Tax Deferred Accumulation Calculator

Tax deferral is usually explained as paying tax later. That undersells half of it and oversells the other half. The half it undersells: money that would have gone to tax each year stays invested and compounds, so deferral raises the rate at which a balance actually grows rather than simply moving a payment to the end. The half it oversells: the tax still arrives, and if it lands on a larger balance at a higher rate, the arithmetic can go the other way.

This calculator makes both halves visible by running the same contributions through two accounts and carrying each to an after-tax value. The taxable account is charged a single modeled rate on its investment earnings at each year end. The tax-deferred account is charged nothing during accumulation and once at the comparison date. Nothing else differs between them.

It is a tax-drag model, not a tax return. It has no brackets, no dividend or capital-gain rates, no realisation lots, no deductions and no required distributions. Two numbers you enter carry the whole comparison, and the calculator's job is to show exactly what those two numbers do — including the modeled rate at which the two paths break even.

Three assumptions drive the answer and a fourth decides how much they matter. The return sets how much there is to tax. The annual drag rate sets how much the taxable account loses each year. The withdrawal rate sets what the deferred account gives back at the end. Time is the fourth, and it is the reason deferral can win despite the tax still being paid: a dollar not sent to the tax authority in year three is a dollar still compounding in year twenty-five.

The cost-of-taxing-along-the-way figure is the clearest single diagnostic, because it is always larger than the tax bills themselves. In the worked example below, $55,701 of tax is charged over 25 years but the taxable account ends $94,056 behind — the extra $38,355, roughly two-fifths of the total, is growth those tax dollars would have earned had they stayed invested. That gap is the entire mechanism, and it widens with the horizon.

Read the break-even withdrawal rate before reading the difference. It is the modeled rate at which the two paths land level, and it tells you which side of the line your own assumption sits on. Below it the deferred path ends higher; above it the taxable path does. It is a property of the arithmetic, not a recommendation about which account to use.

The setting that matters most, and is easiest to miss, is what the withdrawal tax applies to. Taxing the whole deferred balance treats the contributions as pre-tax dollars while still comparing them against equal nominal after-tax dollars in the taxable account — which is why that setting can leave the taxable path ahead. Taxing earnings only compares like with like. Neither is wrong; they answer different questions, and the calculator says which one is running.

One period-by-period run produces every figure on this page. Both accounts receive identical cash flows and compound at the same gross period rate. The entered return is an effective annual rate and the period rate is its exact n-th root, i = (1 + r)^(1/n) − 1, so moving from monthly to weekly contributions changes when money lands but never the annual return assumed.

The taxable account is charged at each year end, on that year's total gross investment earnings, at the drag rate you enter. Nothing is charged on contributions and nothing on principal — only on modeled earnings. A year of negative earnings is charged nothing and generates no credit, because no loss-offset model is implemented; losses are not carried forward either.

Charging tax annually against an explicit earnings figure is a deliberate choice. It means every row of the schedule can be checked by hand: that year's tax is that year's gross earnings multiplied by the rate, and nothing else. The alternative — compounding the taxable account at r(1 − t) — happens to land within about a hundredth of a percent of this over long horizons, but it never shows what was charged on what, so it cannot be audited. With annual periods and no contributions the two are identical, which is the boundary case pinned in the test suite.

The tax-deferred account is charged nothing during accumulation. Because it receives the same cash flows and pays nothing along the way, its gross balance is also the no-tax benchmark for those contributions, which is why the page uses one number for both.

At the comparison date a single modeled rate is applied to the deferred balance, against one of two bases you choose. The whole balance is the simplified traditional pre-tax assumption: every dollar is taxable on the way out. Earnings only is what a contribution made from already-taxed money would leave behind. The choice changes the answer materially, so it is an explicit input rather than a hidden default.

Contribution timing changes the order of operations inside each period and nothing else, identically in both accounts: at end-of-period the balance grows and the deposit lands afterwards; at start-of-period the deposit lands first and earns that period's growth too. An annual contribution increase steps the deposit once a year, on the anniversary, in both accounts alike.

The break-even rate is solved analytically and verified in the test suite against an independent bisection run on a reference ledger written separately from the engine. The ledger itself is checked the same way: an independent accumulation loop with its own year-end tax charge has to reproduce every balance, every annual tax figure and every schedule total.

This calculator compares generic tax timing. The Roth conversion calculator handles a specific decision with IRA basis, Form 8606 pro-rata and the tax due on converting now. The retirement savings calculator answers whether a plan reaches a retirement capital target. The savings goal planner solves for the deposit, the time or the balance behind a fixed target. None of them overlaps with the question here, which is only what annual taxation costs compounding and what deferring it is worth.

Take $25,000 to start and $500 a month for 25 years at a 6% effective annual return, with 24% modeled as the annual drag on investment earnings and 22% modeled at withdrawal. Contributions total $150,000, so $175,000 goes in altogether.

In year one the taxable account earns $1,663.26 gross and is charged $399.18 — exactly 24% of those earnings — leaving it at $32,264.08 against the deferred account's $32,663.26. The gap after one year is the single tax bill. By year 25 the taxable account holds $351,385.54 having paid $55,700.70 in total, while the deferred account holds $445,441.25. The $94,055.71 between them is more than the tax bills: $38,355.02 of it, about two-fifths, is growth the tax dollars would have earned.

What happens next depends entirely on the withdrawal base. Taxing the whole deferred balance at 22% takes $97,997.07 and leaves $347,444.17 — $3,941.36 below the taxable account. Taxing the $270,441.25 of earnings alone takes $59,497.07 and leaves $385,944.17, which is $34,558.63 above it, or 9.83% more. Same accumulation, opposite conclusion, because the second version compares equal after-tax dollars and the first does not.

The break-even rates say the same thing more precisely. Against the whole balance the two paths land level at a modeled 21.12% — just under the 22% assumed, which is why the taxable path edges ahead. Against earnings only they land level at 34.78%, well above 22%, so deferral leads comfortably. Neither figure is a recommendation; both are the point at which the arithmetic changes sign.