Roth vs. Traditional 401(k)/IRA Calculator
Retirement Savings Comparison:
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Deciding between a Roth and a Traditional 401(k) or IRA is one of the most significant financial choices you'll make for your retirement. Both offer powerful tax advantages, but they differ fundamentally in when those advantages are realized. This calculator helps you compare the potential net value of each option in retirement, based on your current and projected tax rates.
How Roth Accounts Work
With a Roth 401(k) or IRA, you contribute money that has already been taxed (post-tax contributions). The key benefit is that your investments grow tax-free, and qualified withdrawals in retirement are also completely tax-free. This means you pay taxes now, at your current marginal tax rate, and never again on that money or its growth.
Best for: Individuals who expect to be in a higher tax bracket in retirement than they are currently. If you're early in your career, anticipate significant income growth, or believe tax rates will generally rise in the future, Roth can be a powerful choice.
How Traditional Accounts Work
Traditional 401(k)s and IRAs allow you to contribute money on a pre-tax basis. This means your contributions reduce your taxable income in the year you make them, potentially lowering 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 are currently in a higher tax bracket than they expect to be in retirement. If you're at the peak of your earning career, or anticipate a lower income in retirement, the upfront tax deduction from a Traditional account can be very appealing.
Key Factors for Comparison
- Current vs. Future Tax Rates: This is the primary driver of the Roth vs. Traditional decision. If your current tax rate is lower than your expected retirement tax rate, Roth is often more advantageous. If your current tax rate is higher, Traditional may be better.
- Income Level: There are income limitations for contributing directly to a Roth IRA, though Roth 401(k)s do not have these. High-income earners might use a "backdoor Roth" strategy.
- Access to Funds: While both are for retirement, Roth contributions (not earnings) can generally be withdrawn tax-free and penalty-free at any time, offering some flexibility.
- Required Minimum Distributions (RMDs): Traditional IRAs and 401(k)s typically have RMDs starting at age 73 (as of 2023). Roth IRAs do not have RMDs for the original owner, offering more control over your money in later life. Roth 401(k)s do have RMDs, but these can be avoided by rolling the funds into a Roth IRA.
How This Calculator Works
This calculator helps you visualize the potential outcome by comparing the net amount you'd have in retirement from the same "pre-tax income allocation."
- For Traditional: It assumes you contribute the full "Annual Pre-Tax Income Allocation" amount. This amount grows tax-deferred, and then the total future value is reduced by your "Expected Retirement Marginal Federal Tax Rate" to show your net, spendable income.
- For Roth: It first reduces your "Annual Pre-Tax Income Allocation" by your "Current Marginal Federal Tax Rate" (as this is money you'd pay taxes on now). The remaining amount is then contributed to the Roth account. This amount grows tax-free, and the entire future value is available to you in retirement without further taxes.
By comparing the net values, you can get a clearer picture of which option might yield more spendable income in your golden years, based on your personal tax situation and investment growth expectations.