Traditional Accounts (Pre-Tax)

Traditional 401(k) and IRA contributions are made with pre-tax dollars, reducing your taxable income today. The money grows tax-deferred, and you pay income tax when you withdraw it in retirement. This can be advantageous if you expect your tax rate in retirement to be lower than your current rate.

Roth Accounts (After-Tax)

Roth 401(k) and IRA contributions are made with after-tax dollars, so you pay taxes today. The money grows tax-free, and qualified withdrawals in retirement are completely tax-free. This can be advantageous if you expect your tax rate in retirement to be higher than your current rate, or if you want tax-free withdrawals and more flexibility.

Key Differences

• Tax Timing: Traditional = tax later; Roth = tax now
• Tax Rate Assumption: The better choice depends on whether your tax rate is higher now or in retirement
• Required Minimum Distributions (RMDs): Traditional accounts require RMDs starting at age 73 (or 75 for those born in 1960+); Roth accounts have no RMDs during your lifetime
• Withdrawal Flexibility: Roth accounts allow penalty-free withdrawal of contributions (not earnings) at any time; Traditional accounts have stricter rules
• Contribution Limits: Same annual limits apply to both Traditional and Roth contributions combined

Why Reality is More Complex

This calculator uses simplified assumptions. Real-world factors not included here include: Required Minimum Distributions (RMDs), early withdrawal penalties and exceptions, changes in tax law, state tax differences, Social Security taxation interactions, Medicare premium impacts, other retirement income sources, employer matches, and many other complexities. Actual results will depend on your specific situation.