A tool designed to project the potential future value of retirement savings under two different 401(k) plans, one with pre-tax contributions and taxable withdrawals in retirement (traditional), and one with after-tax contributions and tax-free withdrawals in retirement (Roth). This resource typically incorporates variables such as contribution amounts, expected rates of return, tax brackets, and time horizons to estimate the final account balance under each scenario. A common application is for an individual deciding between contributing to a traditional 401(k) or a Roth 401(k) through their employer.
The significance of utilizing such a tool lies in its ability to provide a quantitative comparison of the long-term financial implications of each 401(k) type. Individuals can gain insight into which option may be more advantageous based on their current income, anticipated future tax rates, and investment goals. Historically, the decision between a traditional and Roth 401(k) was often based on a general rule of thumb; however, these tools allow for a more personalized and data-driven approach.
