Roth or Traditional 401k Calculator

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Roth vs. Traditional 401k Comparison Calculator

Comparison Results

Traditional 401k (Net):

$0
After-tax value at retirement

Roth 401k (Net):

$0
Tax-free value at retirement
function calculateRetirement() { var currentAge = parseFloat(document.getElementById('currentAge').value); var retirementAge = parseFloat(document.getElementById('retirementAge').value); var annualIncome = parseFloat(document.getElementById('annualIncome').value); var contributionPercent = parseFloat(document.getElementById('contributionPercent').value) / 100; var currentTaxRate = parseFloat(document.getElementById('currentTaxRate').value) / 100; var retirementTaxRate = parseFloat(document.getElementById('retirementTaxRate').value) / 100; var rateOfReturn = parseFloat(document.getElementById('rateOfReturn').value) / 100; if (isNaN(currentAge) || isNaN(retirementAge) || isNaN(annualIncome) || retirementAge <= currentAge) { alert("Please enter valid positive numbers and ensure retirement age is greater than current age."); return; } var years = retirementAge – currentAge; var annualContribution = annualIncome * contributionPercent; // Traditional Calculation // We assume the full annual contribution is invested. var tradFV = 0; for (var i = 0; i < years; i++) { tradFV = (tradFV + annualContribution) * (1 + rateOfReturn); } var tradNet = tradFV * (1 – retirementTaxRate); // Roth Calculation // To make a fair comparison, we assume the user has the same "out of pocket" cost. // In a Traditional 401k, the "cost" is (Contribution * (1 – CurrentTaxRate)). // So for a Roth, we invest the amount that costs the same as the traditional contribution. var rothAnnualContribution = annualContribution * (1 – currentTaxRate); var rothFV = 0; for (var j = 0; j tradNet) { verdict.style.color = "#27ae60"; verdict.innerHTML = "The Roth 401k is better by approximately " + formattedDiff + " in net value."; } else if (tradNet > rothNet) { verdict.style.color = "#2c3e50"; verdict.innerHTML = "The Traditional 401k is better by approximately " + formattedDiff + " in net value."; } else { verdict.style.color = "#333"; verdict.innerHTML = "Both options result in the same net value."; } document.getElementById('resultsArea').style.display = 'block'; }

Traditional vs. Roth 401k: Which Is Better for Your Future?

Deciding between a Traditional 401k and a Roth 401k is one of the most significant financial decisions you'll make in your career. While both accounts offer tax advantages for retirement savings, they handle those taxes at completely opposite ends of the timeline.

The Fundamentals

  • Traditional 401k: Contributions are made with pre-tax dollars. This lowers your taxable income today, effectively giving you a tax break now. However, you pay ordinary income tax on all withdrawals (both contributions and earnings) during retirement.
  • Roth 401k: Contributions are made with after-tax dollars. You pay taxes on the money now, but once the funds are in the account, they grow tax-free, and qualified withdrawals in retirement are completely tax-free.

The Math Behind the Comparison

The "winner" between Roth and Traditional depends almost entirely on your marginal tax rate now versus your marginal tax rate in retirement.

If your current tax rate is higher than your expected retirement tax rate, the Traditional 401k usually wins because you save at a high rate now and pay at a lower rate later. Conversely, if you expect to be in a higher tax bracket later, the Roth 401k is superior because you pay the lower rate today to avoid the higher rate later.

Realistic Example

Imagine you are 30 years old, earning $75,000 per year, and contributing 10% ($7,500) to your retirement. Your current tax rate is 22%, and you expect to retire at 65 with a 15% tax rate.

  • Traditional Path: You invest the full $7,500. After 35 years at a 7% return, your account grows to roughly $1,036,000. After paying a 15% tax at withdrawal, you are left with $880,600.
  • Roth Path: To keep your "take-home pay" the same as the Traditional option, you can only afford to invest $5,850 ($7,500 minus the 22% tax). After 35 years at 7%, this grows to $808,000.

In this specific scenario, because your tax rate dropped from 22% to 15%, the Traditional 401k provided more net wealth. If the tax rates were reversed, the Roth would come out significantly ahead.

Key Considerations

1. Tax Diversification: Many experts suggest having both types of accounts. This gives you flexibility in retirement to withdraw from different buckets to manage your taxable income precisely.

2. Employer Match: Regardless of which you choose, employer matching contributions are almost always placed into a Traditional 401k account (though recent legislation like the SECURE Act 2.0 is starting to change this, most current plans still follow this rule).

3. RMDs: Traditional 401ks require "Required Minimum Distributions" starting at age 73 or 75. Roth 401ks (as of 2024) no longer require RMDs during the owner's lifetime, offering more control over your money in old age.

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