Traditional vs Roth 401(k) / IRA Impact Calculator

Choosing between Traditional and Roth retirement accounts is one of the most significant financial decisions you'll make. Both 401(k) plans and IRAs offer these two distinct options, each with unique tax advantages that can dramatically impact your retirement wealth. The core difference lies in when you pay taxes: today or in retirement.

Traditional accounts (Traditional 401(k) and Traditional IRA) allow you to contribute pre-tax dollars, reducing your taxable income today. Your investments grow tax-deferred, meaning you don't pay taxes on dividends, interest, or capital gains each year. However, when you withdraw money in retirement, those distributions are taxed as ordinary income.

Roth accounts (Roth 401(k) and Roth IRA) work in the opposite way. You contribute after-tax dollars, so there's no immediate tax deduction. However, your investments grow completely tax-free, and qualified withdrawals in retirement are also tax-free. This means you'll never pay taxes on the growth of your Roth investments.

The decision between Traditional and Roth ultimately depends on comparing your current tax rate to your expected tax rate in retirement. If you expect to be in a higher tax bracket in retirement, Roth typically wins. If you expect a lower tax bracket in retirement, Traditional usually comes out ahead.

This calculator helps you compare the long-term after-tax impact of Traditional vs Roth contributions. Follow these steps to get your personalized analysis:

1. Select your account type: Choose between 401(k) or IRA. This affects contribution limits and some rules.
2. Enter your current marginal tax rate: This is the tax rate on your next dollar of income. Include both federal and state taxes if applicable.
3. Estimate your retirement tax rate: Project what tax bracket you'll be in when withdrawing funds. Consider your expected retirement income from all sources.
4. Choose a comparison mode: "Same take-home cost" compares what happens when you reduce your paycheck by the same amount for both options. "Same contribution amount" compares identical dollar contributions.
5. Set contribution amount: Enter either your annual contribution or the annual reduction to your take-home pay.
6. Specify years to grow: Enter how many years until you'll start withdrawing funds.
7. Set expected annual return: A typical assumption is 6-7% for a diversified portfolio, but adjust based on your investment strategy.

The calculator will show you the projected final balance for both Traditional and Roth options, along with the after-tax difference between them. This helps you make an informed decision about which account type is better for your specific situation.

Understanding the mathematics helps you see why tax rates are the deciding factor. Let's break down the formulas:

Traditional Account (Pre-Tax)

Roth Account (After-Tax)

When They're Equal

If your current tax rate equals your retirement tax rate, both options produce identical after-tax results (assuming the same pre-tax contribution). This is because:

The order of multiplication doesn't matter—taxes now or taxes later produce the same result when rates are equal. The advantage comes only when rates differ.

While tax rates are the primary consideration, several other factors can influence which account type is better for you:

1. Current vs Future Tax Rates

If you're early in your career with a lower income, Roth is often better because you're paying taxes at a low rate now to avoid higher rates later. If you're at your peak earning years, Traditional may be better because you're avoiding high taxes now.

2. Tax Law Uncertainty

Future tax rates are uncertain. Tax laws change, and rates could be higher or lower when you retire. Roth locks in today's known tax rate, while Traditional bets on future rates being lower.

3. Required Minimum Distributions (RMDs)

Traditional 401(k)s and IRAs require you to take minimum distributions starting at age 73 (75 for those born 1960+), potentially forcing you into a higher tax bracket. Roth accounts have no RMDs during your lifetime, providing more flexibility and potential tax savings.

4. State Tax Considerations

If you live in a high-tax state now but plan to retire in a low-tax or no-income-tax state, Traditional becomes more attractive. Conversely, if you'll move to a higher-tax state, Roth may be better.

5. Social Security and Medicare

Traditional withdrawals count as income and can cause more of your Social Security benefits to be taxed and increase Medicare premiums (IRMAA surcharges). Roth withdrawals don't affect these calculations.

6. Estate Planning

Roth accounts can be passed to heirs tax-free (though they must take distributions over 10 years under current rules). Traditional accounts pass the tax burden to your beneficiaries.

Many people make these errors when deciding between Traditional and Roth accounts:

❌ Comparing Apples to Oranges

Don't compare a $10,000 Roth contribution to a $10,000 Traditional contribution directly. The Traditional contribution is pre-tax, while Roth is after-tax. For a fair comparison, account for the tax savings from Traditional contributions that could be invested elsewhere, or compare "same take-home cost" scenarios.

❌ Ignoring Marginal vs Effective Rates

Your current marginal rate (rate on your last dollar) matters for Traditional deductions, but your retirement effective rate (overall average rate) matters for withdrawals. Don't compare your current marginal rate to your expected retirement marginal rate.

❌ Assuming Retirement Tax Rate is Always Lower

Many retirees have significant income from Social Security, pensions, required distributions, and other sources. Your retirement tax rate might not be as low as you expect.

❌ Overlooking RMD Impact

Required Minimum Distributions from Traditional accounts can push you into higher tax brackets and affect Social Security taxation and Medicare premiums. Factor this into your projections.

❌ All-or-Nothing Thinking

You don't have to choose just one. Many financial advisors recommend having both Traditional and Roth accounts for tax diversification. This gives you flexibility to manage your taxable income in retirement.

❌ Forgetting About Employer Match

If your employer offers a 401(k) match, that match goes into a Traditional account regardless of your choice. This automatic Traditional balance is another reason to consider Roth for your own contributions—for diversification.

Consider these strategies to optimize your retirement tax planning:

Tax Bracket Filling

Contribute enough to Traditional accounts to reduce your income to the top of a lower tax bracket, then contribute additional amounts to Roth. This optimizes the tax deduction while building tax-free Roth wealth.

Roth Conversion Ladder

After retirement (or in low-income years), convert Traditional balances to Roth by paying taxes at your lower rate. This is especially powerful in early retirement before Social Security begins or RMDs start.

Mega Backdoor Roth

Some 401(k) plans allow after-tax contributions beyond the regular limit, which can be converted to Roth. This can add over $40,000 per year in additional Roth savings for high earners.

Tax-Gain Harvesting in Retirement

Strategically withdraw from Traditional, Roth, and taxable accounts to manage your annual tax bracket. Use Roth withdrawals in high-income years and Traditional in low-income years.

Tax Diversification

Building wealth in Traditional, Roth, and taxable accounts gives you maximum flexibility in retirement. Each has different tax characteristics: Traditional is taxed as income, Roth is tax-free, and taxable accounts have favorable capital gains rates.

Understanding contribution limits helps you maximize your retirement savings:

401(k) Limits (2024/2025)

IRA Limits (2024/2025)

Roth IRA Income Limits (2024/2025)

Unlike 401(k)s, Roth IRA contributions have income limits:

• Single filers: Phase-out begins at $146,000 MAGI (2024) / $150,000 (2025)
• Married filing jointly: Phase-out begins at $230,000 MAGI (2024) / $236,000 (2025)

If your income exceeds these limits, consider the "Backdoor Roth IRA" strategy: contribute to a Traditional IRA (non-deductible) and immediately convert to Roth.