401k vs 401k Roth Calculator

401k vs. Roth 401k Comparison Calculator

Traditional 401k:

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Roth 401k:

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Comparison:

Traditional 401k

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Roth 401k

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Understanding Your Retirement Savings: 401k vs. Roth 401k

Choosing between a traditional 401k and a Roth 401k is one of the most significant financial decisions you'll make for your retirement. Both are excellent vehicles for saving, but they differ fundamentally in how your contributions and withdrawals are taxed. This calculator helps you visualize the potential outcomes of each option based on your personal financial situation.

What is a Traditional 401k?

A traditional 401k allows you to contribute pre-tax dollars from your paycheck. This means your taxable income for the current year is reduced by the amount you contribute, 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 retirement, all withdrawals (both contributions and earnings) are taxed as ordinary income at your then-current income tax rate.

Key Features:

• Contributions are made with pre-tax dollars.
• Reduces your current taxable income.
• Investments grow tax-deferred.
• Withdrawals in retirement are taxed as ordinary income.
• Often beneficial if you expect to be in a lower tax bracket in retirement than you are now.

What is a Roth 401k?

A Roth 401k operates on an "after-tax" basis. You contribute money that has already been taxed from your paycheck. The significant advantage of a Roth 401k is that your qualified withdrawals in retirement are completely tax-free. This includes both your contributions and all the earnings your investments have generated over the years. To qualify for tax-free withdrawals, the account must be open for at least five years, and you must be at least 59½ years old (or meet other specific conditions).

Key Features:

• Contributions are made with after-tax dollars.
• Does not reduce your current taxable income.
• Investments grow tax-free.
• Qualified withdrawals in retirement are completely tax-free.
• Often beneficial if you expect to be in a higher tax bracket in retirement than you are now, or if you want tax-free income in retirement.

How to Use the Calculator

Our 401k vs. Roth 401k calculator helps you compare the potential net retirement income from each option. Here's how to use it:

1. Current Age: Your current age in years.
2. Expected Retirement Age: The age at which you plan to retire and start withdrawing funds.
3. Annual Contribution Amount: The dollar amount you plan to contribute to your 401k each year.
4. Annual Investment Growth Rate (%): Your estimated average annual return on investment. A common historical average for diversified portfolios is 7-10%.
5. Current Income Tax Rate (%): Your current marginal income tax rate. This is relevant for understanding the immediate tax savings of a traditional 401k.
6. Expected Retirement Income Tax Rate (%): Your estimated marginal income tax rate during retirement. This is crucial for determining the tax burden on traditional 401k withdrawals.

After entering your details, click "Calculate Comparison" to see a breakdown of the estimated total value at retirement and the net income you would receive from each plan, taking into account their respective tax treatments.

When to Choose Which Option?

• Choose Traditional 401k if: You believe your income tax rate will be lower in retirement than it is today. The immediate tax deduction is valuable, and you'll pay taxes when you're in a lower bracket.
• Choose Roth 401k if: You believe your income tax rate will be higher in retirement than it is today, or if you want the certainty of tax-free income in retirement. This is often a good choice for younger individuals who expect their income (and thus tax bracket) to increase over their career.
• Consider a Hybrid Approach: Some individuals choose to contribute to both a traditional and a Roth 401k, or switch between them over their career, to diversify their tax exposure in retirement.

Remember, this calculator provides estimates based on your inputs. Tax laws can change, and investment returns are not guaranteed. It's always wise to consult with a qualified financial advisor for personalized advice.