The taxable vs tax-advantaged calculator compares the after-tax final value of investing in a taxable brokerage account, traditional IRA/401k, and Roth IRA/401k. Tax-advantaged accounts can add hundreds of thousands of dollars over a 30-year investment horizon.
Annual tax cost from dividends & rebalancing (~1-2% typical)
Which Account Type Wins?
The answer depends on your tax rate trajectory. Roth wins if your tax rate rises in retirement. Traditional wins if your rate falls. Taxable is least efficient but offers flexibility — no contribution limits, no early withdrawal penalties, no required minimum distributions.
Tax Diversification Strategy
Many financial planners recommend holding all three account types to hedge against future tax law changes. Max out Roth IRA first (if eligible), then traditional 401k for pre-tax reduction, then taxable for overflow. This creates flexibility to draw from different buckets in retirement to minimize each year's tax burden.
FAQ
What is a tax-advantaged account?
Tax-advantaged accounts provide tax breaks not available to regular brokerage accounts. Traditional IRA/401k contributions are pre-tax (deductible), and growth is tax-deferred until withdrawal. Roth IRA/401k contributions are after-tax but growth and qualified withdrawals are tax-free.
Is a Roth IRA always better than a traditional IRA?
Not always. Roth is better if your tax rate in retirement will be higher than today. Traditional is better if your rate will be lower. For many people early in their career (lower current bracket), Roth wins. Near-retirees in high brackets often favor traditional. Tax diversification — holding both — is often recommended.
When is a taxable brokerage account better?
Taxable accounts are better when you've maxed tax-advantaged options, need flexibility (no early withdrawal penalties), or expect long-term capital gains rates to be favorable. Index funds in taxable accounts can be very tax-efficient due to low turnover.
What is the annual dividend tax drag in a taxable account?
Taxable accounts pay taxes on dividends and realized capital gains each year, reducing the compounding effect. Even a 1-2% annual tax drag significantly reduces final account value over 30 years compared to tax-deferred growth.