401(k) vs Roth IRA Calculator

1. The Basics of Retirement Accounts

Planning for retirement is one of the most critical financial journeys you will undertake. In the United States, two of the most popular vehicles for building wealth are the Traditional 401(k) and the Roth IRA. While both are designed to help you save for the future, they differ significantly in how they are taxed, how they are funded, and who can contribute to them.

A 401(k) is an employer-sponsored plan that allows you to contribute a portion of your pre-tax salary. A Roth IRA, on the other hand, is an individual retirement account that you open yourself, funded with after-tax dollars. Understanding the nuances between these two can save you tens of thousands of dollars in taxes over your lifetime.

2. Traditional 401(k): The Power of Pre-Tax Investing

The primary advantage of a Traditional 401(k) is the immediate tax break. Because contributions are taken out of your paycheck before taxes are calculated, they lower your taxable income for the year. For example, if you earn $60,000 and contribute $10,000 to your 401(k), you only pay income tax on $50,000.

Employer Matching: Perhaps the greatest benefit of a 401(k) is the employer match. Many companies will match your contributions up to a certain percentage (e.g., 50% of your contributions up to 6% of your salary). This is essentially "free money" and provides an immediate 50% or 100% return on your investment before the market even moves.

Taxation at Withdrawal: The trade-off is that you must pay ordinary income tax on all withdrawals during retirement. If you expect to be in a lower tax bracket when you retire, this strategy is highly effective.

3. Roth IRA: Tax-Free Growth and Withdrawals

A Roth IRA flips the tax script. You contribute money that has already been taxed (after-tax dollars). Because you've already paid the tax man, your money grows tax-free, and qualified withdrawals in retirement are completely tax-free.

Flexibility: Roth IRAs offer more flexibility than 401(k)s. You can withdraw your contributions (but not earnings) at any time without penalty. Additionally, Roth IRAs do not have Required Minimum Distributions (RMDs), meaning you can leave the money in the account as long as you live.

Income Limits: Unlike 401(k)s, Roth IRAs have income limits. If you earn too much, you may be ineligible to contribute directly to a Roth IRA, though "Backdoor Roth" strategies exist for high earners.

4. Which One Should You Choose?

The "best" account depends largely on your current tax bracket versus your expected tax bracket in retirement. Here are some general rules of thumb:

• Choose 401(k) if: You are currently in a high tax bracket and expect to be in a lower one during retirement. Also, always contribute enough to get the full employer match.
• Choose Roth IRA if: You are currently in a low tax bracket (e.g., early in your career) and expect your income and tax rates to rise in the future.
• The Hybrid Strategy: Many financial advisors recommend a "tax-diversified" approach—contributing to a 401(k) up to the employer match, then maxing out a Roth IRA, and then returning to the 401(k) if you have more to save.

5. The Impact of Time and Compounding

Regardless of which account you choose, the most important factor is time. Compound interest is often called the eighth wonder of the world. By starting just 10 years earlier, you can potentially double your retirement nest egg with the same monthly contribution.

Our calculator demonstrates this by projecting your balance over decades. Even a small increase in your contribution percentage or a slightly higher annual return can lead to massive differences in your final balance due to the exponential nature of growth.