Taxable vs Tax-Deferred Growth Calculator

In a tax-deferred account (like a Traditional IRA or 401(k)), your contributions and earnings grow without being taxed each year, but you pay income tax when you withdraw the money. In a tax-free account (like a Roth IRA), qualified withdrawals — including all growth — are completely free of federal income tax, provided you meet the requirements.

A taxable account is a standard brokerage account where you invest after-tax dollars. Any dividends, interest, or capital gains you earn each year are generally subject to income or capital gains tax in the year they're paid, reducing your compounding power over time.

When taxes are deferred, you're compounding on a larger base each year because no portion of your return is siphoned off for taxes annually. Over decades, this compounding advantage can result in substantially larger balances — even after accounting for taxes paid at withdrawal.

Yes, you can contribute to both. However, if you (or your spouse) have a workplace retirement plan, your ability to deduct Traditional IRA contributions phases out above certain income thresholds. Roth IRA eligibility also phases out at higher income levels. Contribution limits apply to the combined total across Traditional and Roth IRAs.

The IRS sets a combined annual contribution limit for Traditional and Roth IRAs together (e.g. $7,000 in 2024, or $8,000 if you're 50+). So if you max out a Roth IRA, you cannot add more to a Traditional IRA for the same tax year — and vice versa.

Holding both account types can provide tax diversification in retirement. A tax-deferred account benefits you more if you expect to be in a lower tax bracket when you withdraw. A tax-free account benefits you if tax rates rise or your income is higher in retirement. Spreading savings across both hedges against future tax uncertainty.

The calculator applies your marginal tax rate to the annual return each year in the taxable account, reducing the effective after-tax return used for compounding. The tax-deferred balance compounds at the full before-tax rate and then applies a lump-sum withdrawal tax at the end. The tax-free balance compounds at its full rate with no tax applied at any point.

Enter your combined marginal federal and state income tax rate. For example, if you're in the 22% federal bracket and pay 5% state income tax, enter 27%. This rate is used both to calculate the annual drag on your taxable account and the final tax owed on the tax-deferred withdrawal.