# 401(k) vs. Roth IRA - Annual Contribution Calculator

You can use this calculator to compare a 401(k) plan with a Roth IRA.

## Example

Your client can afford \$300 per month toward retirement. Should she contribute to her employer's 401(k) or to a Roth IRA?

Field Input
Annual Roth IRA contribution \$3,600
Federal tax rate 28%
State tax rate 4%
State tax deducted on federal return? Yes
Years of contributions 10
Annual rate of return 8%
Average tax rate during retirement 20%
Years of retirement 20
Annual rate of return during retirement 7%

In this example, your client's monthly retirement income after taxes would be \$467.98 if the contributions were made to the employer's 401(k) account. The client's monthly income after taxes for the Roth IRA would be \$404.33. The 401(k) is higher by \$63.65 per month.

Notes
• The Roth IRA would only have a contribution of \$3,600 because there are no tax savings at the point of contribution. The \$3,600 reduction in take-home pay is identical for the two options in this example; however, the 401(k) produces a larger contribution amount.
• The federal and state tax rates applied to contributions is usually the marginal tax rate. During retirement, the distributions from a retirement account are often a major source of taxable income. This is why the average tax rate, rather than the marginal tax rate, is used to compute the after tax income. For example, if the retirement income is the only source of income, some of the income will not be taxed at all, some will be taxed at a lower rate, and so on. This averaging of tax rates is usually not required for contributions.