401k vs Taxable Account Calculator

How it is calculated

The same yearly amount of pre-tax pay is routed two ways and both are valued after tax at the end.

F = ((1 + r)n − 1) ÷ r (one deposit a year at year end)
401k = C × F × (1 − tret)
invested = C × (1 − tnow)
taxable = invested × F − 15% (or your rate) × gain, where gain = invested × F − invested × n

C is the yearly contribution in dollars, r the return as a decimal, n the years (up to 80), and the three tax rates are percentages. In the 401k the full amount is invested and taxed once on withdrawal. In the taxable account income tax is paid first and capital gains tax is charged once, on the final gain only. The tool does not tax dividends or gains year by year, and does not model an employer match. If the return is zero or negative the gain is floored at zero and no capital gains tax is charged.

Common mistakes

• Entering a rate as a decimal. Tax rates and the return are percentages: 24 means 24%, and 0.24 is read as 0.24%.
• Expecting yearly dividend or capital gains tax in the taxable account. Here tax on the gain is taken only once at the end, so the taxable result is flattered compared with a fund that pays taxable dividends every year.
• Using the same tax rate for the income tax now and the retirement tax rate when you expect them to differ. This choice drives the result: with a retirement rate equal to today's and 0% capital gains tax, the two accounts come out identical.
• Entering the contribution after tax. The field is the pre-tax amount; the tool itself subtracts the current income tax for the taxable side.
• Forgetting the employer match and the early withdrawal rules. Neither is modelled, so a match would make the 401k look even better, while access before retirement age favours the taxable account.