Roth vs Traditional IRA Calculator
Roth vs Traditional IRA: Use Taxes to Your Advantage
Choosing between a Roth IRA and a Traditional IRA is ultimately a tax-timing decision. Both accounts are designed to help you save for retirement, and both allow your investments to grow without yearly tax on interest, dividends, or capital gains. The key difference is when you pay income tax:
- Roth IRA: You contribute money that has already been taxed, and qualified withdrawals in retirement are generally tax‑free.
- Traditional IRA: You contribute pre‑tax money or claim a deduction today, then pay ordinary income tax on withdrawals in retirement.
This calculator compares the after‑tax value of making the same pre‑tax financial sacrifice in each account. In other words, you tell the tool how much income you are willing to give up each year, and it estimates the value of that decision if routed to a Roth versus a Traditional IRA under the tax and return assumptions you provide.
How This Roth vs Traditional IRA Calculator Works
The calculator treats your input as a pre‑tax contribution budget – the amount of income you are prepared to set aside each year for retirement. It then adjusts that amount differently for Roth and Traditional scenarios:
- Roth scenario: You must first pay your current marginal tax rate on that income. Only the after‑tax dollars go into the Roth IRA, but they then grow and can typically be withdrawn tax‑free in retirement.
- Traditional scenario: You contribute the full pre‑tax amount to a Traditional IRA. You get the tax benefit now (or a deduction), but withdrawals in retirement are taxed at your expected retirement tax rate.
The calculator assumes that you make the same contribution amount every year, that the money compounds at a constant annual rate of return, and that taxes are applied either up front (Roth) or at the end (Traditional), but not in between. This gives you a clean, apples‑to‑apples comparison of how tax timing interacts with growth.
Core Formulas
Both IRA balances are modeled using the future value of an ordinary annuity, which assumes level contributions at the end of each year. The future value before any retirement taxes is:
Where:
- P = annual contribution actually deposited in the account
- r = annual rate of return (as a decimal, e.g., 7% = 0.07)
- n = number of years you contribute and invest
The calculator uses this formula twice, once for Roth and once for Traditional, with different effective contributions.
Roth IRA Calculation
Let C be your annual pre‑tax contribution budget and tnow be your current marginal tax rate (as a decimal). Because Roth contributions are made with after‑tax dollars, the amount that actually lands in the Roth account each year is:
PRoth = C × (1 − tnow)
The future value of the Roth account at retirement is then:
FVRoth = PRoth × ((1 + r)n − 1) / r
Under standard rules for qualified withdrawals, this Roth future value is already after‑tax, because income tax was paid before the money entered the account.
Traditional IRA Calculation
For the Traditional IRA, your entire pre‑tax budget is contributed:
PTrad = C
The pre‑tax future value is:
FVTrad, pre‑tax = PTrad × ((1 + r)n − 1) / r
Let tret be your expected retirement marginal tax rate. To estimate the spendable value after tax in retirement, the calculator multiplies by (1 − tret):
In simpler text form:
FVTrad, after = FVTrad, pre‑tax × (1 − tret)
Interpreting Your Results
After you enter your assumptions and run the calculator, you will see two key numbers: the after‑tax Roth balance and the after‑tax Traditional balance at the end of your investment horizon. Here is how to read them:
- If the Roth after‑tax value is higher, then under your assumptions it is more advantageous to pay tax now and enjoy tax‑free withdrawals later.
- If the Traditional after‑tax value is higher, then under your assumptions it is more advantageous to take the tax benefit today and pay tax at a lower rate in retirement.
- If the values are very close, then small changes in your future tax rate, returns, or contribution pattern could flip the result. In that case, the choice may hinge on flexibility, withdrawal rules, or your preference for tax diversification.
The most important driver in the comparison is the difference between your current and retirement tax rates:
- Higher tax rate now than in retirement: A Traditional IRA is often favored, because you avoid paying a high rate today and pay a lower rate later.
- Lower tax rate now than in retirement: A Roth IRA often looks better, since you lock in the lower tax rate today and avoid higher taxes later.
The rate of return and years to invest affect how much your money grows but, given the same pre‑tax contribution budget and flat tax rates, they influence both accounts similarly. Where they matter most is in amplifying the consequences of getting the tax‑rate assumption right or wrong.
Worked Example
Suppose you enter the following values:
- Annual contribution (pre‑tax) C = $6,000
- Current tax rate tnow = 24% (0.24)
- Retirement tax rate tret = 22% (0.22)
- Annual return rate r = 7% (0.07)
- Years to invest n = 30
Roth Scenario
After‑tax contribution each year:
PRoth = 6,000 × (1 − 0.24) = 6,000 × 0.76 = 4,560
Future value:
FVRoth = 4,560 × ((1.07)30 − 1) / 0.07
Numerically, ((1.07)30 − 1) / 0.07 is about 94.46, so:
FVRoth ≈ 4,560 × 94.46 ≈ $430,700 (rounded)
Because this is a Roth IRA, we treat the $430,700 as fully spendable in retirement under current qualified withdrawal rules.
Traditional Scenario
Annual contribution:
PTrad = 6,000
Future value before tax:
FVTrad, pre‑tax = 6,000 × ((1.07)30 − 1) / 0.07
Using the same factor of about 94.46:
FVTrad, pre‑tax ≈ 6,000 × 94.46 ≈ $566,800 (rounded)
After applying the retirement tax rate of 22%:
FVTrad, after = 566,800 × (1 − 0.22) = 566,800 × 0.78 ≈ $442,100
In this scenario, the Traditional IRA yields an estimated $442,100 after tax, slightly more than the Roth’s $430,700. That result reflects the assumption that your tax rate in retirement (22%) is lower than it is today (24%). If you instead assumed a higher retirement tax rate, the Roth result would often come out ahead.
When Roth vs Traditional IRA May Be Better
The calculator focuses on after‑tax value, but qualitative factors also matter. The table below summarizes common situations in which one account type might be more attractive than the other, assuming the same pre‑tax cost to you.
| Situation | Roth IRA Tendencies | Traditional IRA Tendencies |
|---|---|---|
| Expect higher tax rate in retirement | Often preferred: pay lower tax now, avoid higher rates later. | Less attractive: future withdrawals taxed at higher rate. |
| Expect lower tax rate in retirement | Less compelling strictly on taxes, though still useful for diversification. | Often preferred: deduct at higher rate now, pay at lower rate later. |
| Early‑career, modest income | Commonly favored: current tax rate is often low. | May still be useful, especially if employer or plan design encourages pre‑tax saving. |
| Peak‑earnings years | Can be attractive for long‑term tax‑free growth and to manage future RMDs. | Often attractive because deductions shield income at high rates. |
| Desire to leave tax‑advantaged assets to heirs | Roth is often advantageous due to tax‑free distributions to beneficiaries (subject to rules). | Heirs will owe income tax on inherited pre‑tax balances. |
| Need for current‑year tax deduction | No up‑front deduction. | Provides immediate deduction (if you qualify under IRS rules). |
In practice, many savers use both account types across their careers to build tax flexibility in retirement. The calculator helps you see how different allocations toward Roth or Traditional contributions might affect your long‑run, after‑tax retirement resources.
Key Assumptions and Limitations
To keep the comparison transparent and easy to interpret, this tool makes several simplifying assumptions. These are important for understanding what the results do not cover.
- Constant tax rates: The calculator assumes your current and retirement tax rates remain fixed at the percentages you enter. In reality, tax brackets can change due to legislation, inflation adjustments, or shifts in your income.
- Single marginal rate: It models tax impact using a single marginal rate, not a full graduated tax bracket system.
- Constant annual return: Investment returns are assumed to be the same every year. Real markets fluctuate, and sequence‑of‑returns risk is not modeled.
- End‑of‑year contributions: Contributions are treated as if made at the end of each year. Contributing more frequently or earlier in the year would slightly change the actual growth.
- No IRS contribution limits: The tool does not enforce annual IRA contribution limits or income‑based eligibility rules. In reality, your ability to contribute may be capped or restricted.
- No penalties or special rules: Early‑withdrawal penalties, exceptions, and the five‑year rules for Roth IRAs are ignored.
- No state or local taxes: Only a single combined tax rate is modeled. State and local income taxes, along with other levies, are not separately accounted for.
- Required minimum distributions (RMDs): The complexities of RMDs for Traditional IRAs (and the absence of lifetime RMDs for Roth IRAs under current rules) are not modeled explicitly.
- Inflation not modeled separately: The calculator uses nominal dollar amounts and nominal rates of return. It does not adjust for purchasing power.
- No interaction with other accounts: Employer plans like 401(k)s, SIMPLE IRAs, and pensions, as well as Social Security, are not integrated into the projection.
Because of these limitations, the outputs should be viewed as illustrative estimates rather than precise forecasts. They are best used to compare the relative advantage of Roth versus Traditional under different logical scenarios, not to produce a single “correct” dollar amount for your retirement plan.
This calculator and explanation are for educational purposes only and do not constitute tax, legal, or investment advice. Individual situations vary, and tax laws change. Before making decisions about IRA contributions, conversions, or withdrawals, consider speaking with a qualified financial or tax professional who can evaluate your specific circumstances.