Roth vs. Traditional 401(k) Calculator
Use this calculator to estimate which 401(k) option, Roth or Traditional, might be more beneficial for you based on your current and expected future tax rates.
This is the amount you are willing to contribute, representing the same impact on your take-home pay for both options.
Understanding Roth vs. Traditional 401(k)
Choosing between a Roth 401(k) and a Traditional 401(k) is a critical decision for your retirement planning, primarily driven by your tax situation now versus what you anticipate it will be in retirement. Both offer tax advantages, but they differ significantly in when those advantages are realized.
Traditional 401(k)
A Traditional 401(k) allows you to contribute pre-tax dollars, meaning your contributions are deducted from your taxable income in the year you make them. This reduces your current tax bill. Your investments grow tax-deferred, meaning you don't pay taxes on the gains until you withdraw the money in retirement. At that point, all withdrawals (contributions and earnings) are taxed as ordinary income at your marginal tax rate during retirement.
Best for: Individuals who expect to be in a higher tax bracket now than they will be in retirement. The immediate tax deduction provides a greater benefit.
Roth 401(k)
With a Roth 401(k), you contribute after-tax dollars. This means your contributions do not reduce your current taxable income, and you don't get an immediate tax deduction. However, the significant advantage comes in retirement: all qualified withdrawals, including both your contributions and earnings, are completely tax-free. Your investments grow tax-free.
Best for: Individuals who expect to be in a lower tax bracket now than they will be in retirement, or those who anticipate tax rates will be higher in the future. Paying taxes now at a lower rate to avoid them entirely later can be a powerful strategy.
Key Factors in Your Decision
- Current vs. Future Tax Rates: This is the most crucial factor. If you believe your tax rate will be higher in retirement, Roth is generally better. If you believe it will be lower, Traditional is often preferred.
- Income Level: High-income earners might find the immediate tax deduction of a Traditional 401(k) more appealing. However, Roth 401(k)s have no income limits for contributions, unlike Roth IRAs.
- Years Until Retirement: The longer your money has to grow, the more significant the tax-free growth of a Roth 401(k) becomes.
- Access to Funds: While both are retirement accounts, Roth contributions can be withdrawn tax-free and penalty-free at any time, which can offer some flexibility (though generally not recommended for retirement savings).
How This Calculator Works
This calculator helps you compare the two options by estimating the total after-tax value you would accumulate in each type of account, assuming the same "after-tax cost" or impact on your take-home pay for your annual contribution. It takes into account your current and expected future marginal tax rates, your annual contribution amount, years until retirement, and your expected investment growth rate.
By inputting your specific financial details, you can see which option is projected to leave you with more money in your pocket during retirement.