How this calculator works (and what “break-even” means)
This calculator compares two ways to make 401(k) contributions:
traditional (pre-tax) contributions that reduce today’s taxable income, and
Roth contributions that are taxed today but can be withdrawn tax-free later.
The output is an estimate of after-tax retirement wealth under each strategy.
The key feature is that it also models what you do with the tax savings created by traditional contributions.
If you invest some (or all) of those savings in a taxable brokerage account, that side account can compound for years and
materially change the comparison.
All contributions are treated as end-of-year deposits for simplicity. Returns are assumed constant and compounded annually.
Tax rates are entered as marginal rates (your tax on the next dollar), not average rates.
- Annual employee contribution (USD): the amount you contribute each year. (This is the amount that is either Roth or traditional.)
- Employer contribution each year (USD): match/profit sharing. This is modeled as traditional money in both strategies.
- Current marginal tax rate (%): used to estimate the annual tax savings from traditional contributions.
- Expected retirement marginal tax rate (%): applied to traditional balances at retirement to estimate after-tax value.
- Years until retirement: how long contributions and investments compound.
- Expected annual investment return (%): return for 401(k) investments (both Roth and traditional accounts).
- Percent of tax savings you invest (%): how much of the traditional tax savings you actually invest in a taxable account.
- Expected annual return on the taxable account (%): growth rate for the reinvested tax savings.
- Capital gains tax rate at retirement (%): applied to the gains portion of the taxable account when liquidated at retirement.
The calculator uses the future value of an annuity factor for end-of-year contributions. For an annual contribution A,
annual return r, and n years:
Traditional strategy after-tax value at retirement is modeled as:
(traditional 401(k) balance \u00d7 (1 \u2212 future tax rate)) + after-tax taxable side account.
Roth strategy after-tax value is modeled as:
(Roth employee balance) + (employer traditional balance \u00d7 (1 \u2212 future tax rate)).
The calculator also reports a break-even future tax rate based on the model’s algebra:
it estimates the future marginal tax rate where the extra after-tax value from reinvested tax savings would exactly offset
the Roth advantage on employee contributions.
Worked example (using the default inputs)
Suppose you contribute $19,500 per year, receive $5,000 per year from your employer, have a current marginal tax rate of
24%, expect a retirement marginal tax rate of 22%, and retire in 25 years. Assume the 401(k) earns 6% annually.
You invest 75% of the tax savings into a taxable account earning 5%, and pay 15% capital gains tax on taxable growth at retirement.
With those assumptions, the calculator will estimate two after-tax retirement values (traditional vs. Roth) and show which is larger.
It will also generate a small scenario table that varies the future tax rate (lower / baseline / higher) so you can see how sensitive the decision is.
How to interpret the results
- Traditional after-tax balance includes the taxable side account (if you reinvest tax savings).
- Roth after-tax balance still includes taxes on the employer match because employer dollars are modeled as traditional.
- Break-even future tax rate is a planning threshold: if your actual retirement marginal rate is above it, Roth tends to look better in this model; below it, traditional tends to look better.
Use the scenario table to stress-test your assumptions. If a small change in future tax rate flips the winner, the decision is sensitive and
you may prefer a split contribution strategy (some Roth, some traditional) to diversify tax risk.
Limitations and assumptions (important)
This is a simplified model designed for comparison, not a full retirement plan. Key limitations:
- Contribution timing: assumes end-of-year deposits; real payroll contributions occur throughout the year.
- Tax complexity: uses marginal rates and does not model progressive brackets, deductions, credits, Social Security taxation, IRMAA/Medicare surcharges, or state taxes.
- Taxable account drag: models capital gains tax only at retirement; it does not model annual dividend taxes or interim realized gains.
- Plan rules: does not model contribution limits, catch-up contributions, vesting schedules, or match formulas tied to pay periods.
- Returns: assumes constant returns; real markets are volatile and sequence-of-returns risk can matter.
Treat the output as a decision aid. If you are making high-stakes choices, validate assumptions with your plan documents and a qualified tax or financial professional.
Scenario comparison table
Roth and traditional outcomes under different future tax rates
| Scenario |
Future tax rate |
Traditional after-tax value |
Roth after-tax value |
Traditional advantage |
| Run the calculator to populate scenarios. |
Planning notes: what this comparison captures (and what it doesn’t)
The Roth vs. traditional decision is often summarized as “pay tax now or pay tax later,” but the real comparison depends on
(1) your current marginal tax rate, (2) your retirement marginal tax rate, and (3) whether you actually invest the tax savings
created by traditional contributions.
This calculator intentionally keeps the model focused so you can run scenarios quickly. It treats employer contributions consistently
(as traditional dollars in both strategies) and gives you a scenario table around your assumed retirement tax rate. That table is useful
because the decision is frequently sensitive to tax-rate uncertainty.
If you want to extend the analysis, common next steps include: adding state income tax assumptions, modeling different returns for Roth vs.
traditional investments (if fees differ), and considering required minimum distributions (RMDs). Those additions can change the effective tax
rate you face in retirement, which is why the break-even rate is best viewed as a planning threshold rather than a precise forecast.
