Roth 401k vs Traditional 401k Calculator: Which is Right for You?

Introduction

Retirement planning is a crucial aspect of financial security. Choosing between a Roth 401k and a traditional 401k can significantly impact your long-term savings. This article provides a comprehensive comparison and an interactive calculator to help you make an informed decision.

Understanding Roth 401k vs Traditional 401k

Roth 401k

• Contributions: After-tax contributions are made.
• Earnings: Earnings grow tax-free.
• Withdrawals: Qualified withdrawals are tax-free, including earnings.

Traditional 401k

• Contributions: Pre-tax contributions are made.
• Earnings: Earnings grow tax-deferred.
• Withdrawals: Withdrawals in retirement are taxed as ordinary income, both contributions and earnings.

Comparing Roth 401k vs Traditional 401k

Tax Implications

• Roth 401k: No taxes on earnings or qualified withdrawals.
• Traditional 401k: Taxes on withdrawals in retirement.

Contribution Limits

• Roth 401k: Same annual contribution limit as traditional 401k ($22,500 for 2023, plus a $7,500 catch-up contribution for those 50 and older).
• Traditional 401k: Same annual contribution limit as Roth 401k.

Income Eligibility

• Roth 401k: Income limits apply. For 2023, individuals with modified adjusted gross incomes (MAGIs) above $153,000 (single) or $228,000 (married filing jointly) are not eligible.
• Traditional 401k: No income limits for contributions.

Early Withdrawal Penalty

• Roth 401k: 10% penalty on withdrawals of earnings before age 59½, unless certain exceptions apply.
• Traditional 401k: 10% penalty on withdrawals before age 59½, except for Roth Conversions after 5 years.

Which is Right for You?

The best option depends on your individual financial situation and retirement goals.

• Roth 401k: Ideal for individuals who anticipate being in a higher tax bracket in retirement.
• Traditional 401k: Better for those who expect to be in a lower tax bracket in retirement or who need an immediate tax deduction.

Roth 401k vs Traditional 401k Calculator

Use our interactive calculator to estimate the potential growth of your retirement savings under different scenarios.

Input:

• Current age
• Estimated retirement age
• Expected annual return
• Income
• Contributions
• Tax rate in retirement

Output:

• Projected account balance at retirement
• Tax implications on withdrawals

Conclusion

Choosing between a Roth 401k and a traditional 401k is a matter of careful consideration. By understanding the key differences and using the provided calculator, you can make an informed decision that aligns with your financial goals and supports a secure retirement.