Roth 401(k) vs. Traditional 401(k) Calculator

Deciding between a Roth 401(k) and a Traditional 401(k) is a crucial financial planning decision that can significantly impact your retirement savings. Both offer tax advantages, but the timing of those advantages differs. This calculator helps you compare the potential after-tax value of your contributions under various scenarios, allowing you to make an informed choice based on your current and projected future tax rates.

Understanding the Difference: Traditional vs. Roth 401(k)

Traditional 401(k)

A Traditional 401(k) 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, leading to immediate tax savings. 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 (contributions and earnings) are taxed as ordinary income at your then-current marginal tax rate.

Tax Benefit: Upfront tax deduction.
Growth: Tax-deferred.
Withdrawals: Taxable in retirement.
Best for: Those who expect to be in a lower tax bracket in retirement than they are currently.

Roth 401(k)

A Roth 401(k) works differently. Your contributions are made with after-tax dollars, meaning you don't get an immediate tax deduction. However, your investments grow tax-free, and qualified withdrawals in retirement are completely tax-free. This includes both your contributions and all the earnings. 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, disabled, or using the funds for a first-time home purchase.

Tax Benefit: Tax-free withdrawals in retirement.
Growth: Tax-free.
Withdrawals: Tax-free in retirement (if qualified).
Best for: Those who expect to be in a higher tax bracket in retirement than they are currently, or who want to ensure a stream of tax-free income in retirement.

Key Factors to Consider

Current vs. Future Tax Rates: This is the most significant factor. If you believe your tax rate will be higher in retirement, a Roth 401(k) is generally more advantageous. If you expect your tax rate to be lower, a Traditional 401(k) might be better.
Employer Match: Employer contributions to a 401(k) are always made on a pre-tax basis, even if you contribute to a Roth 401(k. These matched funds and their earnings will be taxable upon withdrawal in retirement, regardless of your contribution type.
Income Limits: Unlike Roth IRAs, there are no income limits for contributing to a Roth 401(k), making it an attractive option for high-income earners.
Diversifying Tax Streams: Some individuals choose to contribute to both Traditional and Roth accounts (if available) to create a mix of taxable and tax-free income streams in retirement, providing flexibility in managing their tax burden later on.

How This Calculator Works

This calculator helps you compare the two options by projecting the after-tax value of a consistent annual pre-tax income allocation over your working years. It assumes you are allocating a specific amount of your gross income to your 401(k) each year and then calculates the net after-tax withdrawal you would receive in retirement under both Traditional and Roth scenarios, taking into account your current and expected future marginal tax rates.

Annual Pre-Tax Income Allocated to 401(k) ($):

Your Current Marginal Federal Tax Rate (%):

Your Current Marginal State Tax Rate (%):

Years Until Retirement:

Expected Annual Investment Growth Rate (%):

Expected Marginal Federal Tax Rate in Retirement (%):

Expected Marginal State Tax Rate in Retirement (%):

Example Scenario

Let's consider an individual who allocates $10,000 of their pre-tax income to their 401(k) annually for 30 years, with an average annual growth rate of 7%.

Current Tax Rates: Federal 22%, State 5% (Total 27%)
Expected Retirement Tax Rates: Federal 15%, State 3% (Total 18%)

Traditional 401(k):

Immediate Annual Tax Savings: $10,000 * 27% = $2,700
Estimated Future Value (Pre-Tax) at Retirement: Approximately $944,607
Estimated Net After-Tax Withdrawal at Retirement: $944,607 * (1 – 18%) = $774,578

Roth 401(k):

Tax Paid Now (Annual): $10,000 * 27% = $2,700
Actual After-Tax Amount Invested Annually: $10,000 – $2,700 = $7,300
Estimated Future Value (Tax-Free) at Retirement: Approximately $7,300 * (1 + 0.07)^30 = $689,563
Estimated Net After-Tax Withdrawal at Retirement: $689,563 (tax-free)

In this example, where the retirement tax rate is lower than the current tax rate, the Traditional 401(k) yields a higher after-tax withdrawal. This highlights the importance of your tax rate assumptions.

Conclusion

The choice between a Roth 401(k) and a Traditional 401(k) is highly personal and depends on your individual financial situation and expectations for future tax rates. While a Traditional 401(k) offers immediate tax relief, a Roth 401(k) provides the invaluable benefit of tax-free withdrawals in retirement. Use this calculator as a tool to explore different scenarios and consult with a financial advisor to determine the best strategy for your retirement goals.

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Comparison Results:

'; resultHTML += 'Assuming you allocate $' + annualPreTaxAllocation.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ' of your pre-tax income annually for retirement savings:'; resultHTML += '

Traditional 401(k) Scenario:

'; resultHTML += 'Immediate Annual Tax Savings: $' + tradImmediateTaxSavings.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ''; resultHTML += 'Estimated Future Value (Pre-Tax) at Retirement: $' + tradFutureValuePreTax.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ''; resultHTML += 'Estimated Net After-Tax Withdrawal at Retirement: $' + tradNetAfterTaxWithdrawal.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ''; resultHTML += '

Roth 401(k) Scenario:

'; resultHTML += 'Tax Paid Now (Annual): $' + rothTaxPaidNow.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ''; resultHTML += 'Actual After-Tax Amount Invested Annually: $' + rothAmountInvestedAfterTax.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ''; resultHTML += 'Estimated Future Value (Tax-Free) at Retirement: $' + rothFutureValueTaxFree.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ''; resultHTML += 'Estimated Net After-Tax Withdrawal at Retirement: $' + rothNetAfterTaxWithdrawal.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ''; resultHTML += '

Summary:

'; if (tradNetAfterTaxWithdrawal > rothNetAfterTaxWithdrawal) { resultHTML += 'Based on these assumptions, the Traditional 401(k) is projected to yield approximately $' + (tradNetAfterTaxWithdrawal – rothNetAfterTaxWithdrawal).toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ' more in after-tax withdrawals at retirement compared to the Roth 401(k).'; resultHTML += 'This suggests your expected total retirement tax rate (' + (totalRetirementTaxRate * 100).toFixed(1) + '%) is lower than your current total tax rate (' + (totalCurrentTaxRate * 100).toFixed(1) + '%).'; } else if (rothNetAfterTaxWithdrawal > tradNetAfterTaxWithdrawal) { resultHTML += 'Based on these assumptions, the Roth 401(k) is projected to yield approximately $' + (rothNetAfterTaxWithdrawal – tradNetAfterTaxWithdrawal).toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ' more in after-tax withdrawals at retirement compared to the Traditional 401(k).'; resultHTML += 'This suggests your expected total retirement tax rate (' + (totalRetirementTaxRate * 100).toFixed(1) + '%) is higher than your current total tax rate (' + (totalCurrentTaxRate * 100).toFixed(1) + '%).'; } else { resultHTML += 'Based on these assumptions, both options are projected to yield a similar amount in after-tax withdrawals at retirement.'; resultHTML += 'This suggests your expected total retirement tax rate (' + (totalRetirementTaxRate * 100).toFixed(1) + '%) is similar to your current total tax rate (' + (totalCurrentTaxRate * 100).toFixed(1) + '%).'; } document.getElementById('result').innerHTML = resultHTML; }

Roth 401k vs 401k Calculator