Roth vs. Traditional 401(k) Calculator 🤔
Deciding between a Roth vs Traditional 401(k) is one of the most important financial choices an employee can make. The right decision could mean tens or even hundreds of thousands of dollars more in your pocket during retirement. This calculator is designed to demystify your 401(k) options and show which plan is more advantageous for your specific financial situation.
This tool is perfect for employees new to their careers, mid-career earners looking to optimize their strategy, or anyone planning for a secure retirement. While the focus is on 401(k) plans, the tax principles are identical for **Roth vs. Traditional IRAs**, so it works for those accounts, too.
Roth vs 401k comparison Calculator: (Image Credit: Pixabay from Pexels)
How to Use the Roth vs 401(k) Comparison Calculator
- Enter Your Financial Details: Input your age, planned retirement age, annual contribution, tax rates, and expected investment return.
- Add Inflation: Enter your best estimate for the average annual inflation rate until you retire. This allows the calculator to show you the future value of your savings in today's dollars.
- Consider the Tax Savings (Optional but Recommended): For the most accurate comparison, check the "Invest the tax savings" box.
Why is this important? A Traditional 401(k) contribution lowers your taxes *today*. A smart investor would invest this saved money. This option simulates that scenario for a true apples-to-apples comparison of which strategy builds more wealth.
Example: Imagine you contribute 6000 USD to a Traditional IRA while in the 24% tax bracket. Your taxable income is reduced, saving you 1440 USD (6000 x 24%) on this year's taxes. By checking this box, you're telling the calculator: "Assume I invest that extra $1,440 each year." The calculator then projects the growth of this second, taxable investment, giving you a complete picture of the Traditional strategy's total potential wealth. - Review Your Results: The calculator will instantly show you the total value, the purchasing power in today's dollars, and the final take-home amount for both a Roth and a Traditional 401(k).
Roth or Traditional 401K:
Which is Better for You?
Based on your inputs, the better option is:
With an estimated advantage of $134,845 in retirement.
Traditional 401(k) / IRA
Retirement Acct. (Net): $789,288
(+) Taxable Savings (Net): $134,845
Nominal Value (Future $): $924,133
Purchasing Power (Today's $): $0
Roth 401(k) / IRA
Retirement Acct. (Net): $924,133
Nominal Value (Future $): $924,133
Purchasing Power (Today's $): $0
What is a Roth 401(k)?
A Roth 401(k) is an employer-sponsored retirement account where you contribute with **after-tax dollars**. This means you don't get an upfront tax deduction, but your investments grow completely tax-free, and all qualified withdrawals in retirement are also 100% tax-free. It's often recommended for those who believe they will be in a higher tax bracket in retirement than they are today.
What is a Traditional 401(k)?
A Traditional 401(k) is a retirement account where your contributions are made with **pre-tax dollars**, lowering your taxable income for the year you contribute. Your investments grow tax-deferred, meaning you don't pay taxes on the growth each year. However, you will pay ordinary income tax on all withdrawals you make during retirement. This type of account is generally favored by those who expect to be in a lower tax bracket in retirement.
What about IRAs?
An Individual Retirement Arrangement (IRA) works very similarly. The main difference is that you open an IRA on your own, while a 401(k) is sponsored by your employer. The tax principles of **Roth vs. Traditional** are identical for both, though contribution limits and income restrictions can differ.
Roth 401(k) vs Traditional 401(k): Which Is Better for You?
The fundamental choice between a Roth 401(k) and a Traditional 401(k) boils down to a simple question: **Do you want to pay income taxes on your savings now or later?**
- Traditional 401(k): You contribute pre-tax dollars. This reduces your taxable income for the year, giving you an immediate tax break. Your money grows tax-deferred, but you'll pay income tax on all withdrawals in retirement.
- Roth 401(k): You contribute after-tax dollars. There's no upfront tax deduction. However, your money grows completely tax-free, and all your qualified withdrawals in retirement are also tax-free.
The decision hinges on your prediction of your future tax situation. If you expect to be in a higher tax bracket in retirement than you are now, a Roth account is often more beneficial. If you expect to be in a lower tax bracket in retirement, a Traditional 401K account might be the better choice.
Understanding the Calculations
The calculator uses the standard future value formula to project the growth of your investments. The key difference lies in when taxes are applied.
Future Value of a Series
The core formula used to calculate the future value of your annual contributions is:
$$ FV = P \times \frac{((1 + r)^n - 1)}{r} $$Where:
- $FV$ = Future Value of the account at retirement.
- $P$ = The annual contribution (payment).
- $r$ = The annual rate of return.
- $n$ = The number of years you'll be contributing.
Applying the Taxes
The real comparison comes from the net, after-tax amount:
- Traditional Net Value: $Net_{Traditional} = (FV_{Retirement} \times (1 - \text{Retirement Tax Rate})) + FV_{Taxable}$
- Roth Net Value: $Net_{Roth} = FV_{Retirement}$ (since withdrawals are tax-free)
This calculator determines which option leaves you with more spendable money after all taxes are paid. For a more comprehensive look at your retirement savings, check out our general Retirement Savings Calculator.
Roth vs Traditional 401(k) Tax Calculator Example
Scenario 1: The Young Earner with a New 401(k)
Profile: Sarah, 25, is just starting her career. Her income is relatively low, placing her in the 12% federal tax bracket. She expects her income (and tax bracket) to rise significantly by the time she retires.
- Inputs: Age: 25, Retirement: 65, Contribution: $5,000, Current Tax: 12%, Retirement Tax: 25%, Return: 8%.
- Analysis: Sarah's current tax rate is low. It's better for her to pay the 12% tax now on her contributions (Roth 401k) rather than deferring and paying a higher 25% tax on a much larger sum in retirement.
- Calculator Result: The Roth 401(k) is the clear winner.
Scenario 2: The Peak Earner Maximizing Deductions
Profile: David, 50, is in his peak earning years and is in the 32% federal tax bracket. He plans to retire at 65 and expects his income and expenses to be lower in retirement, placing him in the 22% tax bracket.
- Inputs: Age: 50, Retirement: 65, Contribution: $20,000, Current Tax: 32%, Retirement Tax: 22%, Return: 6%.
- Analysis: David benefits greatly from the upfront tax deduction of a Traditional 401(k). He saves 32% on his contributions now and will only pay 22% on his withdrawals later. When he invests this tax savings, his overall net worth is higher.
- Calculator Result: The Traditional 401(k) is the better option.
Scenario 3: The Mid-Career Professional with Tax Uncertainty
Profile: Maria, 35, is a mid-career professional in the 24% tax bracket. She's unsure if her tax rate will go up or down in retirement. Tax laws could change, and her retirement income is hard to predict.
- Inputs: Age: 35, Retirement: 65, Contribution: $10,000, Current Tax: 24%, Retirement Tax: 24%, Return: 7%.
- Analysis: When the current and future tax rates are the same and the tax savings are invested, the math works out to be identical for both accounts. The choice then comes down to qualitative factors. The Roth 401(k) offers tax diversification and immunity from future tax rate hikes.
- Calculator Result: The net values are identical, but the qualitative benefits lean toward **Roth**.
Frequently Asked Questions (FAQs)
1. What does "Purchasing Power (Today's $)" mean?
This shows you what your final retirement balance would be worth in today's dollars. A million dollars in 30 years won't buy as much as a million dollars today due to inflation. This number discounts your future balance by the inflation rate you entered to give you a realistic idea of its actual buying power.
2. How does the calculator project the growth of the 'taxable investment'?
The "Invest the tax savings" feature projects the growth of your tax refund in four key steps:
- Calculate Annual Tax Savings: It determines your yearly tax refund by multiplying your `Annual Contribution` by your `Current Marginal Tax Rate`.
- Project Future Value: It assumes you invest this refund each year and calculates its future value using the `Expected Annual Rate of Return`.
- Calculate Capital Gains Tax: Since this investment is in a taxable account, it calculates the tax owed only on the investment *gains* (total value minus total contributions), using a standard 15% long-term capital gains rate.
- Determine Final Net Value: It subtracts the capital gains tax from the total future value. This final number is the "Taxable Savings Value" you see in the results, which is then added to your Traditional account's net value.
3. What if my employer only offers a Traditional 401(k)?
You should still contribute, especially to get any employer match (that's free money!). You can then supplement your savings with a personal Roth IRA if you believe it's a better fit for your tax situation. This gives you the best of both worlds.
4. Can I contribute to both a 401(k) and an IRA?
Yes, absolutely. You can contribute to a 401(k) at work and also contribute to a personal IRA (Roth or Traditional). Note that there are separate annual contribution limits set by the IRS that apply to your 401(k)s and your IRAs.
5. Does this calculator account for employer match?
This calculator focuses on the tax implications of your own contributions. Importantly, any employer match to a 401(k) is always made on a pre-tax basis and will be held in a separate traditional account, regardless of whether your contributions are Roth or Traditional. You will owe taxes on the employer match and its earnings upon withdrawal. To see how a match impacts your savings, use our 401(k) Match Calculator.
6. Are there income limits for contributing to Roth accounts?
For a **Roth IRA**, yes, there are Modified Adjusted Gross Income (MAGI) phase-outs that may limit or prevent high-income earners from contributing directly. However, for a **Roth 401(k)**, there are currently no income limitations.
Helpful Resources & Further Reading
Continue your journey to a secure retirement with these helpful resources:
- Internal Tools:
- 401(k) Retirement Calculator: A detailed calculator to project your 401(k) growth.
- FIRE Calculator (Financial Independence, Retire Early): See what it takes to retire early.
- Compound Interest Calculator: Visualize the power of compounding on your savings.
- External Authoritative Sources:
- IRS.gov - 401(k) Plans: Answers directly from the Internal Revenue Service.
- Investor.gov: Unbiased information about retirement plans from the U.S. Securities and Exchange Commission.