Where Most People Get the Roth vs Traditional Math Wrong | The Limitless Retirement Podcast

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Danny Gudorf discusses the complexities of choosing between Roth and traditional retirement accounts. He emphasizes the importance of understanding foundational tax math, the impact of tax rates on retirement planning, and strategies for maximizing contributions. Danny also addresses concerns about required minimum distributions and highlights the value of flexibility in managing retirement accounts. The discussion aims to clarify common misconceptions and provide actionable insights for effective retirement planning.

Roth vs. Traditional: The Simple Math Most People Get Wrong—and Why It Matters More Than Ever

If you’ve been second-guessing whether Roth or traditional retirement accounts are the “right” choice, it’s not because the decision is complicated. It’s because most advice starts with the wrong math.

If you’ve ever felt overwhelmed trying to decide between Roth and traditional retirement accounts, you’re not alone.

You hear one camp say Roth accounts are always better because withdrawals are tax-free. Another group insists traditional accounts win because of the upfront tax deduction. Both sides sound confident. Both sides sound convincing. And both sides often miss the most important point.

When you start with bad math, everything that follows becomes confusing.

After more than 15 years of helping people make smarter tax planning decisions, I’ve noticed a pattern. Most mistakes around Roth versus traditional accounts don’t come from bad intentions. They come from misunderstanding one foundational principle.

Once you understand this principle, the decision becomes far clearer—and far less stressful.

The Biggest Myth in Retirement Tax Planning

The most common mistake people make is believing one option is automatically better than the other.

  • Roth is “better” because it’s tax-free later
  • Traditional is “better” because you get a deduction now

Both statements sound reasonable. Both are incomplete.

Here’s the truth most people never hear clearly stated:

If your tax rate is the same when you contribute and when you withdraw, Roth and traditional accounts produce the exact same spendable outcome.

That statement alone contradicts years of oversimplified advice. But it’s not an opinion. It’s math.

The Simple Math That Changes Everything

Let’s strip this down to a clean, easy-to-follow example.

Imagine you have $10,000 of earnings from your job, or $10,000 sitting in a traditional IRA that you’re considering converting to a Roth. We’ll compare two paths—the traditional path and the Roth path—while keeping everything else identical.

  • Same growth rate
  • Same time horizon
  • Same tax rate

The Traditional Path

You start with $10,000 in a traditional IRA.

  • No taxes today
  • Tax-deferred growth
  • Assume an 8% annual return for eight years

Over that period, your $10,000 doubles to $20,000.

When you withdraw the money in retirement and pay a 25% combined tax rate, $5,000 goes to taxes.

That leaves you with $15,000 of spendable income.

The Roth Path

Now take the Roth route.

  • Pay taxes upfront at 25%
  • Invest the remaining $7,500 in a Roth

That $7,500 grows at the same rate over the same period and doubles to $15,000.

Because it’s Roth, withdrawals are tax-free.

You also end up with $15,000 of spendable income.

The Result Most People Don’t Expect

Both paths lead to the same destination.

  • Same growth
  • Same tax rate
  • Same spendable outcome

This is the foundational math behind Roth versus traditional decisions, and it’s where most people go wrong.

If tax rates are equal at contribution and withdrawal, it doesn’t matter which account you use. The order of taxation doesn’t change the result.

So if the math comes out equal, why does this decision matter at all?

Because tax rates don’t always stay the same.

The Real Question You Should Be Asking

The Roth versus traditional debate isn’t about returns or market timing.

It comes down to one question:

Will your tax rate be higher or lower in the future than it is today?

Once you focus on that question, the fog starts to lift.

Four Situations Where the Choice Actually Matters

There are specific scenarios where the decision meaningfully affects your outcome.

1. Your Tax Rate Will Be Higher in Retirement

Roth contributions may make sense if:

  • You’re in a lower tax bracket today
  • You expect higher income later
  • Tax rates rise or filing status changes

Paying taxes now at a lower rate may reduce lifetime taxes.

2. Your Tax Rate Will Be Lower in Retirement

This is more common than many people think.

  • No salary in retirement
  • Social Security may not be fully taxed
  • Withdrawals can be managed

Many retirees fall into lower tax brackets than during their working years.

If you’re paying 22% today to avoid paying 12% later, traditional contributions may be more efficient.

3. You’re Maxing Out Contributions

Contribution limits change the equation.

  • Roth contributions are after-tax
  • Every dollar belongs to you
  • Traditional contributions include future taxes

If you’re maxing out either way, Roth contributions can effectively put more money to work—assuming tax savings from traditional contributions aren’t invested elsewhere.

4. You Want Tax Diversification

Tax diversification creates flexibility.

  • Traditional accounts
  • Roth accounts
  • Taxable brokerage accounts

This mix allows you to control your tax bracket year by year instead of reacting to it.

One client called this “degrees of freedom.”

Why Flexibility Can Be More Valuable Than Optimization

Imagine needing $100,000 per year in retirement.

You might:

  • Withdraw $50,000 from a traditional IRA
  • Take $30,000 from a brokerage account
  • Use $20,000 from Roth or HSA funds

You create six figures of spendable income while keeping taxes relatively low.

That’s not about picking the “best” account. It’s about having options.

The Fear Around Required Minimum Distributions

Required minimum distributions often sound scarier than they are.

Even with $1.5 million in a traditional IRA, early RMDs may be around $60,000 per year.

For many retirees, that still results in a lower tax bracket than during their working years.

RMDs are a planning consideration, not a reason to panic.

Regret Is Usually Based on Hindsight, Not Math

Many retirees worry they didn’t do enough Roth contributions earlier.

When the numbers are reviewed, they often discover they were in much higher tax brackets during their earning years.

They made a reasonable decision with the information they had.

Tax planning isn’t about perfection. It’s about thoughtful choices over time.

What You Should Take Away From This

The key principle is simple:

  • Same tax rate in
  • Same tax rate out
  • Same spendable result

Once you understand that, the real planning begins.

General guidelines:

  • Lower tax rate today may favor Roth
  • Higher tax rate today may favor traditional
  • Uncertainty often favors a mix of both

This is rarely an all-or-nothing decision.

Conclusion

The Roth versus traditional debate doesn’t need to be confusing.

When you strip away the noise, the decision comes down to understanding taxes—not chasing the “best” account.

Math removes emotion. Strategy adds flexibility.

And flexibility is one of the most valuable assets you can have in retirement.

*This blog post is based on the insights shared by Gudorf Financial Group. For personalized advice tailored to your unique circumstances, always consult a financial, legal, or tax professional.*

Transcript: Prefer to Read — Click to Open


Danny (00:00.078)

If you’re trying to decide between Roth and traditional retirement accounts, you’ve probably heard a lot of conflicting advice. Some people say Roths are always better. Others swear by the tax deductions that traditional IRAs bring. The truth is most people get the foundational math wrong. And when you start with bad math, everything else becomes unnecessarily complicated. I’m Danny Gudorf. And over the last 15 years, my team and I have helped

hundreds of people over 50 make smarter decisions about their tax planning. Today, I’m going to show you the simple math that changes everything, and once you understand it, the Roth versus traditional decision becomes a lot clearer. Let’s start with the biggest mistake people make. They think Roth is automatically better because it’s tax-free in retirement, or they think traditional is always smarter because you get a tax deduction today.

But here’s what most people miss. If your tax rate stays the same, Roth and traditional give you the exact same spendable amount in retirement after taxes. Let me show you what I mean by this. Let’s say you have $10,000 of earnings from your job, or maybe you have $10,000 sitting in a traditional IRA and you’re thinking about converting it to a Roth. We’re going to compare two paths, the traditional path and the Roth path.

And we’re gonna keep everything else the same so we can see if one is actually better than the other. Here’s how the traditional path works. You start with $10,000 in an IRA. You don’t pay taxes on it today. And that money grows over time. Let’s say it earns around 8 % per year for eight years. We’re gonna use those numbers because the math is much easier. Your $10,000

doubles $20,000. But now, you want to take that money out in retirement and spend it. But you have to pay taxes on it. Let’s say your tax rate is 25%, which includes state and federal taxes. You would pay $5,000 in taxes, and that leaves you with $15,000 to actually spend. That’s your spendable amount. Now, let’s take a look at the Roth path.

Danny (02:23.471)

Let’s say you start with that same $10,000, but with the Roth, you have to pay the taxes upfront. So at that same 25 % tax rate, $2,500 in taxes. So you’ll only have $7,500 left to invest in the Roth. That $7,500 grows at the same rate over the same period of time. It doubles

$15,000 over that time frame. And because it’s Roth, there’s no taxes when you take it out. You get to spend all $15,000. Do you see what just happened there? Both paths give you the same $15,000 to spend. The net spendable amount is exactly the same. This is the foundational math that everyone needs to understand.

If your tax rate is the same when you put the money in and the same when you take the money out, it doesn’t matter which path you choose. You always end up with the same money in the end. Now, I know what some of you are thinking. What if I invest my Roth more aggressively than my traditional account? Won’t that make a difference? Sure, but that’s not the tax question. That’s an investment question. You could just invest your traditional account

more aggressively too, and you would get the same exact result. The point is the rate of return doesn’t change the tax math. What matters is the tax rate when you contribute your money and the tax rate when you withdraw your money. This is where people get confused. They think if they extend the time period longer or change the rate of return, the math will change. Or they think if they contribute differently, the outcomes will be different, but it won’t.

This is basic mathematics. It doesn’t matter what order you multiply things in. 10 times 2 times 0.75 equals the same thing as 10 times 0.75 times 2. That’s something we all learned in school, but we forget it applies here too. So if the spendable amount is the same when tax rates are equal, why does this decision matter at all? Because tax rates don’t always stay the same.

Danny (04:46.478)

There are four main reasons you might choose one path over the other. The first reason is if your tax rate will be higher in retirement. If you’re paying 12 % in taxes today, but you’ll be paying 22 % taxes in retirement, then the Roth decision makes a lot of sense. You pay the lower rate now and avoid the higher tax rate later. This can happen if you’re really good at saving and you end up with a lot

of retirement income, or if the government raises taxes in the future, or if you’re married filing jointly now, but you’ll be filing as a widower later, which pushes you into a higher tax bracket. The second reason is if your tax rate will be lower in retirement. This is actually more common than most people think. A lot of folks are in the 22 or 24 % bracket while they’re working, but in retirement, their income drops.

They’re not earning a salary anymore, Social Security isn’t fully taxed, and they can control how much they would draw from their accounts. So they end up in the 10 or 12 % tax bracket in retirement. If this is your situation, additional makes more sense. While you’re paying 22 % today, when you can be paying 12 % later in retirement. The third reason is if you’re maxing out your contribution limits.

Let’s say you’re gonna be contributing the maximum to your FK no matter what. If you max out a Roth, you’re effectively putting more money away than if you max out a traditional account. That’s because the Roth contribution is after tax. All of it is yours when the traditional part of it belongs to the IRS. Now, the best strategy to max out your traditional and then, now, another way to go about doing this.

and could be the best strategy is to max out your traditional IRA and then invest the tax savings somewhere else in a brokerage account. But a lot of people don’t do that. So if you’re just going to max your retirement accounts either way, maxing out your Roth puts more money to work and savings for you. The fourth reason is tax diversification. This is about giving yourself options in retirement. You have money in traditional accounts

Danny (07:09.025)

Roth accounts and regular taxable accounts. You can control your tax bracket in retirement if you have this setup. You can fill up the lower tax brackets with traditional withdrawals and then take money from your Roth or your taxable accounts without pushing yourself into higher tax brackets. This gives you what one of my clients who’s an engineer calls degrees of freedom. You’re not locked into just one path. You can adjust it.

based upon what’s happening in your life and what’s the tax rates are like at that time. Let me give you an example of this and see how this works. Let’s say you’re single and you need $100,000 a year in retirement to spend. You could take $50,000 from your traditional IRA and pay only 10 or 12 % tax on it. Then you could sell some of your investments from your taxable brokerage account. Maybe you sell $30,000 worth of stocks

but only 15,000 of it has gain. Because you’re in that lower tax bracket, you might pay 0 % on those long-term capital gains. Then you could top it off with $20,000 from your Roth or your HSA account if it’s being used for qualified medical expenses. You just created a thousand, scratch that, you just created $100,000 of spendable income and kept your tax bill.

very low. That’s the power of having options. Now, let’s talk about required minimum distributions, because this is where a lot of people get scared. They hear about RMDs and they think they’re going to get crushed by taxes later on in retirement. But here’s the reality. Even if you have a million and a half in your IRA, your required minimum distributions at age 73 or 75 is only going to be around $60,000 starting out.

If that stacks on top of your social security, you might be in the 22 % tax bracket. But that’s probably still lower than the bracket you were in when you were working. So don’t panic about your RMDs. A lot of times, they’re not as bad as people make them out to be. I’ve had clients come to me feeling guilty that they didn’t do more Roth contributions when they were younger. But when I run the numbers, I find out that they were in a very high tax bracket then.

Danny (09:35.758)

and they’re in a lower tax bracket now. They ended up making the right choice without even knowing it. So don’t beat yourself up about it and pass decisions. Focus on what you can control today and moving forward. Here’s what I want you to take away from this. The foundational math is simple. Same tax rates equals same spendable amount. Once you understand that, you can focus on the real tax question, which is, your tax rate be higher?

or lower in retirement. That’s the question that truly matters. And the answer is different for every family. It depends on how much you’ve saved, how much you’ll spend, and what the government does with tax rates. Also, whether you’re single or married when you’re taking this money out makes a big difference. One more thing, a lot of people think they need to go all Roth or all traditional. But that’s not true. You can do both. In fact,

you probably should do both. Having money in different types of accounts gives you flexibility. And flexibility is one of the most valuable things you can have in retirement. So here’s what I recommend. If you’re in a low tax bracket today, lean towards Roth. If you’re in a high tax bracket today and you expect to be in a lower tax bracket in retirement, then lean towards those traditional retirement accounts. And if you’re not sure, split the difference between the two. Do some of both.

And if you’re already retired, think about whether you have enough tax diversification or not. If everything is in those traditional retirement accounts, you might want to start doing some Roth conversions while you’re in these lower tax brackets. The key is to stop thinking about this as an all or nothing decision because it’s not. It’s about understanding the math and knowing your own unique situation and making the choices that give you the most spendable income.

over your lifetime after taxes. So that’s the foundational math behind Roth versus traditional. Once you get this right, everything else starts to make sense. However, understanding the math is just the first step. The real challenge is figuring out how to apply this to your specific situation, especially if you’re already in retirement and trying to manage your different tax brackets year by year. That’s where things get more complex and it’s easy to make costly mistakes.

Danny (12:03.788)

If you want to see exactly how to build a multi-year Roth conversion strategy that may help reduce your lifetime tax bill, click on this video right now. I walked through a hypothetical client example where strategic planning helped significantly reduce their projected lifetime tax bill. Your results will depend on your specific situation, but don’t miss it. I’ll see you over there.

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