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When saving for retirement, you can often pick between traditional and after-tax Roth contributions — and determining the right choice may be trickier than you expect.
Traditional deferrals offer an upfront tax break, but you’ll owe regular income taxes on future withdrawals. The opposite is true for Roth contributions, which happen after taxes, but the balance grows tax-free.
Many decide between traditional and Roth contributions by weighing current vs. future tax brackets, but that can be a mistake, according to certified financial planner Cody Garrett, founder of Measure Twice Planners in Houston.
“People always talk in marginal rates, but lived experiences are [your] effective rates,” said Garrett, who is also co-author of the new book, “Tax Planning To and Through Early Retirement.”
Marginal vs. effective tax rates
The U.S. federal income tax brackets are progressive, meaning tiers of earnings are subject to different rates. Your marginal rate is the percentage paid on your last dollar of taxable income. (You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income.)
By comparison, your effective tax rate is taxes paid as a percentage of your total income.
The difference between these numbers matters when making traditional vs. Roth contributions because your effective rate in retirement may be much lower than you expect, Garrett said.
Garrett shared an example of marginal vs. effective tax rates in a LinkedIn post last month.
Let’s say you’re single and 50 years old, with a gross income of $200,000. For 2025, your standard deduction is $15,750, which brings your taxable income to $184,250.
Breakdown of tax for each tier of taxable income:
$11,925 taxed at 10%: $1,192.50
$36,550 taxed at 12%: $4,386
$54,875 taxed at 22%: $12,072.50
$80,900 taxed at 24%: $19,416
Total tax: $37,067
Your highest marginal tax rate is 24%. But your effective tax rate is 18.5%, which is your total tax ($37,067) divided by $200,000 gross income.
However, you would need gross income above $326,900 for your effective rate to reach 24%, Garrett said.
Depending on your situation, pretax contributions could make sense if you’re expecting a much lower effective tax rate in retirement, he said.
Consider your lifetime tax bill
“Your goal is to pay tax when the rate is the lowest,” certified public accountant Jeff Levine previously told CNBC.
With no pretax savings, some retirees could miss future planning opportunities, such as Roth individual retirement account conversions during early retirement years.
