Investment Growth Calculator: Taxable, Tax-Deferred, and Tax-Free

You can find your marginal tax bracket by looking at the current IRS tax tables alongside your most recent tax return or pay stub. Because bracket thresholds are adjusted annually for inflation, you should reference current IRS guidance or talk with a tax professional.

For context, your marginal tax bracket is the rate applied to the last dollar of your taxable income. Taxable income is what remains after deductions, which can be meaningfully lower than your gross earnings.

Tip: If you're close to a bracket boundary, running this calculator at two or three different rates can show you how sensitively your projected results respond, which adds a useful dimension to your planning process.

Tax-free accounts don't automatically outperform tax-deferred accounts. The outcome depends on the relationship between your tax rate today and your expected tax rate at withdrawal.

When your future tax rate is expected to be the same or higher than your current rate, a tax-free account like a Roth IRA may offer a stronger long-term outcome. This is because contributions are made with after-tax dollars and qualified withdrawals are not subject to federal income tax.

Tax-deferred accounts, however, may perform more favorably when your current tax rate is higher than what you expect to pay in retirement. In that case, the upfront deduction you receive today can be worth more than the tax you'll pay later.

Tip: Many investors hold both account types. This is a strategy sometimes called tax diversification as it gives you flexibility to draw from different sources based on your tax situation in any given year. 

Tax drag is the reduction in growth that occurs when investment gains are taxed each year rather than allowed to compound uninterrupted.

In a taxable account, dividends, interest, and realized capital gains may generate a tax bill annually, reducing the amount of money available to reinvest. Over time, even a modest annual tax cost can compound into a meaningful difference in your ending balance.

Tax-advantaged accounts, including both tax-deferred and tax-free options, allow your money to grow without that annual reduction, which is one reason they play a central role in long-term retirement planning.

Tip: Running the same inputs across all three scenarios in this calculator is one of the most direct ways to see how tax drag plays out in your specific situation.

The short answer? It depends.

Tax-deferred accounts like traditional IRAs and 401(k) plans, along with tax-free accounts like Roth IRAs, come with annual contribution limits set by the IRS. These limits are adjusted periodically for inflation, so it's worth reviewing current IRS guidance each year.

For employer-sponsored plans like 401(k)s, the annual limit is significantly higher than what's allowed for individual IRAs, and many plans also offer catch-up contributions for investors who are age 50 or older. Understanding these limits is an important part of building a tax-efficient investing strategy.

Tip: If you've already maxed out contributions to one type of account, this calculator can help you explore how additional dollars saved in a taxable account compare to what you might gain by funding a different account type. The results can be important to share with your financial advisor regarding tax diversification across your retirement accounts.

A Roth conversion is the process of moving money from a tax-deferred account, such as a traditional IRA or a former employer's 401(k), into a Roth IRA. The converted amount is included in your taxable income for that year, which means you'll owe taxes on it at your current marginal rate. In exchange, the converted funds potentially grow in a tax-free environment, and qualified withdrawals in retirement are not subject to federal income tax.

This conversion may be worth exploring when you expect your tax rate to be higher in the future, such as during a year when your income is temporarily lower, or in the early years of retirement before required minimum distributions begin. Because a conversion increases your taxable income in the year it occurs, it may impact your state taxes.

Tip: The after-tax investment returns you see in this calculator can help frame the potential long-term value of moving to a tax-free structure, though the decision is one best made in conversation with a tax professional or financial advisor.