A Roth 401(k) is a powerful retirement savings vehicle that combines features of a traditional 401(k) with those of a Roth IRA. Unlike a traditional 401(k), contributions to a Roth 401(k) are made with after-tax dollars. This means you do not get an immediate tax deduction, but your investments grow tax-free, and qualified withdrawals during retirement are also tax-free.
Key Benefits of a Roth 401(k)
Tax-Free Income: Since you've already paid taxes on your contributions, the principal and all earnings can be withdrawn tax-free after age 59½ (provided the account has been open for 5 years).
Higher Contribution Limits: Roth 401(k)s share the same high contribution limits as traditional 401(k)s, which are significantly higher than Roth IRA limits.
Employer Matching: Many employers offer matching contributions. Note that while your contributions go into the Roth side, employer matches typically go into a traditional (pre-tax) bucket, though recent legislation (SECURE 2.0) is starting to allow for Roth employer matches.
Understanding the Calculation
The Roth 401(k) calculator uses compound interest logic to project your future nest egg. The formula takes your current salary and applies your annual contribution percentage. It then calculates the employer match based on your salary, capped by their specific limit. Every year, the total balance earns a return (the "Expected Annual Return"), and your salary increases by the specified "Annual Salary Increase" percentage, which in turn increases your future contributions.
Example Scenario
Imagine a 30-year-old earning $75,000 per year who plans to retire at 65. If they contribute 10% of their salary and receive a 50% match on the first 6% of their income, with an expected annual return of 7% and a 3% annual raise:
Employee Contribution: $7,500 in Year 1.
Employer Match: $2,250 in Year 1 (50% of the 6% limit).
Total Annual Addition: $9,750.
Growth: Over 35 years, with salary increases and compounding returns, the balance could grow to over $2,000,000, much of which would be available tax-free.
Is a Roth 401(k) Right for You?
Generally, a Roth 401(k) is most beneficial if you expect to be in a higher tax bracket during retirement than you are now. By "locking in" your current tax rate, you protect your future self from potentially higher income tax rates down the road. If you are early in your career and your income is likely to grow significantly, the Roth option is often highly recommended by financial experts.
function calculateRoth401k() {
var age = parseFloat(document.getElementById('rothAge').value);
var retireAge = parseFloat(document.getElementById('rothRetireAge').value);
var salary = parseFloat(document.getElementById('rothSalary').value);
var salaryIncrease = parseFloat(document.getElementById('rothIncrease').value) / 100;
var balance = parseFloat(document.getElementById('rothBalance').value);
var contribRate = parseFloat(document.getElementById('rothContrib').value) / 100;
var matchRate = parseFloat(document.getElementById('rothMatch').value) / 100;
var matchLimit = parseFloat(document.getElementById('rothMatchLimit').value) / 100;
var annualReturn = parseFloat(document.getElementById('rothReturn').value) / 100;
if (isNaN(age) || isNaN(retireAge) || isNaN(salary) || age >= retireAge) {
alert("Please enter valid numbers and ensure retirement age is greater than current age.");
return;
}
var years = retireAge – age;
var totalEmployeeContrib = 0;
var totalEmployerContrib = 0;
var currentSalary = salary;
var currentBalance = balance;
for (var i = 0; i 0 ? (matchRate) : 1)));
// Simplified match: 50% of salary up to the limit
var actualMatchPercent = Math.min(contribRate, matchLimit);
var employerYearly = (currentSalary * actualMatchPercent) * (matchRate / (actualMatchPercent / actualMatchPercent));
// Correct match logic:
var matchEffectiveRate = Math.min((contribRate), matchLimit) * matchRate;
employerYearly = currentSalary * matchEffectiveRate;
totalEmployeeContrib += employeeYearly;
totalEmployerContrib += employerYearly;
// Add contributions at end of year
currentBalance += (employeeYearly + employerYearly);
// Apply Growth
currentBalance = currentBalance * (1 + annualReturn);
// Increase Salary for next year
currentSalary = currentSalary * (1 + salaryIncrease);
}
var resultDiv = document.getElementById('rothResult');
var finalValueDiv = document.getElementById('finalValue');
var detailedDiv = document.getElementById('detailedBreakdown');
resultDiv.style.display = 'block';
finalValueDiv.innerHTML = '$' + currentBalance.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
detailedDiv.innerHTML = 'Over the next ' + years + ' years, you will have contributed a total of $' + totalEmployeeContrib.toLocaleString(undefined, {maximumFractionDigits: 0}) + '. Your employer will have added $' + totalEmployerContrib.toLocaleString(undefined, {maximumFractionDigits: 0}) + ' in matching funds. Thanks to the power of compounding at a ' + (annualReturn * 100) + '% return, your estimated balance at age ' + retireAge + ' will be $' + currentBalance.toLocaleString(undefined, {maximumFractionDigits: 0}) + '.';
}