Roth or Traditional Calculator

Roth vs. Traditional Retirement Calculator

function calculateRothTraditional() { var afterTaxContribution = parseFloat(document.getElementById('afterTaxContribution').value); var currentTaxRate = parseFloat(document.getElementById('currentTaxRate').value); var retirementTaxRate = parseFloat(document.getElementById('retirementTaxRate').value); var yearsToRetirement = parseFloat(document.getElementById('yearsToRetirement').value); var growthRate = parseFloat(document.getElementById('growthRate').value); // Input validation if (isNaN(afterTaxContribution) || afterTaxContribution < 0 || isNaN(currentTaxRate) || currentTaxRate 100 || isNaN(retirementTaxRate) || retirementTaxRate 100 || isNaN(yearsToRetirement) || yearsToRetirement < 1 || isNaN(growthRate) || growthRate traditionalNetRetirementIncome) { recommendationText = 'Based on these assumptions, a Roth account appears to provide a higher net retirement value.'; } else if (traditionalNetRetirementIncome > rothNetRetirementIncome) { recommendationText = 'Based on these assumptions, a Traditional account appears to provide a higher net retirement value.'; } else { recommendationText = 'Both Roth and Traditional accounts yield a similar net retirement value under these assumptions.'; } document.getElementById('recommendation').innerText = recommendationText; }

Roth vs. Traditional Retirement Accounts: Which is Right for You?

Deciding between a Roth and a Traditional retirement account (like an IRA or 401(k)) is one of the most significant financial planning choices you'll make. Both offer powerful tax advantages, but they differ in when you receive those benefits. This calculator helps you compare the potential net retirement value of each option based on your personal tax situation now and in the future.

Understanding the Core Difference

The fundamental distinction lies in their tax treatment:

• Traditional Accounts (e.g., Traditional IRA, Traditional 401(k)): Contributions are typically made with pre-tax dollars, meaning they can reduce your taxable income in the year you contribute. Your investments grow tax-deferred, but withdrawals in retirement are taxed as ordinary income.
• Roth Accounts (e.g., Roth IRA, Roth 401(k)): Contributions are made with after-tax dollars, so there's no upfront tax deduction. However, your investments grow tax-free, and qualified withdrawals in retirement are completely tax-free.

Key Factors Influencing Your Decision

The "better" choice largely depends on your expectations for your tax bracket:

1. Current vs. Future Tax Bracket:
   • If you expect to be in a higher tax bracket in retirement than you are now, a Roth account is generally more advantageous. You pay taxes now at your lower rate, and enjoy tax-free withdrawals later when your rate would be higher.
   • If you expect to be in a lower tax bracket in retirement than you are now, a Traditional account might be better. You get a tax deduction now at your higher rate, and pay taxes later at your lower retirement rate.
2. Immediate Tax Savings: Traditional accounts offer an immediate tax deduction, which can be appealing if you want to reduce your current tax bill. This calculator also shows you the immediate tax savings you'd realize from a Traditional contribution equivalent to your Roth contribution.
3. Income Limitations: Roth IRA contributions have income limitations, while Traditional IRA deductions can also be limited based on income and workplace retirement plan participation. Roth 401(k)s do not have income limits.
4. Required Minimum Distributions (RMDs): Traditional IRAs and 401(k)s have RMDs starting at age 73 (as of 2023), forcing you to withdraw money whether you need it or not. Roth IRAs do not have RMDs for the original owner, offering greater flexibility in retirement. Roth 401(k)s do have RMDs, but can be rolled into a Roth IRA to avoid them.

How This Calculator Works

This calculator compares the net amount you would have in retirement from a Roth versus a Traditional account, assuming you invest the same after-tax dollar amount each year. Here's what each input means:

• Annual After-Tax Contribution: The amount you are able to save and invest each year after paying your current taxes. This is the baseline for comparison.
• Current Marginal Tax Rate (%): Your highest federal income tax bracket percentage. This is used to calculate the pre-tax equivalent contribution for a Traditional account and the immediate tax savings.
• Expected Retirement Marginal Tax Rate (%): Your estimated highest federal income tax bracket percentage during retirement. This is used to calculate the post-tax value of Traditional withdrawals.
• Years Until Retirement: The number of years your investments will grow.
• Annual Investment Growth Rate (%): Your estimated average annual return on investment.

The calculator then projects the future value of your contributions for both account types and applies the relevant tax rules to determine the net, spendable amount you'd have in retirement from each. It also highlights the immediate tax savings you'd get from the Traditional option.

Example Scenario:

Let's say you can afford to invest $6,000 after taxes each year. Your current marginal tax rate is 24%, and you expect it to drop to 15% in retirement. You have 30 years until retirement, and you anticipate an average annual growth rate of 7%.

• Roth Account: You invest $6,000 after-tax. This grows to approximately $456,000, all of which is tax-free in retirement.
• Traditional Account: To invest an equivalent after-tax amount, you'd need to contribute approximately $7,895 pre-tax ($6,000 / (1 – 0.24)). This contribution would also give you an immediate tax saving of $1,895 ($7,895 – $6,000). This $7,895 pre-tax amount grows to approximately $600,000. After paying 15% tax in retirement, you'd be left with approximately $510,000.

In this example, the Traditional account yields a higher net retirement value, primarily because your retirement tax rate is lower than your current tax rate.

Important Considerations

This calculator provides a simplified comparison. Real-world scenarios involve many other factors, such as state taxes, Social Security benefits, other income sources in retirement, and changes in tax laws. It's always recommended to consult with a qualified financial advisor to make the best decision for your unique situation.