAA surcharges), ACA subsidies (when applicable), and RMDs. We are not aware of any factors that would significantly change the outcome of this analysis.

We swept across three key dimensions:

• Initial Incomes: $50,000, $75,000, $100,000, $150,000, $225,000, and $300,000 (household, married filing jointly). Note that these are assumed to be income starting at age 35.
• Retirement Ages: 50, 55, 60, 65, and 70
• Savings Rates: 5%, 10%, 15%, and 20% of gross income

Assumptions and parameters:

• The simulation starts at age 35.
• We used an average real income increase of 3.7% per year until retirement. (This is a real rate of return, meaning not including inflation.)
• We used a 5% real rate of return on investments.
• Social Security is claimed at age 67 and is estimated based on final income.
• Taxes are enforced both during accumulation and depletion: capital gains, social security, IRMAA, ACA subsidies, etc.
• Required Minimum Distributions (RMDs) are enforced on Traditional IRA balances beginning at age 73. The retirement optimizer must take at least the IRS-mandated RMD each year, meaning the Roth account's compounding advantage (no lifetime RMDs) is fully reflected in the results.

For each of these 120 scenarios, we calculated:

1. The maximum sustainable annual retirement spend when using an optimized mix of Traditional, Roth, and cash savings
2. The sustainable spend using Traditional-only savings
3. The sustainable spend using Roth-only savings
   • "Roth-only" in this context means that the accumulation model forces enough Traditional contributions each year to ensure that the household benefits from ACA subsidies for retirement scenarios that start before age 65. This is the "Traditional Bridge" described in our ACA post. We did this to make the comparison as fair as possible, as we believe that most people who retire early will need to take advantage of ACA subsidies to some extent.
4. We are assuming money is saved in a 401K up to the annual limit, and then in a taxable brokerage account if the savings rate exceeds the 401K limit.
5. During retirement, we are running our Traditional IRA Withdrawal and Roth Conversion Calculator. Thus once in retirement, we are running our optimized withdrawal strategy to maximize the sustainable spend.

Traditional IRA: A Near-Perfect Match for Most

The chart below shows the efficiency loss for a pure Traditional IRA strategy. A value of -2% means you could spend 2% more by optimizing your account mix instead of going all-Traditional.

"Efficiency Loss" is how much spendable income you permanently leave on the table (as a percentage) by committing to a single account type vs. the optimized approach.

The first thing to notice is the scale: most lines cluster between 0% and -5%. This tells us that a Traditional IRA strategy is remarkably close to the optimal outcome in most scenarios. However, the worst drag emerges at higher savings rates (teal and green lines), particularly at retirement ages 65 and 70. This is counterintuitive but makes sense: when you save aggressively in a Traditional account, you accumulate more pre-tax money than the standard deduction and low brackets can absorb efficiently. At that point, a small Roth allocation would have been the better tool, and the Traditional-only constraint costs you. For lower savings rates (red and blue lines), the Traditional account is often the near-perfect match for the optimizer.

A Concrete Example

For a household earning $150,000 and retiring at age 65 with a 5% savings rate:

• Traditional-only sustainable spend: $122,573/year
• Optimized mix sustainable spend: $122,573/year
• Efficiency Loss: 0% — the Traditional strategy is the optimal strategy

The reason becomes clear from the tax hurdle heatmap below: for this scenario the optimal hurdle rate is 0% — meaning Traditional wins at any marginal rate. There is no threshold to cross. The standard deduction and low brackets on withdrawal absorb the balance so efficiently that a dollar saved in Traditional is always better than a dollar saved in Roth.

Roth IRA: A Hidden Cost Most People Don't See

Now look at the same analysis for a Roth-only strategy.

Across nearly every scenario, the Roth strategy underperforms. The pattern is consistent and telling:

• Lower savings rates (red and blue lines) see the biggest Roth penalty, particularly at higher incomes and later retirement ages.
• Higher savings rates (teal and green lines) close the gap somewhat, because accumulating more Roth savings eventually gives the optimizer enough to work with.

A Concrete Example

For the same household earning $150,000 and retiring at age 65 with a 5% savings rate:

• Roth-only sustainable spend: $113,828/year
• Optimized mix sustainable spend: $122,573/year
• Efficiency Loss: -7.7% — over $8,745 per year left on the table

That is real money. At a 30-year retirement, that gap compounds to over $260,000 in total additional spending power.

Why Is the Roth Penalty So Large?

An important note on how the simulation works: even the "Roth only" baseline does not go 100% Roth. The accumulation model forces enough Traditional contributions each year to hit a minimum Traditional balance at retirement—exactly what is needed to generate the MAGI required to stay in the ACA subsidy band before Medicare at 65. This is the "Traditional Bridge" described in our ACA post. (We did this to keep the Roth vs. Traditional comparison fair.)

In other words: the simulation enforces a level playing field on ACA subsidies for both strategies. The gap you see in the Roth chart is purely the cost of pre-paying taxes at the wrong rate. The penalty comes entirely from a single source:

1. The "Pre-Payment" Tax Cost: Every dollar contributed to a Roth IRA was taxed at your current marginal rate (22–24% for most of the incomes we modeled). Every dollar contributed to a Traditional IRA is withdrawn at your future effective rate, which is lower. The post Simplified Roth vs. Traditional IRA Conversations May Be Costly quantified this gap. For a $150,000 household, the marginal tax rate is 22%, while the effective rate in retirement could easily be under 15%.

Where the Two Strategies Are Close

It is important to note that in some scenarios the strategies converge. The table below identifies conditions where Traditional and Roth are within 1% of each other:

In short: Traditional dominates for the vast majority of scenarios. Only the highest-income, highest-saving households near standard retirement age face meaningful trade-offs.

How Much Can You Sustainably Spend?

The absolute numbers matter, not just the relative efficiency. Here is the maximum sustainable annual spend across all scenarios:

This shows the upper bound for what each combination of income, savings rate, and retirement age can generate. A few observations:

• Retiring at 70 vs. 50 with the same income and savings rate can double your sustainable spend—the compounding effect of additional years of savings is enormous.
• The lines show only the optimized mix — the ceiling of what each income/savings-rate/age combination can achieve with the best possible account allocation.
• Lower income levels at early retirement ages can end up in scenarios where even optimal strategies result in unsustainable retirement plans—a reminder that saving at all is always the first priority.

The Portfolio at Retirement

The optimizer's preferred starting balance at the point of retirement almost always includes a significant Traditional IRA. Here is the composition from the model:

The mix reflects two competing pressures: save enough in Traditional to use low-bracket and standard-deduction space efficiently, and save enough in Roth to supplement spending without generating excess MAGI that would trigger higher taxes or ACA subsidy loss.

How the Optimizer Builds the Portfolio

Abstract efficiency percentages are useful, but it helps to see how the optimizer actually behaves year by year. The chart below shows the contribution timeline for each income level, using a representative scenario (retirement at 60, 15% savings rate). Each stacked bar represents one year of savings: blue for Traditional, red for Roth, and green for Cash (taxable spillover once tax-advantaged limits are hit). The dashed black line is the actual marginal tax rate each year; the dotted red line is the optimal hurdle rate for that income.

The triangle markers (▲) along the baseline indicate years where the accumulation model forced Traditional contributions to build the ACA bridge balance—ensuring there are enough Traditional funds to generate the MAGI needed to qualify for ACA subsidies during the 5-year gap between retirement and Medicare at age 65.

A few patterns jump out:

• Lower incomes ($50k–$100k) favor Roth — despite the headline being "Traditional wins." With a 12% hurdle, early career years at these incomes often fall below the threshold, making Roth the correct choice then. The triangles show the years where the optimizer was forced into Traditional anyway—to build exactly the ACA bridge balance needed to cover healthcare costs in the five years before Medicare. Outside of those forced years, Roth dominates.
• Middle incomes ($150k–$225k) go all-Traditional with a 0% hurdle. At these incomes the marginal rate never drops below the threshold in any year, so Traditional wins unconditionally. No Roth, no bridge forcing needed—the Traditional balance alone is more than sufficient to generate the MAGI for ACA subsidies.
• High incomes ($225k–$300k) quickly overflow into taxable Cash. The 401k contribution cap limits how much can go into any tax-advantaged account, so the green Cash (Spillover) bars grow rapidly. At $300k the 24% hurdle means some Roth is optimal in early years, visible as the brief red layer before the marginal rate climbs above the threshold.

The Tax Hurdle: When Does Traditional Win?

The heatmap below answers the most actionable question in this analysis: For a specific scenario (income, retirement age, and savings rate), what is the minimum marginal tax rate at which a Traditional contribution beats a Roth contribution?

The rule is simple: If the current marginal tax rate is above the hurdle, contribute to Traditional; if it is below the hurdle, contribute to Roth. A hurdle of 0% means Traditional always wins; a hurdle of 100% would mean Roth always wins

A few patterns stand out:

• Low hurdle rates dominate: 46% of all scenarios have a 0% hurdle — Traditional wins at any marginal rate. Of the remaining scenarios, 82.5% have a hurdle of 22% or less. If you are currently paying 22% in federal taxes, the data says Traditional is almost certainly the right choice.
• High hurdles are rare: The only scenarios with a 32% hurdle are $300k income, 15–20% savings rate, retiring at 65 or 70. These are the edge cases where aggressive savers near standard retirement age have accumulated so much Traditional that some Roth would have been more efficient.
• Use this as your personal test: Find your income panel and your planned retirement age. If your current marginal rate exceeds the number in that cell, Traditional is the right choice for your next dollar of savings. A 0% means Traditional wins unconditionally.

What Action Should You Take?

The above is information to serve as a general guide. It would be highly unlikely that anyone falls onto any of the scenarios that we chose. Further it is impossible to know what your income, tax situation, and actual returns will be over the course of your accumulation phase.

A reasonable alternative is to periodically use a calculator like the Traditional IRA Withdrawal and Roth Conversion Calculator to run your own simulations. Project what you think your balances will be at retirement, run a few scenarios, and see what the calculator suggests. Then, over time, rebalance assets accordingly. Also be sure and verify your plans with a qualified tax and investment professional to ensure you've not missed anything.

Takeaways

• Traditional is the stronger default: For most middle-income households ($75k–$225k) with typical savings rates (5–15%), the Traditional IRA gets within 0–3% of the optimal outcome on its own. The Roth, by contrast, can underperform by 5–10%.
• The Roth penalty is largest at lower savings rates: Against the optimized benchmark, Roth underperforms by 5–10% in most scenarios — purely from having pre-paid taxes at the wrong (marginal vs. effective) rate.
• The conventional wisdom is backwards for most people: The standard advice of "Roth if you expect higher taxes in retirement" gets it wrong for most FIRE-path savers, because it ignores the effective vs. marginal distinction. In 46% of scenarios the hurdle rate is 0% — Traditional wins unconditionally.
• A hybrid approach is optimal, but Traditional-first is correct: The optimizer almost always wants some Traditional funds. The question is only how much. Our Traditional IRA Withdrawal and Roth Conversion Calculator can help you dial in your specific number.
• Tax regulations are fluid: Tax laws change. What is optimal today may not be optimal tomorrow. It is important to periodically review your tax situation and adjust your savings strategy accordingly.

Tax issues are complex. This post uses simulated results across many simplifying assumptions to identify broad patterns. Your personal situation—Social Security income, state taxes, pension income, and other factors—will affect your specific outcome. This is not tax advice. Please consult a tax professional before making decisions.

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**For Educational Purposes Only:** All content on this site, including articles, tools, and simulations, is for informational and educational purposes only. It should not be construed as financial, investment, legal, or tax advice. The information provided is general in nature and not tailored to any individual’s specific circumstances.

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