How it works
The Roth-versus-traditional decision reduces, almost embarrassingly, to one comparison: your combined marginal tax rate TODAY versus your expected rate WHEN WITHDRAWING. Traditional deducts the contribution now and taxes every dollar of growth later; Roth taxes the contribution now and never again. Because multiplication commutes, years of compounding and the return assumption cancel out of the comparison entirely — both pots grow by the identical factor, so only the rate gap decides the winner, and the breakeven future rate always equals today's combined rate. This calculator makes the algebra concrete: it grows both wrappers at your assumed return, applies the respective tax treatments, and shows the dollar gap alongside the verdict. The practical playbook falls straight out of the math — high earners in peak career brackets usually favor traditional deductions, early-career and early-retirement windows favor Roth or bracket-filling conversions, and movers from high-tax states to low-tax states tilt traditional hard. What the tool cannot know is future tax law; every rate field is your assumption, clearly yours to stress.
Formula
FV(Traditional) = contribution × growth × (1 − future rate) | FV(Roth) = contribution × (1 − today's rate) × growth | Breakeven: future rate = today's rate
Tips
- Compare marginal rates, not effective ones — the margin is where the decision lives.
- Include state tax both ends; deducting in a high-tax state then retiring tax-free widens traditional's edge.
- When unsure, splitting contributions hedges legislative risk on either side.
- High-income peak-career years usually argue traditional; low-income gaps argue Roth.
- Stress the future-rate input ±10 points — robustness beats false precision.
Frequently asked questions
- What is the breakeven tax rate between Roth and traditional?
- Exactly your current combined marginal rate. Deduct at 27% federal-plus-state and any future rate above 27% favors Roth; below it favors traditional. Compounding, returns and time horizons cancel out because both wrappers grow by the same factor before taxation — only the rate gap ever decides.
- Does a longer time horizon favor Roth accounts?
- No — that is the most common myth. Twenty-five years at 6% grows a $20,000 contribution identically in both wrappers; only the tax timing differs. Longer horizons AMPLIFY whichever winner the rate gap picks, but they never flip the verdict.
- Why do experts say young investors should choose Roth?
- Because early-career salaries usually sit in low brackets — 12% beats most retiree situations. A 24-year-old deducting at 12% then withdrawing at 22% loses ten points forever, whereas the same person contributing Roth locks today's cheap rate on decades of growth.
- How do state taxes change the Roth vs traditional choice?
- Sharply, for movers. Deducting at California's ~9% and retiring in a zero-tax state hands traditional a nine-point head start beyond federal math. The reverse move — earn in Texas, retire in Oregon — flips it. Enter honest state rates for BOTH endpoints.
- Can I just split between Roth and traditional 401(k)?
- Often sensibly. A common rule: contribute enough traditional to fill your lowest bracket — say the 12% band — then switch to Roth above it. Splitting diversifies against unknown future tax schedules the way bonds diversify market risk, hedging legislative surprises on either side.