How Roth versus a taxable account is calculated

The comparison in one paragraph

This comparison puts the same after-tax cash into two accounts and grows both at the same monthly rate. A Roth-style balance is left untaxed at the end. A taxable brokerage balance pays the capital-gains rate you type, and only on the gain above the money you put in. The Roth versus taxable calculator is that sketch. It is not a traditional pre-tax IRA versus a Roth, and it is not a tax return. The starting amount and the monthly amount are typed as gross figures. Both accounts then invest what is left after the contribution tax, so the pre-tax balances match when the return matches. The gap you see is the gains tax the taxable account still owes.

When to use

Use this guide when the question is “if I fund both accounts with the same after-tax dollars, what does a gains tax at the end do to the taxable one?” It fits a long horizon, a first look at contribution tax versus the gains rate, or a check that you are not comparing a pre-tax deposit with an after-tax deposit by accident. Change one input at a time.

It does not fit a goal dated in calendar years with a required deposit. That is the savings goal calculator. It does not fit what the balance will buy after prices rise. That is the inflation guide. It does not size the portfolio that covers spending. That is the FIRE number. Contribution limits, income phaseouts, early-withdrawal penalties, and which account you are allowed to open are outside the formula.

The formula in plain English

Contribution tax = the tax on contributions, or the ordinary rate if that tax is zero
Invested = gross amount × (1 − contribution tax)
Each month: balance = balance × (1 + annual return / 12) + invested monthly
Taxable basis = invested initial + every invested monthly deposit
Gain = taxable balance − basis, and never below zero
Taxable after tax = taxable balance − gain × capital-gains rate
Roth advantage = Roth balance − taxable after tax

The ordinary-income rate is only the fallback. If the contribution-tax input is above zero, the ordinary slider does not change the math. It does not give one account a pre-tax contribution and the other an after-tax one. Both sides lose the same contribution tax, then compound monthly. The deposit lands at the end of the month, after that month’s growth on the prior balance.

Basis tracks cash that was actually invested. Growth is not added to basis. At each year-end the model estimates the gains tax on the unrealized gain and subtracts it from the taxable balance for the “after tax” line. It does not sell inside the year, and it does not tax dividends along the way. The Roth line is never reduced by that gains tax. If the taxable after-tax balance is zero, the advantage percent is reported as zero. Nothing you type is sent to a server to compute the result.

A worked example

Use the sketch the calculator opens with. Gross figures, then a 24% contribution tax on both accounts, 15% capital gains on the taxable gain only, 8% a year, 30 years.

The two gross lines match because the model refuses to give the Roth more invested cash than the taxable account. The entire advantage in this sketch is the gains tax that was not charged on the Roth. A higher gains rate widens that gap. A shorter horizon shrinks it, because there is less gain to tax. Set the contribution tax to zero only if you mean the amounts you type are already after tax. If you leave contribution tax at zero, the ordinary-income rate is used instead, and both accounts are still reduced by that rate.

How to read the result

Roth ending balance is the after-tax wealth in the tax-free sketch. Taxable gross is the brokerage balance before the exit tax. Taxable after tax is that balance minus gains tax on the gain, not on the whole balance. Subtracting the tax from money that was already taxed on the way in is the mistake the basis line exists to prevent. The advantage is Roth minus taxable after tax. It is not a promise that a Roth will beat every other account you could have funded with pre-tax dollars. This page never runs that race.

The chart draws the Roth line and the after-tax taxable line. Early years look close, because the gain is small. Later years open up if the return stays positive and the gains rate stays above zero. Fees, dividend drag, and a return that is not a flat 8% are not in the lines.

Common mistakes

Comparing a pre-tax monthly amount in one account with an after-tax amount in the other. This calculator taxes the gross contribution on both sides so the invested cash matches. If you want them to match, do not “correct” one side by hand.

Taxing the entire taxable balance, including the deposits. Only the gain above basis is multiplied by the capital-gains rate. The example’s gap is about 75,760, not 15% of 649,450.

Reading the ordinary-income slider as a traditional IRA. It does not create a pre-tax contribution. It steps in only when the contribution-tax input is zero, and then it hits both accounts.

Ignoring limits and penalties. A real Roth has eligibility rules and a penalty regime this formula does not know. An assumed 8% is not a market forecast. The page will still draw the curve.

Treating the advantage as spendable advice. The dollars are nominal. Inflation, a state tax, and a future change in the gains rate are not simulated. The inflation guide is the separate question of what a nominal balance buys.

FAQ

Why are the Roth and taxable gross balances the same?

Because both accounts invest the same after-tax cash at the same monthly rate. The Roth benefit on this page shows up when the taxable account pays gains tax on the growth. It does not show up as a larger pre-tax balance.

Does the ordinary tax rate change the result?

Only when the contribution-tax input is zero. Otherwise the contribution-tax rate is the one that reduces what gets invested, on both sides. The ordinary slider is not a traditional-versus-Roth switch.

Is the capital-gains tax charged every year?

No. The model compounds the full taxable balance and estimates the gains tax on the unrealized gain at each year-end for the after-tax line. It does not withhold dividend tax or force a sale along the way.

What if the return is zero?

The balances are the invested deposits added up. There is no gain, so the gains tax is zero and the Roth advantage on tax is zero. You still gave up the contribution tax on the way in, on both accounts.

Is this financial advice?

No. FinTools4U guides and calculators are for education. They do not know your eligibility, your state’s tax, or whether the return will happen.

Related guides

• How compound interest actually works — the same monthly growth engine, without the two-account tax split.
• What your FIRE number means in plain English — the spending target a balance is trying to cover, which is a different formula.
• Inflation and real return — what a nominal ending balance buys after the inflation rate you type.
• How a savings goal is calculated — a dated target and the deposit that hits it, rather than a Roth-versus-taxable race.

Try it with your figures

Open the Roth versus taxable calculator. Set the gross starting balance, the gross monthly amount, the contribution tax, the gains rate, and the years. Read the after-tax taxable line against the Roth line, not the two gross lines against each other. Share the URL if you want those inputs again — the numbers stay in the link, not on a server.