Roth IRA vs. 401k Calculator

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How To Use The Roth IRA vs. 401k Calculator

Simply fill out the fields in the Roth IRA vs. 401k calculator featured above, using a value for each of the following items:

• Annual Contribution
• Expected Rate of Return
• Inflation Rate
• Current Age
• Current Tax Rate
• Retirement Age, and
• Expected Tax Rate in Retirement

Not sure what these terms mean? Not sure what numbers to put in?

Use the section below as a guide for your Roth IRA vs. 401k calculations.

Then, as you fill in each field with numbers customized to your situation, the calculator will automatically update to reveal two projected inflation-adjusted values for your retirement savings - one if you invested your contributions in your Roth IRA and the other if you invested them in your 401k.

Roth IRA vs. 401k Calculator Terms

Below is an explanation of each calculator term:

Annual Contribution
This is the amount you plan to contribute to either your Roth IRA or 401k on an annual basis.

For example, let's say you plan to contribute $150 per month. If so, then put $1,800 in the "Annual Contribution" field.

The default for this field is set to $5,000 because that's the maximum contribution you can make to an IRA if you're under age 50.

However, the maximum contribution is $6,000 for people age 50 and older. So if you're 50 or older and plan to make the maximum contribution, put $6,000 in the "Annual Contribution" field.

If you're married, and both you and your spouse intend to make the maximum contribution, then input the appropriate amount in this field.

For example, if both you and your spouse are over age 50 and eligible to contribute the maximum amount, then put $12,000 in the "Annual Contribution" field.

Expected Rate of Return
This is the annual compound rate of return you anticipate receiving on your retirement savings. This will vary from person to person based investing strategy, fees, types of investments, and other factors.

However, since most people invest their retirement savings in stocks, the default is set to 10.85% - the annual compound rate of return on the S&P 500 from 1959 to 2003.

If you expect a higher or lower rate of return, adjust accordingly.

Inflation Rate
This is the annual rate of inflation you project for the timeframe in which your retirement savings is invested.

It's important that you don't underestimate the rate of inflation since it will eat away at the purchasing power of your savings over time.

The default rate is set at 4.1% - the approximate annual rate of inflation over the past seven decades.

However, if you're more conservative, you might want to use a higher rate of inflation.

Current Age
This is fairly self-explanatory. Just check your birth certificate if you're not sure!

Seriously, though, you might want to consider an older age for this field if you're not yet investing for retirement but plan to do so in the future.

Current Tax Rate
This is the income tax rate which currently applies to your income.

For instance, if you earn $60,000 per year, and you're currently in the 25% federal income tax bracket, put 25% in the "Current Tax Rate" field.

Retirement Age
This is the age at which you'd like to retire, and while you'd probably like to make this the same as your current age, that may not be realistic... (although I hope I'm wrong!)

Make sure you put a realistic age in the "Retirement Age" field in order to get the most accurate calculation of your inflation-adjusted retirement savings.

Expected Tax Rate in Retirement
This is the tax rate you anticipate in your retirement years.

While tax rates are subject to change over time, a good ballpark estimate will serve you well.

For example, if you're currently in the 25% tax bracket but you anticipate earning less in your retirement years, then you might put 15% in the "Expected Tax Rate in Retirement" field.

However, if you're currently in the 25% tax bracket but you expect to earn more in retirement or you think tax rates will climb over time, then you might put 30% or 35% in the "Expected Tax Rate in Retirement" field.

Roth IRA Retirement Balance
This is the projected inflation-adjusted value of your Roth IRA when you retire.

The Roth IRA vs. 401k calculator automatically updates this value when you fill in the aforementioned fields.

This value represents your tax-free savings in terms of today's dollars - meaning a million dollar nest egg will retain the equivalent purchasing power of a million dollars today.

401k Retirement Balance
This is the projected inflation-adjusted value of your 401k when you retire.

The Roth IRA vs. 401k calculator automatically updates this value when you fill in the aforementioned fields.

This value represents your tax-free savings in terms of today's dollars - meaning a million dollar nest egg will retain the equivalent purchasing power of a million dollars today.

This figure indicates the after-tax value (at your expected tax rate in retirement) of your 401k. This is an important distinction since you're comparing this balance to an otherwise tax-free Roth IRA balance.

Calculating a Roth IRA vs. 401k

When comparing a Roth IRA vs. 401k, many factors come into play, and the ultimate size of your retirement savings is just one of them.

This Roth IRA vs. 401k calculator provides you with a ballpark estimate of your inflation-adjusted retirement savings under two different scenarios - one where you prioritize your contributions to invest in your Roth IRA and one where you prioritize to invest in your 401k.

But it's important to remember this is only an estimate.

After all, estimates are only as good as their underlying assumptions.

So do lot's of research.

When it comes to weighing the benefits of a Roth IRA vs. 401k, your Current Tax Rate and your Expected Tax Rate In Retirement are two of the most important factors.

Generally speaking, if you expect to be in a higher tax bracket in retirement, you'll save more with a Roth IRA, while if you expect to be in a lower tax bracket in retirement, you'll save more with a 401k.

But remember that you need to consider other factors as well, such as forced distributions.

With a 401k, you're forced to start taking distributions at age 70 ½. But with a Roth IRA, you're never forced to make a distribution.

Investigate the pros and cons of each before making your decision.

In the meantime, the Roth IRA vs. 401k calculator above will hopefully provide you with another valuable means of comparison.

***SPECIAL NOTE***

As you plug in your numbers, keep the following points in mind...

1) 401k Company Match - Our Roth IRA vs. 401k calculator does not account for a company 401k match. As a general rule, you should contribute to your 401k first (up to the company match) before focusing on your Roth IRA.

Why?

Because a company match is a 100% return on your contribution right off the bat!

Your Roth IRA can't offer that, so make sure you contribute up to the match if your company offers a 401k match.

After that, use our Roth IRA vs. 401k calculator to determine where your contributions should be directed next.

2) You Can Contribute To Both - Unlike with your Roth IRA and Traditional IRA, you can make the maximum annual contribution to both your Roth IRA and your 401k.

It's not an either or proposition.

So if you're able to make the maximum contribution to both, by all means do so.

However, if you plan on contributing less than the annual maximum, our calculator is useful in prioritizing where you should direct your contributions.

3) Taxes - Our Roth IRA vs. 401k calculator assumes you're unable to make the maximum annual contribution to both your Roth IRA and your 401k.

Otherwise, you would do so, and you wouldn't need a calculator to determine which one should take priority.

That said, keep in mind that your 401k is tax deductible while your Roth IRA is not. Likewise, your 401k is taxable when you make withdrawals in retirement while your Roth IRA is not.

This discrepancy will impact your numbers.

For instance, let's say you have $1,000 to contribute, and you're in the 25% tax bracket.

If you contribute to your 401k, the entire $1,000 goes into your account where it grows tax-free until retirement. Then, any funds you withdraw are taxed at the appropriate rate.

However, if you contribute the $1,000 to your Roth IRA, then only $750 ($1,000 taxed at a 25% rate) goes into your account where it grows tax-free until retirement. Unlike your 401k, though, Roth IRA withdrawals are tax-free.

But what if you put $1,000 after-tax in your Roth IRA?

Since Roth IRA withdrawals in retirement are tax-free, it would be worth more in retirement than $1,000 in your taxable 401k account.

Additional Roth IRA Calculators

Roth IRA Conversion Calculator - Use this calculator to compare the projected after-tax value of your Traditional IRA or 401k to the projected tax-free value of the same funds in your Roth IRA. Comparing the two will help you determine if a Roth IRA conversion is right for you.

Roth IRA vs. Traditional IRA Calculator - Use this calculator to determine which retirement account is best for you - a Roth IRA or a Traditional IRA. Discover why your current tax rate and expected future tax rate play a pivotal role in your decision.

Roth IRA Savings Calculator - Use this calculator to estimate the inflation-adjusted value of your Roth IRA at retirement age. Experiment with different starting balances, annual contributions, rates of return, inflation rates, and retirement ages to help set the parameters of your retirement plan.

Roth IRA Contribution Calculator - Use this calculator to determine the dollar amount of the annual contribution you need to make in order to meet your desired Roth IRA retirement balance.

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