If your client’s 401(k) or 403(b) retirement plan accepts both traditional and Roth contributions, your client has two ways to save for retirement. Both offer federal income tax advantages.
Traditional accounts provide a tax break now. Traditional 401(k) and 403(b) contributions are not taxed at the time of investment. Instead, taxes are paid on withdrawals, including any earnings. Getting a tax break at the time of investment will leave more money in your client’s pocket now — money that can be invested, saved or spent.
Roth accounts provide a tax advantage later. Roth 401(k) and 403(b) contributions are made with money that’s already been taxed, so your client won’t have to pay taxes on qualified withdrawals, including earnings.
Enter your client’s personal information to compare the results of traditional before-tax savings and Roth after-tax savings. Click on the question marks below for help and additional information.
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Participants in 401(k) and 403(b) plans that accept both Roth and traditional contributions can contribute either type or a combination of both. With traditional accounts, withdrawals of pretax contributions and earnings are taxable and may be subject to a 10% early withdrawal penalty if taken before age 59-1/2. Qualified distributions from Roth accounts are tax- and penalty-free if the first Roth contribution was made at least five years before, and if your client is at least 59-1/2, disabled or deceased. For nonqualified distributions from Roth accounts, earnings are taxable and may be subject to a 10% early withdrawal penalty. IRS contribution limits are adjusted for inflation in $500 increments.
Future tax rates may change. The analyzer applies tax rates to all taxable income. When estimating your client’s future tax rate, you should consider whether the amount of taxable distributions might push your client into a higher tax bracket.
Regular investing does not ensure a profit or protect against loss. Hypothetical annual rates of return are not intended to reflect actual results; your client’s results may vary based on market conditions. The analyzer compounds earnings monthly and assumes that withdrawals are made at the beginning of the year. The analyzer does not take certain factors into account, including state and local taxes, required minimum distributions and holding periods, early withdrawal penalties, matching contributions, previous retirement plan contributions and IRS withdrawal rules. Be sure to recommend that your client consult with a financial professional or tax professional to discuss his or her specific situation.
This analyzer is intended for use in making a rough comparison of Roth and traditional retirement plan accounts. We do not guarantee the accuracy of the results or their relevance to your client’s particular circumstances. Results shown are hypothetical and are not intended to portray actual results. Your client’s results will differ. Encourage your client to seek the assistance of a financial planner.