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Updated Jan 24, 2024

Roth 401(k) vs. Traditional 401(k) Calculator

Mike Berner
Mike Berner, Business Operations Insider and Senior Analyst
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Two of the most popular retirement plans for small business owners are the Roth 401(k) and the traditional 401(k). Your income during retirement can vary dramatically depending on which type of account you hold. Use this calculator to help you determine how to allocate your retirement savings between these two plans.

Key Terms

These are the key terms you should understand in order to make the most of this 401(k) calculator:

  • Current age: Enter your current age.
  • Annual contribution: Estimate the amount that you will contribute annually to your retirement accounts.
  • Retirement age: Enter the age when you plan to begin withdrawals from your retirement accounts.
  • Number of years: Estimate the number of years that you will spend in retirement.
  • Rate of return (distribution phase): The rate of return refers to how much, on average, the investment is expected to grow each year in percentage terms. Over the long run, United States stock market returns average approximately 10 percent annually before adjusting for inflation. Government bonds average around 5 percent annually. Estimate your rate of return during the years that you spend in retirement.
  • Income tax bracket (distribution phase): This refers to the highest tax rate that applies to your income during retirement. Consult the current federal income tax brackets and rates for your exact percentage.
  • Rate of return (accumulation phase): The rate of return refers to how much, on average, the investment is expected to grow each year in percentage terms. Over the long run, United States stock market returns average approximately 10 percent annually before adjusting for inflation. Government bonds average around 5 percent annually. Estimate your rate of return during the period that you spend accumulating retirement savings.
  • Income tax bracket (accumulation phase): This refers to the highest tax rate that applies to your income during your working career. Consult the current federal income tax brackets and rates for your exact percentage.
  • Taxation of contribution options: Select from the following options: 1) Your traditional 401(k) deductible account is fully funded, and contributions to Roth 401(k) non-deductible accounts are reduced. 2) You make the full contribution to Roth 401(k) non-deductible account, and the traditional 401(k) account is given a “side-account” to reflect tax savings.

What are the benefits of a retirement plan for employers and employees?

Employee retirement plans offer advantages for both employees and employers. From the employee’s standpoint, these plans facilitate effortless and automatic savings for retirement. The inclusion of tax benefits is a major incentive. Contributions are deducted on a pretax basis, which reduces the current taxable income burden. Furthermore, employer matches are often a lucrative source of “free” money for employees.

From the employer’s perspective, retirement plans are often critical for attracting and retaining employees. These plans play a crucial role in workforce planning, ensuring that employees are financially equipped for retirement. Vesting schedules tied to contribution matches provide yet another incentive for employees to remain with the company, further reducing turnover.

What is the difference in taxation between a Roth 401(k) and a traditional 401(k)?

In a traditional 401(k), contributions are made with pretax dollars. This provides an immediate tax deduction. However, withdrawals during retirement are subject to income taxes. This structure can be advantageous for individuals expecting to be in a lower tax bracket during retirement.

On the other hand, Roth 401(k) contributions are made with after-tax dollars. While there is no immediate tax deduction, withdrawals are tax-free. This allows retirement savings to grow tax-free, which is particularly advantageous if you anticipate being in a higher tax bracket in the future.

When can you make withdrawals from a Roth 401(k) and a traditional 401(k)?

Beyond tax treatment, withdrawal rules are also different for the two types of accounts. traditional 401(k) withdrawals before age 59½ may incur penalties and are subject to required minimum distributions (RMDs) starting at age 72. Roth 401(k) initial contributions can be withdrawn at any time tax-free, and there are no RMDs during the account holder’s lifetime. However, the earnings in a Roth 401(k) can be withdrawn only after age 59½.

How do you choose a retirement plan provider?

When selecting a retirement plan provider for your business, businesses should prioritize competitive pricing and a comprehensive array of investment options. Look for essential features recommended by experts, such as the provider’s track record in managing administrative tasks, educational tools for retirement planning, convenient online access for employees, and no kickbacks from mutual fund companies.

Mike Berner
Mike Berner, Business Operations Insider and Senior Analyst
Mike Berner is a finance expert who spent more than half a decade serving as an economic analyst for the U.S. Army Corps of Engineers. He is experienced in conducting quantitative analysis and research to guide clients and companies through changes in the financial markets. With a bachelor's degree in economics and a bachelor of business administration in finance, Mike is adept at breaking down the complex financial topics that affect business owners, from business loans and accounting to payroll and credit card processing. He also tests and analyzes the latest financial software solutions and enjoys giving tips on matters ranging from tax forms to sales strategies to investing through platforms like YouTube, TikTok and Substack.
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