This calculator provides an estimate. Consult with a financial advisor for personalized advice.
Understanding Roth IRA vs. 401(k)
Choosing between a Roth IRA and a 401(k) (or deciding how to utilize both) is a crucial step in retirement planning. The primary difference lies in when you pay taxes.
Roth IRA: Pay Taxes Now
With a Roth IRA, you contribute money that has already been taxed (after-tax dollars). The major benefit is that your investments grow tax-free, and qualified withdrawals in retirement are also tax-free. This is advantageous if you expect your tax rate to be higher in retirement than it is currently.
Key Features:
Contributions are made with after-tax money.
Qualified withdrawals in retirement are tax-free.
Potential for tax-free growth.
Subject to income limitations for direct contributions.
Annual contribution limits apply.
401(k): Pay Taxes Later (Traditional)
A traditional 401(k) allows you to contribute pre-tax dollars. This means your contributions reduce your taxable income in the current year. Your investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income. This is generally preferred if you expect your tax rate to be lower in retirement.
Key Features:
Contributions are made with pre-tax money, reducing current taxable income.
Investments grow tax-deferred.
Withdrawals in retirement are taxed as ordinary income.
Often comes with an employer match, which is essentially free money.
Higher contribution limits than IRAs.
Employer match is typically on pre-tax contributions.
The Calculator's Logic
This calculator helps you compare the potential annual tax savings and the total potential contribution amount for both account types, considering your current and expected future tax situations. It aims to illustrate the immediate tax benefit of a 401(k) versus the future tax-free withdrawals of a Roth IRA.
Calculation Breakdown:
Your Annual Contribution Amount (Base): Your annual income multiplied by your contribution percentage.
Roth IRA Contribution: The lesser of your base contribution amount or the Roth IRA annual limit.
401(k) Contribution: The lesser of your base contribution amount or the 401(k) annual limit.
401(k) Employer Match: Calculated based on your 401(k) contribution amount and the employer match percentage.
401(k) Total Potential Contribution: The sum of your 401(k) contribution and the employer match.
Current Tax Savings (401(k) Pre-Tax): Your 401(k) contribution amount multiplied by your current tax bracket percentage. This estimates the immediate tax relief.
Estimated Future Tax Cost (Roth IRA Tax-Free): This comparison highlights the *absence* of future taxes on Roth IRA withdrawals. To illustrate this, we calculate what the tax *would have been* if this money had been contributed to a traditional account and withdrawn at your expected future tax rate.
By comparing the immediate tax savings of a 401(k) against the potential future tax-free growth and withdrawals of a Roth IRA, you can make a more informed decision based on your personal financial outlook and tax expectations.
function calculateComparison() {
var annualIncome = parseFloat(document.getElementById("annualIncome").value);
var contributionPercentage = parseFloat(document.getElementById("contributionPercentage").value);
var currentTaxBracket = parseFloat(document.getElementById("currentTaxBracket").value) / 100;
var expectedFutureTaxBracket = parseFloat(document.getElementById("expectedFutureTaxBracket").value) / 100;
var iraContributionLimit = parseFloat(document.getElementById("iraContributionLimit").value);
var k401ContributionLimit = parseFloat(document.getElementById("k401ContributionLimit").value);
var employerMatchPercentage = parseFloat(document.getElementById("employerMatchPercentage").value) / 100;
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = "; // Clear previous results
// Input validation
if (isNaN(annualIncome) || isNaN(contributionPercentage) || isNaN(currentTaxBracket) || isNaN(expectedFutureTaxBracket) || isNaN(iraContributionLimit) || isNaN(k401ContributionLimit) || isNaN(employerMatchPercentage)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (contributionPercentage 100) {
resultDiv.innerHTML = "Contribution percentage must be between 0 and 100.";
return;
}
if (currentTaxBracket 1 || expectedFutureTaxBracket 1) {
resultDiv.innerHTML = "Tax brackets must be between 0% and 100%.";
return;
}
if (employerMatchPercentage 1) {
resultDiv.innerHTML = "Employer match percentage must be between 0% and 100%.";
return;
}
// — Calculations —
// 1. Your Base Contribution Amount
var baseContributionAmount = annualIncome * (contributionPercentage / 100);
// 2. Roth IRA Contribution
var rothContribution = Math.min(baseContributionAmount, iraContributionLimit);
// 3. 401(k) Contribution
var k401Contribution = Math.min(baseContributionAmount, k401ContributionLimit);
// 4. Employer 401(k) Match
// Match is typically calculated on the employee's contribution, up to a certain limit.
// We'll assume it applies to the k401Contribution calculated above.
var k401Match = k401Contribution * employerMatchPercentage;
// 5. 401(k) Total Potential Contribution (Employee + Employer)
var k401TotalContribution = k401Contribution + k401Match;
// 6. Current Tax Savings (401(k) Pre-Tax)
// This is the tax benefit of contributing to a traditional 401(k)
var currentTaxSavings401k = k401Contribution * currentTaxBracket;
// 7. Estimated Future Tax Cost (Roth IRA Tax-Free Advantage)
// This is the potential tax you AVOID paying in retirement with a Roth IRA
// compared to a traditional account. We calculate what taxes would have been
// on the Roth contribution if it were taxed at the *expected future rate*.
// Note: This simplifies the comparison. Real-world tax scenarios are more complex.
var estimatedFutureTaxAvoidedRoth = rothContribution * expectedFutureTaxBracket;
// — Display Results —
var resultHTML = "