Traditional vs. Roth: How to Build a Tax-Smart Retirement Portfolio

The principle: where you hold money matters, not just how much

Most retirement savers think about how much to save and how to invest it. A third question gets less attention: which tax "box" each dollar sits in. Because each box is taxed differently when you take money out, the mix can affect how much of your savings you actually get to spend.

Tax diversification means holding meaningful amounts in more than one box, so that in retirement you can choose where each year's spending comes from. Nobody knows future tax rates; that sits in the layer outside your control. Having more than one box gives you room to respond.

The three tax boxes

The IRS confirms two features that shape retirement planning. Original owners of Roth IRAs do not have to take required minimum distributions, and since 2024 designated Roth accounts in workplace plans are also excluded from lifetime RMDs. Traditional accounts do require them, starting at the "applicable age": 73 for people who reach 72 after 2022 and 73 before 2033, and 75 for people born in 1960 or later, as described in the IRS final regulations published in Internal Revenue Bulletin 2024-33.

The gap years: a window many retirees overlook

For many people, the years between retiring and starting Social Security and RMDs are the lowest-income years of their adult lives. Paychecks have stopped, but the large taxable income streams have not yet started. That creates a window to deliberately recognize some income at relatively low rates, often by converting part of a traditional IRA to a Roth IRA.

A conversion is not free. IRS Publication 590-A explains that you must include in your gross income the amount converted that would have been taxable if withdrawn. You pay tax now in exchange for tax-free withdrawals later, and smaller RMDs because the traditional balance is lower.

Source: IRS 2026 inflation adjustments. The 2026 standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers; additional amounts apply at 65 and older.

A worked example: filling the 12% bracket

Assumptions (hypothetical): Ellen and Jim, 62, married filing jointly, 2026 tax rules; $40,000 of other ordinary income (pension and interest); standard deduction of $32,200 (both under 65); no state income tax; the conversion tax is paid from their taxable savings, not from the IRA. Federal income tax only.

Whether that is a good trade depends on what the converted money would otherwise be taxed at later. If Ellen and Jim expect RMDs plus Social Security to push them into the 22% bracket or higher, paying roughly 11.6% now may be attractive. If they expect lower income later, or might leave the IRA to charity, it may not be.

Caveats: income interacts with other programs

• Medicare premiums (IRMAA). Social Security sets Medicare Part B and Part D surcharges using income from two years earlier. A large conversion at 63 or later can raise premiums at 65. For 2026 the surcharges start above $218,000 of modified adjusted gross income for joint filers and $109,000 for individuals.
• ACA premium subsidies. If you buy health coverage on the Marketplace before 65, your premium savings depend on your estimated household income for the year. Extra income from a conversion can reduce or eliminate those savings. See Navigating Early Retirement ACA Premium Tax Subsidies and Roth Conversions: Compressing Tax Liabilities Pre-Medicare.
• Taxation of Social Security. Once benefits start, more of your other income can make more of your benefit taxable, which raises the effective cost of income in some ranges.
• Five-year rules. Roth accounts have holding-period rules that affect whether earnings, and in some cases converted amounts, can be withdrawn tax- and penalty-free. See IRS Publication 590-B.
• Heirs. Most non-spouse beneficiaries must empty inherited retirement accounts within 10 years. Traditional balances are taxable to them; Roth balances generally are not. See The SECURE Act 2.0 & Inherited IRAs.

What you can do

• List your balances by tax box: tax-deferred, tax-free and taxable.
• Find your RMD starting age from your birth year (73 for most people born 1951–1958, 75 if born in 1960 or later).
• Sketch your expected income for each year from now until RMDs begin.
• Identify low-income years when recognizing extra income might cost relatively little.
• Check how extra income would affect IRMAA, ACA subsidies and Social Security taxation.
• Model a few conversion amounts, for example with the WealthLanding Roth strategy tool, and review results with a tax professional.

While you are still working, the same thinking applies to new contributions: splitting between traditional and Roth options can build flexibility over time. Principle 03 covers where those contributions fit in your priorities.

Put this principle to work

These WealthLanding tools and guides from the Retirement Lab help you apply this principle to your own numbers.

• Roth strategy tool (Optimize Roth)Model Roth conversions against your tax brackets.
• Roth Conversions: Compressing Tax Liabilities Pre-MedicareHow conversion timing interacts with Medicare premium surcharges.
• The IRS Was His Silent Business PartnerA case study on how much of a traditional IRA is really yours.

Common mistakes

Assuming Roth is always better

Traditional contributions can be the better choice when your tax rate is high today and expected to be lower later. Roth's advantage depends on the comparison of rates.

Converting too much in one year

A single large conversion can push income into higher brackets and trigger IRMAA or lost subsidies. Spreading conversions over several years is common.

Paying the conversion tax from the IRA

Withholding tax from the converted amount reduces what reaches the Roth and, before 59½, may trigger penalties on the withheld portion.

Ignoring the household view

After the year of a spouse's death, the survivor generally files as a single taxpayer, with narrower brackets, which can raise taxes on similar income. That is one argument for building some tax-free savings.

When individual circumstances change the answer

• Charitable intentions. Traditional IRA money may be well suited to charitable giving, which can reduce the case for converting.
• State taxes, especially if you plan to move between high- and low-tax states.
• Large pensions or other income that already fill the lower brackets.
• Future law changes. Brackets set for 2026 can change. Tax diversification is partly a hedge against not knowing.

Questions readers ask

When do required minimum distributions start?

Under the IRS final regulations, the applicable age is 73 for people born from 1951 through 1958 and 75 for people born in 1960 or later. If you were born in 1959, confirm your age with the IRS or your plan, because the statute's wording for that birth year has needed separate guidance. Roth IRAs have no RMDs for the original owner.

Is a Roth conversion a good idea?

Sometimes. A conversion adds the converted amount to your taxable income now. It tends to make more sense when your current tax rate is lower than the rate you expect later, and you can pay the tax from other funds. It can also raise Medicare premiums or reduce ACA subsidies, so it should be modeled carefully.

What is tax diversification?

Holding savings in more than one tax treatment (tax-deferred, tax-free and taxable) so that in retirement you can choose where withdrawals come from each year to manage your taxable income.