401k vs. Roth IRA Comparison Calculator
Use this calculator to estimate which retirement account, a Traditional 401k or a Roth IRA, might provide you with more after-tax wealth in retirement, based on your current and expected future tax rates, and employer match.
Comparison Results:
Estimated Net Value of Traditional 401k in Retirement:
Estimated Net Value of Roth IRA in Retirement:
Difference (Roth IRA vs. Traditional 401k):
Estimated Current Annual Tax Savings with 401k:
Estimated Current Annual Tax Impact with Roth IRA:
Understanding 401k vs. Roth IRA
Deciding between a Traditional 401k and a Roth IRA is a cornerstone of effective retirement planning. Both are powerful tools for building wealth, but they differ significantly in their tax treatment, which can have a substantial impact on your net retirement income.
Traditional 401k
A Traditional 401k is an employer-sponsored retirement plan that allows you to contribute pre-tax dollars from your paycheck. This means your contributions reduce your taxable income in the year you make them, leading to immediate tax savings. Your investments grow tax-deferred, meaning you don't pay taxes on capital gains or dividends until you withdraw the money in retirement. At that point, all withdrawals are taxed as ordinary income at your marginal tax rate during retirement.
A significant advantage of a Traditional 401k is the potential for an employer match. Many employers will contribute a certain percentage of your contributions, or a percentage of your salary, up to a cap. This "free money" can significantly boost your retirement savings.
Roth IRA
A Roth IRA is an individual retirement account where you contribute after-tax dollars. This means your contributions do not reduce your current taxable income, so there are no immediate tax savings. However, the major benefit of a Roth IRA is that your investments grow tax-free, and qualified withdrawals in retirement are completely tax-free. This can be incredibly valuable if you expect to be in a higher tax bracket during retirement than you are today.
Roth IRAs have income limitations for direct contributions, meaning high-income earners may not be eligible to contribute directly. Unlike 401ks, Roth IRAs typically do not come with an employer match. If your employer offers a Roth 401k, any employer match will usually be made into a traditional (pre-tax) 401k sub-account.
Key Decision Factor: Your Tax Rate
The primary factor in choosing between a Traditional 401k and a Roth IRA is your expectation of future tax rates compared to your current tax rate:
- If you expect your tax rate to be lower in retirement: A Traditional 401k might be more advantageous. You get a tax deduction now (when your rate is higher) and pay taxes later (when your rate is lower).
- If you expect your tax rate to be higher in retirement: A Roth IRA might be more advantageous. You pay taxes now (when your rate is lower) and enjoy tax-free withdrawals later (when your rate would otherwise be higher).
Other considerations include the availability of an employer match (always take advantage of a 401k match!), your income level (for Roth IRA eligibility), and your desire for tax diversification in retirement.
How This Calculator Works
This calculator estimates the future value of your annual savings in both a Traditional 401k and a Roth IRA, taking into account your current and future tax rates, and any employer match for the 401k. It assumes consistent annual contributions and a steady growth rate. The "Net Value" represents the estimated amount you would have available to spend after all taxes are paid in retirement.
Disclaimer: This calculator provides estimates for illustrative purposes only. It does not account for inflation, changes in tax laws, contribution limits, early withdrawal penalties, or other individual financial circumstances. Consult with a qualified financial advisor for personalized advice.