Compound Interest Calculator

A Roth IRA uses post-tax contributions but grows completely tax-free — you pay no tax on withdrawals in retirement. A Traditional 401(k) uses pre-tax contributions (reducing your current taxable income) and grows tax-deferred, but the entire withdrawal is taxed as ordinary income in retirement. If your tax rate stays the same, the after-tax result is identical. If your retirement tax rate is lower, the 401(k) wins; if higher, the Roth wins.

Tax drag is the annual reduction in returns caused by paying taxes on dividends, interest, and realized capital gains each year. In a taxable brokerage account, these taxes reduce the amount that compounds, so over 20-30 years the difference can be substantial compared to tax-advantaged accounts like a Roth IRA or 401(k) where growth compounds without annual tax.

For 2025, the Roth IRA contribution limit is $7,000 ($8,000 if age 50 or older). The 401(k) employee contribution limit is $23,500 ($31,000 if age 50-59 or 64+, and $34,750 if age 60-63 under the new super catch-up provision). Roth IRA contributions phase out at higher incomes: $150,000-$165,000 for single filers and $236,000-$246,000 for married filing jointly.

For 2025, long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your taxable income. Single filers pay 0% on gains up to $48,350, 15% on gains from $48,351 to $533,400, and 20% on gains above $533,400. An additional 3.8% Net Investment Income Tax (NIIT) applies to higher earners.

Compound interest means you earn returns on both your original investment and on previously earned returns. For example, $10,000 earning 7% annually becomes $10,700 after year one. In year two, you earn 7% on $10,700 (not just $10,000), giving you $11,449. Over long periods, this snowball effect becomes very powerful — $10,000 at 7% grows to $38,697 after 20 years and $76,123 after 30 years, even with no additional contributions.

If you are eligible and have not maxed out your Roth IRA, it is almost always better to contribute there first. Roth IRA growth and qualified withdrawals are completely tax-free, while taxable brokerage accounts face annual tax drag and capital gains tax on sale. The main reasons to use a taxable account are if you have exceeded retirement account limits, need access before age 59.5 without penalties, or your income exceeds the Roth IRA eligibility threshold.

Use your current federal marginal tax rate — the rate applied to your last dollar of income. For 2025, common brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Most working Americans fall in the 22% or 24% bracket. If you are unsure, 22% is a reasonable default. The marginal rate affects the annual tax drag on taxable accounts and the withdrawal tax on Traditional 401(k) distributions.

Yes, you can contribute to both a Roth IRA and a Traditional 401(k) in the same year, subject to each account's separate contribution limits. Many financial advisors recommend maxing out your employer 401(k) match first, then contributing to a Roth IRA, and finally adding more to the 401(k) if you have additional funds. This diversifies your tax exposure in retirement between tax-free (Roth) and tax-deferred (401k) withdrawals.