Pre-Tax Account vs Taxable Investing
A pre-tax account, a tax-free (Roth-style) account or a plain taxable account? It comes down to one comparison: the tax rate you pay today against the one you will pay when you take the money out. Enter your numbers and see which one leaves you with more.
Which one leaves you with more?
The same yearly effort, put into three different kinds of account.
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Pre-tax account
Tax-free account
Taxable account
What does it depend on?
Almost everything comes down to your tax rate today against your tax rate later.
The number that really decides
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That's the whole bet of a pre-tax account, in a single figure: you swap tax today for tax tomorrow. If your rate now is high and you expect lower income in retirement, you win; if it's the other way round, you lose.
And in other cases?
What happens with other retirement tax rates, and when each account makes sense.
How it changes with your tax rate in retirement
Same amount, same years, same return and same tax today: only the tax rate you pay when you withdraw changes. Your row is highlighted.
| Tax rate in retirement | Net · pre-tax | Net · tax-free | Net · taxable | Best |
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When each one makes sense
There is no single winner. These are the situations where each account usually shines:
- High tax rate today, lower income later. The textbook case for a pre-tax account: you deduct at a high rate and withdraw at a low one.
- To capture your employer's match. If your employer adds money, that is an immediate return no other account offers. Take it first, before comparing anything.
- Low tax rate today, higher income later. A young investor early in their career often does better paying the tax now in a tax-free (Roth-style) account.
- You may need the money before retirement. Accounts with tax advantages usually restrict or penalize early withdrawals. A plain taxable account keeps the money fully available.
«A pre-tax account is always better because more money goes in.»
More money goes in because it hasn't been taxed yet, but you owe that tax later. With the same tax rate today and in retirement, a pre-tax and a tax-free account end up exactly equal. The advantage comes from the difference between the two rates, not from the account itself.
Where each number comes from
Pre-tax account: the full amount goes in each year, grows at your return, and everything you withdraw is taxed at your average retirement rate.
Tax-free account: you pay tax first, so only the amount left after your current rate goes in. It grows and comes out without tax.
Taxable account: the same after-tax amount as the tax-free account goes in, but when you sell you pay your capital gains rate on the gain only.
The comparison spends the same effort in all three: what you set aside before tax is the same, and the taxed accounts receive what remains after tax. Contributions are made at the end of each year, with no fees and no inflation. The taxable account is taxed only when you sell, which flatters it: if it paid taxable dividends or interest each year, the tax-advantaged accounts would do better.
What each figure means
A quick look at every input and every result.
What you can put into the account yearly, measured before tax. The tax-free and taxable accounts receive the amount that is left after your current tax rate, so the effort is the same in all three.
Your marginal rate: the tax you pay on the last dollar you earn. It is the rate a pre-tax contribution saves you.
The average share of your withdrawals that goes to tax. It's an average, not the marginal rate, because withdrawals are spread over several brackets.
What you pay on the profit when you sell investments held in a regular account. It only applies to the gain, not to what you put in.
Money goes in before tax and is taxed on the way out. Examples: a traditional 401(k) or IRA in the US, a SIPP in the UK, an RRSP in Canada.
Money goes in after tax and comes out without tax, growth included. Examples: a Roth IRA or Roth 401(k) in the US, an ISA in the UK, a TFSA in Canada.
A regular brokerage account: no restrictions, full access to your money at any time, and tax only on the gains when you sell.
The retirement tax rate at which a pre-tax and a taxable account leave you with the same amount. Below it, the pre-tax account wins; above it, the taxable one does.
How to fill in this calculator
- Amount you set aside each year: what you can invest per year, before tax. Check the yearly limit for tax-advantaged accounts in your country: above it, the extra goes to a regular account.
- Your tax rate today: your marginal rate, the tax on your last dollar of income. It is the single number that drives how much a pre-tax contribution saves you.
- Your average tax rate in retirement: the share of each withdrawal that goes to tax. Be honest and a bit conservative: it is the figure nobody knows in advance.
- Tax on gains in a regular account: the capital gains rate you would pay on a sale. It only matters for the taxable column.
- Years until you withdraw and annual return: a long horizon helps tax-free growth, and a 6-7% return is a reasonable assumption for a diversified stock portfolio over decades. It is an assumption, not a promise.
- Read the result in three pieces: the verdict tells you which account wins and by how much; the break-even rate tells you how far your retirement rate can move before the answer flips; and the table shows what happens at other rates.
Frequently asked questions about this calculator
What's the difference between a pre-tax and a tax-free (Roth-style) account?
In a pre-tax account you get the tax break now and pay tax when you withdraw. In a tax-free account you pay tax now and withdraw without tax. If your tax rate is the same today and in retirement, both end up equal. The one that wins is whichever lets you pay tax at the lower rate.
Which tax rate should I enter for today and for retirement?
For today, use your marginal rate: the tax on your last dollar of income. For retirement, use the average share of each withdrawal that goes to tax, which is usually lower than your marginal rate because the first part of your income is taxed less. If you are unsure, try a few values: the table shows what happens at other rates.
Why does the tax-free account never lose to the taxable one?
Because it receives the same after-tax money, but its growth is never taxed, while the taxable account pays tax on the gain. In practice the tax-free account is limited by yearly allowances and eligibility rules, and it can restrict early access: that is what you give up for the advantage.
What about my employer's match?
This calculator ignores it, and you shouldn't. If your employer adds money to a pre-tax plan, that's an immediate return no investment offers, so capturing the full match comes before comparing accounts.
Does it include fees, inflation and the tax on dividends?
No. It assumes no fees and no inflation, and it taxes the taxable account only when you sell, which flatters it. If your taxable account paid taxable dividends or interest every year, the tax-advantaged accounts would do better than shown here.
Does this apply to my country?
The logic does: every country with tax-advantaged accounts asks the same question, tax now or tax later. The rules differ: limits, early-withdrawal penalties, and in some places a part of the withdrawal is tax-free. That's why you enter the rates yourself instead of relying on a country's tax tables.