401k vs Roth IRA
Tax now or tax later? Compare after-tax retirement wealth between traditional pre-tax accounts and Roth after-tax accounts based on your situation.
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Tax now or tax later? Compare after-tax retirement wealth between traditional pre-tax accounts and Roth after-tax accounts based on your situation.
Retirement accounts are among the most powerful wealth-building tools available to working Americans, yet many people contribute to them without fully understanding how tax treatment, employer matching, and compound growth interact over decades. The 401(k) & Roth IRA Calculator on Digital.Finance helps you project the future value of your retirement savings under different contribution levels and account types, giving you a clearer sense of whether your current strategy is on track to support the retirement lifestyle you want. Small differences in contribution rates and account choices made in your 30s can mean hundreds of thousands of dollars by the time you reach retirement age.
The calculator uses your current age, planned retirement age, existing account balances, annual contribution amounts, expected annual return, and account type to project a future balance. The core calculation applies compound growth to both your existing balance and ongoing contributions. If you are 35 years old with $50,000 already saved in a 401(k), contributing $10,000 per year and earning an average 7% annual return, your balance at age 65 would grow to approximately $1,227,000. The formula underlying this projection is FV = PV(1+r)^n + PMT × [((1+r)^n - 1) / r], where FV is the future value, PV is the present value, r is the periodic growth rate, n is the number of periods, and PMT is the regular contribution amount.
The most important distinction between a traditional 401(k) and a Roth IRA is when your money is taxed. Traditional 401(k) contributions are made pre-tax, reducing your taxable income in the year you contribute. You pay ordinary income tax on withdrawals in retirement. If you contribute $15,000 in a year when you are in the 22% tax bracket, you effectively reduce your tax bill by $3,300 that year. Roth IRA contributions, by contrast, are made with after-tax dollars — there is no upfront tax break, but qualified withdrawals in retirement are completely tax-free, including all the growth. The Roth tends to be advantageous for younger workers who expect to be in a higher tax bracket in retirement, while the traditional account often benefits those who expect their tax rate to fall after they stop working.
For 2025, the IRS allows employees to contribute up to $23,500 to a 401(k), with an additional $7,500 catch-up contribution available to those aged 50 and older. Roth IRA contribution limits are $7,000 per year, or $8,000 for those 50 and older, though eligibility phases out for single filers with modified adjusted gross income above $150,000 and for married filers above $236,000. Employer matching is one of the most valuable benefits attached to a 401(k). If your employer matches 50% of contributions up to 6% of your salary, and you earn $80,000, contributing at least $4,800 per year earns you an additional $2,400 from your employer — an immediate 50% return on that portion of your savings. Failing to contribute enough to capture the full employer match is widely considered one of the most costly financial mistakes a worker can make.
The projected return rate you choose significantly influences your projected balance. The stock market has historically returned around 10% annually before inflation, or roughly 7% adjusted for inflation. A more conservative portfolio blended with bonds might average 5% to 6%. It is worth running projections at multiple return assumptions — 5%, 7%, and 9% — to understand the range of possible outcomes. Asset allocation should also shift over time, typically moving from a higher equity concentration in early career years to a more conservative bond-heavy mix as retirement approaches. Target-date funds, available in most 401(k) plans, automate this shift based on your expected retirement year.
Traditional 401(k) and IRA accounts are subject to required minimum distributions, or RMDs, beginning at age 73 under current law. The IRS calculates your RMD each year by dividing your account balance by a life expectancy factor from their Uniform Lifetime Table. Failing to take the full RMD results in a penalty equal to 25% of the shortfall. Roth IRAs, notably, have no RMDs during the owner's lifetime, making them attractive vehicles for estate planning or for retirees who do not need the income immediately. Some individuals perform Roth conversions — moving money from a traditional account to a Roth — during lower-income years to pay tax now at a lower rate and avoid higher taxes on RMDs later.
A common strategy is to contribute to your 401(k) up to the employer match first — that free money has no equal. After capturing the full match, many financial planners suggest maxing out a Roth IRA for its tax-free growth and withdrawal flexibility. If you still have capacity to save more, return to the 401(k) to increase contributions toward the annual limit. This sequence captures the match, maximizes Roth flexibility, and then uses the tax deferral of the 401(k) for additional savings.
You have several options when leaving an employer. You can leave the money in your former employer's plan if the plan allows it and the balance exceeds $5,000. You can roll it into your new employer's 401(k) or into an individual IRA, which gives you more investment options and consolidates your accounts. Cashing out triggers ordinary income tax on the entire balance plus a 10% early withdrawal penalty if you are under 59½ — a combination that can eliminate 30% or more of the account value depending on your tax bracket.
Yes, as long as you meet the income eligibility requirements for the Roth IRA. The contribution limits are separate — you can contribute up to the 401(k) annual limit in your workplace plan and also contribute up to the Roth IRA limit in a personal account in the same tax year. This allows dual-account savers to maximize both tax-deferred and tax-free growth simultaneously.
A widely cited rule of thumb is to accumulate 25 times your expected annual expenses in retirement, a figure derived from the 4% safe withdrawal rate. If you plan to spend $60,000 per year, you would aim to save $1.5 million. Another common benchmark is to have one times your salary saved by age 30, three times by 40, six times by 50, and eight to ten times by 65. These are starting points, not absolute targets — your specific healthcare costs, Social Security income, and retirement lifestyle expectations all affect the actual number you need.