Taxable vs. Tax-Deferred Investment Calculator
Compare the growth of taxable and tax-deferred investment accounts over time
| Metric | Taxable Account | Tax-Deferred Account |
|---|---|---|
| Pre-Tax Value | $0.00 | $0.00 |
| Taxes Paid | $0.00 | $0.00 |
| After-Tax Value | $0.00 | $0.00 |
| Effective Annual Return | 0.00% | 0.00% |
Key Insights
Taxable Accounts: You pay taxes on dividends and capital gains annually, reducing your compounding potential.
Tax-Deferred Accounts: Taxes are deferred until withdrawal, allowing your investments to grow tax-free.
The difference shown accounts for all taxes paid over the investment period and at withdrawal.
1. Introduction
A Taxable vs. Tax-Deferred Investment Calculator helps investors compare the long-term growth of investments in taxable accounts (e.g., brokerage) versus tax-advantaged accounts (e.g., 401(k), IRA). This tool is essential for retirement planning, optimizing investment strategies, and minimizing tax liabilities.
2. Key Concepts
A. Taxable Accounts
Examples: Brokerage accounts, savings accounts
Tax Treatment:
Dividends & Interest: Taxed annually (ordinary income rates)
Capital Gains: Taxed when realized (short-term vs. long-term rates)
B. Tax-Deferred Accounts
Examples: Traditional 401(k), Traditional IRA
Tax Treatment:
Contributions: Pre-tax (reduce taxable income)
Growth: No taxes on dividends/capital gains until withdrawal
Withdrawals: Taxed as ordinary income
C. Tax-Free Accounts (For Comparison)
Examples: Roth 401(k), Roth IRA
Tax Treatment:
Contributions: After-tax
Growth & Withdrawals: Tax-free (if rules are followed)
3. Calculator Inputs
| Input | Taxable Account | Tax-Deferred Account |
|---|---|---|
| Initial Investment | $10,000 | $10,000 |
| Annual Contribution | $5,000 (after-tax) | $5,000 (pre-tax) |
| Investment Horizon | 30 years | 30 years |
| Expected Return | 7% | 7% |
| Dividend Tax Rate | 20% (qualified) | 0% (deferred) |
| Capital Gains Tax | 15% (long-term) | Ordinary income tax at withdrawal |
| Income Tax Rate | 24% (current) | 22% (expected at retirement) |
4. How the Calculator Works
A. Taxable Account Growth Formula
Tax Drag: Annual taxes on dividends & capital gains reduce compounding.
B. Tax-Deferred Account Growth Formula
C. Example Calculation
| Metric | Taxable Account | Tax-Deferred Account |
|---|---|---|
| Pre-Tax Value | $574,349 | $761,225 |
| After-Tax Value | $488,197 | $593,756 |
| (Assumes 24% tax on withdrawals, 15% capital gains tax, 2% annual dividend yield taxed at 20%) |
5. When Taxable Accounts Win
Lower Future Tax Rate: If retirement tax rate is higher than current capital gains/dividend rates.
Liquidity Needs: No early withdrawal penalties.
Estate Planning: Step-up in cost basis at death.
6. When Tax-Deferred Accounts Win
Higher Future Tax Rate: If retirement tax rate is lower than current rate.
Tax-Free Compounding: No annual tax drag.
Employer Matching: Free money in 401(k)s.
7. Advanced Features
Roth Conversion Analysis
Social Security Tax Impact
State Tax Considerations
Inflation Adjustments
8. Limitations
Assumes Fixed Tax Rates (real-world changes occur).
Doesn’t Account for RMDs (Required Minimum Distributions).
Simplified Tax Drag Estimation.
9. Recommendations
High Earners: Prioritize tax-deferred accounts.
Early Career/Low Tax Bracket: Consider Roth options.
Diversify Tax Treatments for flexibility.