Taxable vs. Tax Deferred Investments
This calculator is designed to help compare a normal taxable investment vs. a tax deferred investment.
How the taxable vs. tax deferred investments calculator works
It grows the same investment two ways: in a taxable account where each year's return is reduced by tax, and in a tax-deferred account that compounds untaxed until a single tax is applied at withdrawal. The deferred account keeps more money compounding, usually winning even after the final tax.
Worked example: with initial investment of $25,000, annual return of 7.00% and years invested of 25, the taxable vs tax-deferred investments shows tax-deferred advantage of $17,771.
- Taxable account
- $91,351
- Tax-deferred (pre-tax)
- $135,686
- Tax-deferred (after-tax)
- $109,121
- Advantage
- $17,771
The formula
Taxable grows at return × (1 − tax) each year. Tax-deferred grows at the full return, then the gain is taxed once: after-tax = principal + gain × (1 − tax).
Results are estimates for educational purposes and are not financial advice. Confirm exact figures with your lender, plan administrator or advisor.
Questions about the taxable vs. tax deferred investments
Why does tax-deferred growth win?
Taxing gains every year shrinks the base that compounds. Deferring the tax lets your full balance keep working, so even after paying tax at the end you usually come out ahead.
What accounts are tax-deferred?
Traditional 401(k)s, 403(b)s and IRAs grow tax-deferred. Roth accounts go further, growing entirely tax-free. Ordinary brokerage accounts are taxable.
Is tax-deferred always better?
Usually, but not always — it depends on your tax rate now versus at withdrawal. The advantage shown here assumes the same rate; a much higher future rate narrows it.
Is the Taxable vs. Tax Deferred Investments free to use?
Yes. Every calculator on FinCalculators is completely free, with no sign-up, login or paywall. You can run as many scenarios as you like.