Roth vs. Trad

This page is a quick computation tool to help allocate between Roth and Trad accounts (IRA or 401k). It uses a simplified model with annual compounding. The contribution is an after tax amount, for traditional accounts the tax savings are kept in a separate brokerage account, which we assume is subject to capital gains tax.

  • The value of the Roth vs Traditional account is largely affected by the tax rate at the time the money is deposited and the tax rate at the time of withdrawl. Additionally, the captial gains tax on qualified dividends, and income tax on ordinary dividends will affect your savings growth in taxable brokerage accounts.
  • There are 2 important limits on overall contributions.
    • Overall limit on combined tax differed and direct Roth contributions for 401ks, regardless of employer (this is separate from IRA limits).
    • Limit on all 401k contributions for a given employer.
    Even if you can not make a tax deductible contribution to an IRA because you exceed the income limit, it is possible to make an after-tax (non-deductible) contribution to a traditional IRA and convert it to a Roth IRA where it can grow tax free (google Backdoor Roth). There was a bill to eliminate this loophole but it has not been passed as of 2022. Similarly, if allowed by your 401k plan, you can make after-tax (non-deductible) contributions to a traditional 401k and convert them to a Roth 401k where they can grow tax free (google Mega-Backdoor Roth).
  • Traditional IRA and 401k accounts have minimum withdrawl amounts after you reach retirement age. (The age and amount of the minimum withdrawls may change, so check the irs website for details). They generally require you withdraw money assuming that you will pass away when you reach median lifespan. Of course you may live much longer than this, and therefore it is possible to deplete your fund early from minimum withdrawls.