Roth IRA vs. Traditional IRA: A California Pre-Retiree's Guide

If you are within ten years of retirement and searching "Roth IRA vs traditional IRA," you are probably not really asking which account is better. You are asking a sharper question, one that keeps people up at night as retirement gets close. Would you rather pay tax on this money now, or later? That is the entire difference between the two accounts, and the honest answer depends on something you can actually estimate, which is whether your tax rate today is higher or lower than the rate you may face when you withdraw the money. Everything else in this article is detail hanging off that one question.

At Up Capital Management, we work with pre-retirees across Roseville, Placer County, and the Sierra foothills, and this decision comes up in nearly every planning conversation. It shapes the taxes you pay now, the income flexibility you have later, and how a conversion plan fits alongside stock compensation, business-sale proceeds, or a concentrated stock position. Here is how to think it through. And as you do, keep in mind what the answer is actually for. The account is a tool, the goal is funding the life you have planned.

What a traditional IRA is and who may qualify for the deduction

A traditional IRA lets you contribute money that may be deductible on this year's tax return. The money grows tax deferred, and you pay ordinary income tax when you withdraw it in retirement.

Anyone with taxable compensation can contribute, at any age. For 2026, the contribution limit is $7,500, or $8,600 if you are 50 or older, and the limit is shared across all of your traditional and Roth IRAs combined. There is no income limit on the contribution itself. The income limits apply only to the deduction, and only if you or your spouse are covered by a workplace retirement plan such as a 401(k).

For 2026, if you are covered by a workplace plan, the deduction phases out between $81,000 and $91,000 of modified adjusted gross income (MAGI) for single filers, and between $129,000 and $149,000 for married couples filing jointly when the contributing spouse is covered. If you are not covered but your spouse is, the phase-out runs from $242,000 to $252,000. If neither spouse is covered, the deduction is available at any income.

That last point matters more than people realize. A spouse without a workplace plan, such as a self-employed consultant or a spouse who has already retired, may still qualify for a full deduction even in a high-income household. A contribution is still permitted even when the deduction is limited or unavailable, which becomes important in the backdoor Roth discussion below.

What a Roth IRA is and who may contribute directly

A Roth IRA flips the tax treatment. You contribute money you have already paid tax on, you get no deduction today, and in exchange, qualified withdrawals in retirement are federal income tax free, including all the growth. To be qualified, a withdrawal generally must come after age 59½ and after the account has been open at least five years.

Unlike the traditional IRA, the Roth has income limits on the contribution itself. For 2026, the ability to contribute directly phases out between $153,000 and $168,000 of MAGI for single and head-of-household filers, and between $242,000 and $252,000 for married couples filing jointly. Above the top of the range, direct Roth contributions are not allowed.

Many of the pre-retirees we work with, particularly dual-income households and professionals in the Sacramento region, find themselves above these limits. That does not close the Roth door. It just changes the entrance.

2026 IRA income limits at a glance

How the backdoor Roth pathway works

The backdoor Roth takes advantage of two rules working together. First, anyone with taxable compensation can make a nondeductible contribution to a traditional IRA regardless of income. Second, there is no income limit on converting a traditional IRA to a Roth IRA. So a high earner contributes after-tax dollars to a traditional IRA, reports the nondeductible contribution on IRS Form 8606, and then converts that money to a Roth. Because the contribution was already taxed, the conversion of that basis is generally not taxable.

The complication is the pro-rata rule. The IRS treats all of your traditional, SEP, and SIMPLE IRAs as one pool when calculating the taxable portion of a conversion. If you already hold significant pre-tax IRA money, perhaps from an old 401(k) rollover, the conversion is taxed proportionally across the whole pool, and the "tax-free backdoor" can turn into a meaningful tax bill. This is the single most common backdoor Roth mistake we see, and it is worth mapping out before any money moves. Timing, IRA balances, basis records, and tax reporting all matter. Our Roth conversion glossary entry → walks through the mechanics in more detail.

The backdoor Roth, and the rule that trips people

How retirement withdrawals and required distributions differ

The differences between the two accounts get bigger, not smaller, once you retire.

Traditional IRA withdrawals are generally taxed as ordinary income, federal and state. On top of that, the IRS eventually requires you to take the money out. Required Minimum Distributions (RMDs) currently begin at age 73 for those born between 1951 and 1959, and at age 75 for those born in 1960 or later. RMDs are not optional, and for retirees with large tax-deferred balances they can push income into higher brackets, raise Medicare premiums through the Income-Related Monthly Adjustment Amount (IRMAA), and increase the tax on Social Security benefits.

Roth IRA owners have no lifetime RMDs. The money can stay invested and growing, and qualified withdrawals never touch your tax return, which creates flexibility when coordinating income with Social Security, capital gains, and Medicare thresholds. Roth IRAs also generally pass to heirs income tax free, though most non-spouse beneficiaries must empty inherited accounts within ten years. If leaving assets to children is part of your picture, our inherited IRA planning guide → covers what your heirs would face with each account type.

One more asymmetry deserves attention. The balance in your traditional IRA is not really all yours. Part of it belongs to the IRS and the Franchise Tax Board, and the size of their share depends on future tax rates and your future income. A Roth balance is fully yours once your withdrawals are qualified. Two retirees with the same statement value can be in very different positions, because control over your tax bill is really control over what the money can do for you in any given year, whether that is a bigger travel year, help for a child, or simply not worrying about a bracket.

Two $1 million IRAs are not the same $1 million

What California taxes on each type of IRA

For California residents, the state generally follows federal treatment of traditional IRA distributions, Roth IRA distributions, and Roth conversions. Traditional IRA withdrawals are taxed by California as ordinary income at the state's regular rates, which are among the highest in the country. Qualified Roth withdrawals are generally not taxable in California, mirroring the federal treatment. California also imposes its own early distribution tax, currently 2.5%, on top of the federal 10% penalty for most withdrawals before age 59½, so early access to tax-deferred money is more expensive here than in most states.

There are exceptions worth knowing. California basis can differ from federal basis because of older state and federal rule differences, prior nondeductible contributions, or changes in residency, and in those cases the California taxable amount of a distribution or conversion may differ from the federal amount. The Franchise Tax Board covers these situations in its Pension and Annuity Guidelines, and a tax return review may be especially helpful before converting a large balance.

There is also a helpful counterweight. California does not tax Social Security benefits. That means a California retiree's state tax bill is driven largely by traditional IRA and 401(k) withdrawals, which makes the traditional-versus-Roth mix a genuine state tax lever, not just a federal one.

Residency timing matters too. Roth conversions are generally taxed by the state where you live when you convert, and California generally does not tax retirement income received by nonresidents. A pre-retiree who may relocate could reasonably sequence conversions around that move, while someone committed to the foothills may prefer converting during low-income years between retirement and RMD age. This is exactly the kind of window we map out in our Roth conversion strategy article for pre-retirees →.

The low-income window most pre-retirees miss

When concentrated stock may change the decision

Around the Sacramento region, we regularly see pre-retirees holding concentrated employer stock, often from the Folsom tech corridor or a Bay Area career, and the IRA decision interacts with that position in ways a generic comparison misses.

Selling appreciated shares creates capital gains that raise your MAGI. Exercising options, receiving deferred compensation, or completing a business sale does the same. Higher MAGI can phase you out of direct Roth contributions, increase the tax cost of a conversion done in the same year, and trigger the 3.8% Net Investment Income Tax. So the years you diversify concentrated stock may favor deductible traditional contributions, if you qualify, because the deduction offsets some of the income you are intentionally realizing.

The reverse is also true. In years when you are not selling, especially the low-income window after your paycheck stops and before RMDs begin, Roth contributions and conversions may be attractive because the tax cost of filling the Roth is at its lowest. The general pattern is to avoid stacking taxable events. Realize gains in some years, convert in others, and let each strategy get the low bracket it deserves. A conversion raises taxable income, and selling stock may use bracket capacity a conversion would otherwise fill. That is why the decision is best approached as a sequence rather than a one-time selection. The right sequence depends entirely on your numbers, which is why this is planning work, not a rule of thumb.

How to coordinate the IRA decision with your retirement income plan

The question is rarely only Roth versus traditional. A well-coordinated retirement income plan considers your current tax return, expected retirement date, workplace plan balances, Social Security timing, required distributions, Medicare premium thresholds, charitable intentions, California residency, and estate goals. It may also consider whether a series of measured Roth conversions could fit within selected tax brackets over several years.

For some households, preserving a current deduction may be sensible. For others, building a pool of tax-free qualified withdrawals may add flexibility later. Both paths involve tradeoffs, and future tax laws, income, and spending needs could change the analysis. In practice, most pre-retirees end up best served by holding both account types and controlling which one they draw from each year. Tax diversification gives you options, and options are what let a plan absorb whatever tax law and markets do next.

There is one more thing worth saying. The point of this exercise is not minimizing a tax number, it is funding the life you actually planned. The account type serves the plan, and the plan serves the life.

If you are nearing retirement and deciding how traditional and Roth IRAs fit your plan, that is a conversation we have with people every week. Up is a fee-only fiduciary wealth management firm with no commissions or broker-dealer affiliations shaping the conversation, which means the advice you get answers to you and no one else.

Schedule a discussion about your retirement income plan →

We welcome the chance to hear from you.

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This content is for general educational purposes only and does not constitute personalized investment, tax, or financial advice. Up Capital Management is a Registered Investment Adviser. Information provided reflects general principles, references IRS rules in effect for 2026, and may not apply to your individual situation. Tax rules may change. Consult a qualified professional before making financial decisions.

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