Traditional vs. Roth: Tax Deferral Illustrator

See how a qualified-plan deduction works, and why, if tax rates stay the same, deferring the tax and paying it today end in the same place.

ILLUSTRATION ONLY

Defer the tax · Traditional$2,098,232After 30% tax at withdrawal

Pay the tax · Roth$2,098,232After 30% tax up front

Difference$0Identical outcome

Step 1 · Today

The deduction: Uncle Sam waits

A pre-tax contribution comes off the top before income tax is figured, so you don't pay tax on it this year.

Gross income$225,000

Taxable income$200,500was $225,000

Qualified plan$24,500pre-tax, invested tax-deferred

Tax not paid this year$7,350

Take-home pay only drops$17,150

Step 2 · Retirement

The deferral: Uncle Sam collects later

The tax isn't forgiven, it's postponed. Every withdrawal is taxed as ordinary income, on the growth too.

Contribute each year$24,500

30 yrs @ 8%
tax-deferred

Account balance$2,997,474

withdraw all

Tax at 30%($899,242)

You keep$2,098,232

Step 3 · Compare

Defer the tax vs. pay the tax

Both start with the same $24,500 of pre-tax income each year. The Roth side pays the tax first and invests what's left.

Defer the tax Traditional

Contribute each year$24,500

Grows 30 yrs @ 8%$2,997,474

Less tax 30% at withdrawal($899,242)

You keep$2,098,232

Pay the tax Roth

Pre-tax income each year$24,500

Less tax 30% today($7,350)

Invest each year$17,150

Grows 30 yrs @ 8%, tax-free$2,098,232

Same tax rate

If taxes are the same, it doesn't matter

At 30% today and 30% in retirement, both paths leave you $2,098,232.

Over time

What you actually keep, year by year

The Traditional balance looks bigger, but part of it belongs to the IRS. Compare the after-tax lines.

Traditional balance (pre-tax)Defer the tax, after taxPay the tax, Roth

The blue and green lines sit on top of each other, same money either way.

The real question

Will your tax rate be higher or lower later?

With 30% today, here's how deferring compares at different retirement tax rates. Above zero, deferring wins; below zero, paying today wins.

Defer the tax winsPay the tax today wins

History

Tax rates don't stand still

The 401(k) came from the Revenue Act of 1978, when the top federal rate was 70%. It has ranged from 7% to 94%, nobody knows what it will be when you retire.

Highest federal marginal income tax rate, 1913–2026. Source: Tax Foundation, IRS.

For illustration only. Assumes a flat tax rate on contributions and withdrawals, contributions at the start of each year, a constant growth rate, and no fees, required minimum distributions, penalties or state-residency changes. FICA is not reduced by qualified-plan contributions. This is not tax or investment advice.