About the Tax-Deferred vs Taxable Account Calculator
This tax-deferred vs taxable account calculator compares what the same savings effort is worth after tax in three places: a tax-deferred account (traditional 401(k) or IRA), a tax-free Roth account, and an ordinary taxable brokerage account. It answers the practical question of where your next dollar of savings should go, and how much tax-free or tax-deferred growth is really worth over your time horizon.
To keep the comparison fair, every account starts from the same pre-tax earnings. A traditional account gets the whole amount because the contribution is deductible; the Roth and taxable accounts get what is left after paying tax at your current marginal rate. The traditional balance is taxed at your retirement rate when withdrawn, the Roth comes out tax-free, and the taxable account pays tax on dividends every year and capital gains tax on the remaining growth when sold.
The results are a model, not a forecast: returns are constant, contributions are made at the start of each year, and the taxable account’s turnover is limited to its dividend yield. It ignores contribution limits, employer matches (which favour the 401(k)), required minimum distributions, state tax and the step-up in basis that can erase capital gains for heirs.
How to use the tax-deferred vs taxable account calculator
- 1Enter the pre-tax amount you plan to save up front and each year.
- 2Set your time horizon and expected average return.
- 3Enter your marginal tax rate now and your expected rate in retirement.
- 4Enter the taxable account’s dividend yield and your dividend and capital gains rates.
- 5Compare the after-tax values and use the chart to see how the gap grows over time.
Formula and method
All three accounts receive the same pre-tax earnings C each year (and the same starting amount). The traditional account invests all of it, grows at the full return r, and its final balance is reduced by your retirement tax rate. The Roth invests C after current tax and grows tax-free, so its value is never taxed again. Mathematically, traditional and Roth give identical results whenever the two tax rates are equal.
The taxable account also invests C after current tax. Each year the dividend portion of the return (yield y) is taxed at your dividend rate, so the account compounds at r − y × t_div. Reinvested after-tax dividends add to cost basis. At the end, capital gains tax is charged on the value above basis. Contributions are made at the start of each year and returns are constant; the chart shows the after-tax value if each account were cashed out at the end of that year.
- C
- Pre-tax earnings saved each year
- r
- Expected total annual return
- t_now / t_ret
- Marginal tax rate now / on retirement withdrawals
- y, t_div, t_cg
- Dividend yield, dividend tax rate and capital gains tax rate
Worked examples
$6,000 a year for 30 years at 7%
The traditional account grows to $682,561 and is worth $532,397 after 22% tax. The Roth gets 76% of each contribution and grows to $518,746 tax-free. The taxable account loses $15,417 to dividend tax along the way and $38,542 to capital gains tax at the end, leaving $450,163. Because the 24% rate today exceeds the 22% rate later, the traditional account edges out the Roth.
High earner: $10,000 a year for 25 years at 6%, 32% now and 24% later
Deducting contributions at 32% and withdrawing at 24% makes the traditional account worth about $441,989 after tax — $46,525 more than a Roth and about $84,464 more than a low-yield taxable account.
Same tax rate now and later: a $50,000 lump sum for 20 years
At equal 22% rates the traditional and Roth accounts both end at $181,777 after tax — the order of multiplying by growth and by (1 − tax) does not matter. The taxable account trails at $156,402 because of annual dividend tax and capital gains tax at sale.
Young saver in the 12% bracket with 0% investment tax rates
Paying 12% tax now and avoiding 22% later makes the Roth worth $650,819 versus $576,862 for the traditional account. With 0% dividend and capital gains rates the taxable account matches the Roth exactly — but only as long as income stays within the 0% capital gains bracket.
Frequently asked questions
Is a tax-deferred account always better than a taxable account?+
Usually, but not always. Deferral wins when your withdrawal tax rate is not much higher than today’s rate, because growth compounds without annual tax. A taxable account can win if you would withdraw at a much higher ordinary rate while paying only 0% or 15% on qualified dividends and long-term gains, or if you need the money before retirement.
When is a Roth better than a traditional account?+
A Roth is better when your tax rate in retirement will be higher than your rate today — common early in a career. A traditional account is better when today’s rate is higher. When the rates are equal the after-tax results are identical, which this calculator shows.
What is tax drag?+
Tax drag is the return you lose each year to taxes on dividends, interest and realized gains in a taxable account. A 2% dividend yield taxed at 15% costs 0.3 percentage points of return a year, which compounds into a meaningful gap over decades.
Why does the calculator start from pre-tax earnings?+
Because that is the real choice: $1,000 of salary becomes $1,000 in a 401(k) but only $760 in a Roth or brokerage account if you are in the 24% bracket. Comparing equal deposits instead would overstate the Roth and taxable options.
Does this include employer matching or contribution limits?+
No. An employer 401(k) match is free money that strongly favours the workplace plan, and annual contribution limits cap how much you can put in tax-advantaged accounts. Capture the full match first, then use this comparison for additional savings.
What about early withdrawal penalties and RMDs?+
Withdrawals from traditional accounts before 59½ usually add a 10% penalty, and required minimum distributions start at 73 or 75. Roth IRA contributions can come out any time. Taxable accounts have no restrictions, which is part of their value for goals before retirement.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.