Traditional vs. Roth
Traditional accounts give a tax break now and tax withdrawals later; Roth accounts are funded with taxed money and grow tax-free.
Traditional after-tax value = C × (1 + r)^t × (1 − t_later) ; Roth = C × (1 − t_now) × (1 + r)^t
Explanation
Traditional 401(k)s and IRAs (also called pre-tax) let you deduct contributions now. The money grows tax-deferred, and withdrawals are taxed as ordinary income. They are subject to required minimum distributions (RMDs) starting at age 73 or 75.
Roth 401(k)s and IRAs take after-tax contributions. Qualified withdrawals, generally after age 59½ and once the account has met a five-year holding rule, are completely tax-free, including the growth. Roth IRAs have no RMDs for the original owner, and since 2024 Roth 401(k)s do not either.
The math is simple at heart: if your marginal tax rate is the same when you contribute and when you withdraw, both end up with the same after-tax amount. Traditional comes out ahead if your rate in retirement is lower; Roth comes out ahead if it is higher. The hard part is predicting future rates, which depend on your future income, RMD size, Social Security, state of residence and tax law.
Other factors: Roth IRA contributions (not earnings) can be withdrawn at any time without tax or penalty; Roth money does not raise your income in retirement, which can help with Social Security taxation, Medicare IRMAA and ACA subsidies; and Roth IRA contributions have income limits, while Roth 401(k)s do not. Many people hold both for flexibility.
In scenarios, you choose how contributions are split, and the app taxes withdrawals accordingly, so you can compare outcomes under different assumptions about future tax rates.
Example
You can set aside $10,000 of pre-tax salary. Your marginal rate is 24% now. Investments earn 7% a year for 30 years (growth factor 1.07^30 = 7.6123).
- Traditional: $10,000 grows to $76,123. Withdrawn at a 15% rate: $76,123 × 0.85 = $64,704
- Roth: after 24% tax you contribute $7,600, which grows to $7,600 × 7.6123 = $57,853, tax-free
Here traditional wins because the rate falls from 24% to 15%. If your rate in retirement were also 24%, traditional would give $76,123 × 0.76 = $57,853, exactly the same as Roth.