Roth vs Traditional 401k Calculator Fidelity

Roth vs. Traditional 401(k) Calculator

Use this calculator to estimate the potential value of your Roth 401(k) versus a Traditional 401(k) at retirement, based on your current and expected future tax rates. This comparison assumes the "Annual Contribution Amount" is the pre-tax equivalent you would contribute to a Traditional 401(k).

Roth 401(k)

Traditional 401(k)

Estimated Retirement Values:

Traditional 401(k) Value (After-Tax):

Roth 401(k) Value (Tax-Free):

Note: This calculation assumes the 'Annual Contribution Amount' is the pre-tax equivalent. For Roth, this means the actual after-tax contribution is lower, reflecting the taxes paid upfront. It does not account for state taxes, investment fees, or changes in tax laws.

Understanding Roth vs. Traditional 401(k) for Your Retirement Planning

Deciding between a Roth 401(k) and a Traditional 401(k) is one of the most significant financial decisions you'll make for your retirement, often through providers like Fidelity. Both offer powerful tax advantages, but they differ fundamentally in when those taxes are applied. Understanding these differences, especially in the context of your current and future tax situation, is key to maximizing your retirement savings.

What is a Traditional 401(k)?

A Traditional 401(k) allows you to contribute pre-tax dollars from your paycheck. This means your contributions reduce your taxable income in the year you make them, 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 marginal tax rate.

Key Features:

• Upfront Tax Deduction: Lowers your current taxable income.
• Tax-Deferred Growth: Investments grow without annual taxation.
• Taxable Withdrawals in Retirement: All distributions are taxed as ordinary income.

What is a Roth 401(k)?

A Roth 401(k), in contrast, is funded with after-tax dollars. You don't get an upfront tax deduction for your contributions, meaning your current taxable income isn't reduced. However, the significant advantage comes in retirement: all qualified withdrawals, including both your contributions and earnings, are completely tax-free. This can be incredibly powerful if you expect to be in a higher tax bracket during retirement than you are today.

Key Features:

• No Upfront Tax Deduction: Contributions are made with after-tax money.
• Tax-Free Growth: Investments grow without annual taxation.
• Tax-Free Withdrawals in Retirement: Qualified distributions are entirely tax-free.

Which One is Right for You?

The choice between a Roth and Traditional 401(k) largely hinges on your expectations for your tax bracket now versus in retirement. Our calculator helps illustrate this by comparing the estimated after-tax value of each option.

• Choose Traditional if: You expect your tax bracket to be lower in retirement than it is today. The upfront tax deduction is more valuable now, and you'll pay taxes at a lower rate later.
• Choose Roth if: You expect your tax bracket to be higher in retirement than it is today. Paying taxes now at a lower rate means your future withdrawals will be entirely tax-free, which can be a huge advantage.
• Consider a Mix: Some individuals choose to contribute to both a Traditional and Roth 401(k) (if offered by their plan) to hedge against uncertainty about future tax rates.

Factors to Consider Beyond Tax Rates:

• Income Level: High-income earners might find the upfront deduction of a Traditional 401(k) more appealing. However, Roth 401(k)s don't have the income limitations that Roth IRAs do.
• Years Until Retirement: The longer your money has to grow, the more significant the tax-free growth of a Roth 401(k) becomes.
• Employer Match: Employer matching contributions are almost always made on a pre-tax basis, even if you contribute to a Roth 401(k). These matching funds and their earnings will be taxed upon withdrawal in retirement.
• Future Tax Laws: Predicting future tax laws is impossible, but many experts believe tax rates may rise in the future, making the tax-free nature of Roth withdrawals even more valuable.

Example Scenario:

Let's use some realistic numbers to illustrate the calculator's output:

• Current Annual Income: $80,000
• Expected Retirement Annual Income: $50,000
• Current Marginal Federal Tax Rate: 22%
• Expected Retirement Marginal Federal Tax Rate: 12%
• Annual Contribution Amount (Pre-Tax Equivalent): $10,000
• Years Until Retirement: 30
• Annual Investment Growth Rate: 7%

Using these inputs, the calculator would show:

• Traditional 401(k) Value (After-Tax): Approximately $831,254.86
• Roth 401(k) Value (Tax-Free): Approximately $736,794.08

In this scenario, the Traditional 401(k) is more advantageous because the current tax rate (22%) is higher than the expected retirement tax rate (12%). By taking the deduction now at a higher rate and paying taxes later at a lower rate, the Traditional option yields a higher net value.

Remember, this calculator provides an estimate. It's always wise to consult with a financial advisor to discuss your specific situation and make the best decision for your retirement goals.