Choosing between a Roth 401(k) and a Traditional 401(k) is a significant financial decision that hinges on your current financial situation, your expectations about your future tax rates, and your investment strategy. Both offer tax-advantaged retirement savings, but they differ fundamentally in *when* you pay taxes.
Traditional 401(k)
Contributions to a Traditional 401(k) are made with pre-tax dollars. This means your taxable income is reduced in the year you make the contribution, providing an immediate tax break. Your investments grow tax-deferred, and you pay ordinary income tax on both your contributions and earnings when you withdraw the money in retirement.
Key Features:
Upfront Tax Deduction: Reduces your current taxable income.
Tax-Deferred Growth: Your investments grow without annual taxation.
Taxable Withdrawals: Withdrawals in retirement are taxed as ordinary income.
When it might be better: If you expect to be in a lower tax bracket in retirement than you are currently, or if you prioritize reducing your current tax burden.
Roth 401(k)
Contributions to a Roth 401(k) are made with after-tax dollars. You don't get an immediate tax deduction. However, your investments grow tax-free, and qualified withdrawals in retirement (including both contributions and earnings) are completely tax-free.
Key Features:
After-Tax Contributions: No immediate tax deduction.
Tax-Free Growth: Your investments grow without annual taxation.
Tax-Free Withdrawals: Qualified withdrawals in retirement are tax-free.
When it might be better: If you expect to be in a higher tax bracket in retirement than you are currently, or if you value the certainty of tax-free income in retirement.
How the Calculator Works
This calculator estimates the potential outcome of saving in a Roth 401(k) versus a Traditional 401(k) over your working life. It projects the total accumulated wealth and the net amount received after considering taxes. The core idea is to compare the "after-tax in retirement" value for each option.
Assumptions & Calculations:
The calculator makes several simplifying assumptions for illustrative purposes. It assumes:
Consistent contribution percentage and income growth rates.
Your current tax rate applies to contributions for Traditional 401(k) and your expected retirement tax rate applies to withdrawals.
Investment growth is compounded annually.
1. Annual Contribution Amount:
Contribution Amount = Annual Income * (Contribution Percentage / 100)
2. Number of Years Until Retirement:
Years to Retirement = Retirement Age – Current Age
3. Future Value of Contributions (Before Taxes):
This is calculated using the future value of an ordinary annuity formula, compounded annually. The income and contribution amounts increase each year based on the 'Expected Annual Income Growth Rate'.
FV = P * [((1 + r)^n – 1) / r] * (1 + r * g)
Where: P is the first year's contribution, r is the investment growth rate, n is the number of years, and g is an adjustment for growth rate differences if income growth is different than investment growth. A more precise simulation year-by-year is generally more accurate for varying growth rates. This calculator uses a year-by-year simulation.
4. Traditional 401(k) Calculation:
Total Contributions (Pre-tax): The sum of annual contributions, which grow in value.
Total Accumulated Value (Pre-Tax): Calculated by simulating year-by-year growth of contributions, assuming they are invested and grow at the `expectedInvestmentGrowth` rate. Income increases by `expectedAnnualIncomeGrowth`.
Yearly Accumulated Value (Trad) = Previous Year's Value * (1 + Investment Growth Rate) + Current Year's Contribution
Taxes Paid in Retirement: Total Accumulated Value * (Expected Retirement Tax Rate / 100).
Net Amount in Retirement (Traditional): Total Accumulated Value – Taxes Paid in Retirement.
5. Roth 401(k) Calculation:
Total Contributions (After-tax): These are the same dollar amounts as Traditional contributions, but made with after-tax money. The calculator does not directly model the "cost" of the tax deduction lost for Traditional.
Total Accumulated Value (After-Tax): Calculated similarly to the Traditional, but conceptually, these withdrawals are tax-free.
Yearly Accumulated Value (Roth) = Previous Year's Value * (1 + Investment Growth Rate) + Current Year's Contribution
Taxes Paid in Retirement: $0 (for qualified withdrawals).
Net Amount in Retirement (Roth): Total Accumulated Value (After-Tax).
6. Upfront Tax Savings (Traditional):
This is an estimate of the immediate tax savings from contributing to a Traditional 401(k) in the first year, which could be reinvested elsewhere.
First Year Tax Savings = (Annual Income * (Contribution Percentage / 100)) * (Current Tax Rate / 100)
Important Note: This calculator provides an estimate. Actual results will vary based on many factors, including changes in tax laws, personal financial circumstances, and actual investment performance. It's always recommended to consult with a qualified financial advisor for personalized advice.
function calculateRothVsTraditional() {
var annualIncome = parseFloat(document.getElementById("annualIncome").value);
var contributionPercentage = parseFloat(document.getElementById("contributionPercentage").value);
var currentAge = parseInt(document.getElementById("currentAge").value);
var retirementAge = parseInt(document.getElementById("retirementAge").value);
var expectedAnnualIncomeGrowth = parseFloat(document.getElementById("expectedAnnualIncomeGrowth").value) / 100;
var expectedInvestmentGrowth = parseFloat(document.getElementById("expectedInvestmentGrowth").value) / 100;
var currentTaxRate = parseFloat(document.getElementById("currentTaxRate").value) / 100;
var expectedRetirementTaxRate = parseFloat(document.getElementById("expectedRetirementTaxRate").value) / 100;
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = "; // Clear previous results
if (isNaN(annualIncome) || isNaN(contributionPercentage) || isNaN(currentAge) || isNaN(retirementAge) ||
isNaN(expectedAnnualIncomeGrowth) || isNaN(expectedInvestmentGrowth) || isNaN(currentTaxRate) || isNaN(expectedRetirementTaxRate)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (retirementAge <= currentAge) {
resultDiv.innerHTML = "Retirement age must be greater than current age.";
return;
}
if (contributionPercentage 100) {
resultDiv.innerHTML = "Contribution percentage must be between 0 and 100.";
return;
}
var yearsToRetirement = retirementAge – currentAge;
var totalTraditionalAccumulated = 0;
var totalRothAccumulated = 0;
var currentIncome = annualIncome;
var totalContributionsMade = 0; // For reporting total contributed
for (var i = 0; i < yearsToRetirement; i++) {
var contributionAmount = currentIncome * (contributionPercentage / 100);
totalContributionsMade += contributionAmount;
// Traditional 401(k) simulation
totalTraditionalAccumulated = (totalTraditionalAccumulated * (1 + expectedInvestmentGrowth)) + contributionAmount;
// Roth 401(k) simulation
totalRothAccumulated = (totalRothAccumulated * (1 + expectedInvestmentGrowth)) + contributionAmount;
// Increase income for next year
currentIncome *= (1 + expectedAnnualIncomeGrowth);
}
var traditionalTaxesInRetirement = totalTraditionalAccumulated * expectedRetirementTaxRate;
var netTraditionalRetirement = totalTraditionalAccumulated – traditionalTaxesInRetirement;
var firstYearContribution = annualIncome * (contributionPercentage / 100);
var firstYearTaxSavingsTraditional = firstYearContribution * currentTaxRate;
resultDiv.innerHTML = 'Estimated Totals at Retirement:' +
'Total Contributions Made: $' + totalContributionsMade.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + '' +
'Traditional 401(k) Estimated Value (Pre-Tax): $' + totalTraditionalAccumulated.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + '' +
'Estimated Taxes on Traditional 401(k) Withdrawals: $' + traditionalTaxesInRetirement.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + '' +
'Net Traditional 401(k) in Retirement (After Taxes): $' + netTraditionalRetirement.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + '' +
'' +
'Roth 401(k) Estimated Value (After-Tax Contributions): $' + totalRothAccumulated.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + '' +
'Net Roth 401(k) in Retirement (Tax-Free Withdrawals): $' + totalRothAccumulated.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + '' +
'' +
'Potential First-Year Tax Savings with Traditional 401(k): $' + firstYearTaxSavingsTraditional.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + '';
if (netTraditionalRetirement > totalRothAccumulated) {
resultDiv.innerHTML += 'Based on these assumptions, the Traditional 401(k) may yield more net spendable income in retirement due to lower expected taxes.';
} else if (totalRothAccumulated > netTraditionalRetirement) {
resultDiv.innerHTML += 'Based on these assumptions, the Roth 401(k) may yield more net spendable income in retirement due to tax-free withdrawals.';
} else {
resultDiv.innerHTML += 'Based on these assumptions, both options result in a similar net spendable income in retirement.';
}
}