Tax Impact Calculator 2025
Compare tax-deferred accounts (401k, IRA) vs. taxable investment accounts. See how much taxes reduce your wealth and why tax-advantaged accounts matter.
Calculator
2024 limits: 401(k) $23,500 | IRA $7,000
Tax Comparison Results
Account Type Comparison
| Account Type | 2024 Contribution Limit | Early Withdrawal | Required Min. Distribution |
|---|---|---|---|
| 401(k) | 23500 | Yes, 10% penalty before 59.5 | Yes, at 73 |
| Traditional IRA | 7000 | Yes, 10% penalty before 59.5 | Yes, at 73 |
| Roth IRA | 7000 | Contributions anytime | None |
| Taxable Account | Unlimited | Anytime | None |
Tax-Advantaged Investing: How Taxes Destroy Wealth
Taxes are often called the largest expense in an investor's lifetime—larger than fees, larger than inflation, and sometimes larger than the returns themselves. The difference between tax-deferred investing (401k, IRA) and taxable account investing can easily exceed six figures over a career. Understanding how taxes erode wealth and using all available tax-advantaged accounts is one of the most powerful—and underutilized—wealth-building strategies.
The Hidden Tax Cost
In a taxable account, you pay taxes annually on capital gains and dividends. This creates a drag on compounding—you're reinvesting less money each year than in a tax-deferred account. Over 30 years at 7% returns and 24% tax bracket, this difference can be $200,000+. Taxes don't just reduce your return; they exponentially reduce compound growth.
The Compounding Cost of Taxes
Year 1: $100,000 with 7% return and 24% tax = $107,000 taxable vs. $107,000 deferred Year 10: $161,000 taxable vs. $196,000 deferred (difference: $35,000) Year 30: $323,000 taxable vs. $761,000 deferred (difference: $438,000!)
Tax-Deferred Accounts: The Big Three
- 1.401(k): $23,500 limit. Employer matches up to 6% common. Forced RMDs at 73.
- 2.Traditional IRA: $7,000 limit. Deductible only if no access to 401(k).
- 3.Roth IRA: $7,000 limit. Tax-free growth + no RMDs + tax-free withdrawals.
Contribution priority: 401(k) match → Max 401(k) → Max Roth IRA
Traditional IRA vs. Roth IRA: The Strategic Choice
Traditional IRA
- •Tax deduction now: Reduce taxable income today
- •Tax-deferred growth: No annual taxes until withdrawal
- •RMDs at 73: Must withdraw and pay taxes
- •Best for high earners: Deduction phases out above $77K single
Roth IRA
- •No tax deduction: Contributes with after-tax dollars
- •Tax-free growth: All gains are completely tax-free
- •No RMDs: Keep growing forever, leave tax-free to heirs
- •Best long-term: High earners now but lower bracket in retirement
Roth Conversion Strategy: Powerful Tax Planning
A Roth conversion allows you to convert Traditional IRA or 401(k) funds to Roth, paying taxes now to avoid taxes forever. This is especially valuable in years with low income (sabbatical, job transition, business downturns).
The Power of Early Conversion
Retire early at 50, take a Roth conversion ladder of $50K annually (15% bracket) until 59.5. Then access funds tax-free forever. Saves 24% lifetime taxes per dollar.
Mid-Career Conversion
In low-income year, convert $50K Traditional to Roth. If tax rate drops from 24% to 12%, you locked in huge arbitrage opportunity.
Tax Bracket Considerations
Your current tax bracket determines how valuable tax deductions are. The higher your bracket, the more valuable each 401(k) contribution. Someone at 37% bracket saves $0.37 per dollar; someone at 12% saves $0.12.
Long-Term Capital Gains: Taxable Account Strategy
In taxable accounts, holding investments 1+ year qualifies gains for lower long-term capital gains rates (0%, 15%, or 20% depending on bracket). This is dramatically better than ordinary income rates.
Long-Term Capital Gains Rates (2024)
Tax-Loss Harvesting: Getting Paid to Lose Money
When an investment loses value, you can sell it and use the loss to offset capital gains or up to $3,000 of ordinary income annually. This is a free tax strategy that reduces taxes without changing your investment exposure.
Example: Harvest Tech Stock Loss
Sell losing tech stock (down $10,000), immediately buy similar tech ETF. Realize $10,000 loss, offset gains, save $2,400 in taxes (24% bracket). Portfolio unchanged.
Wash Sale Rule
Can't rebuy the same security within 30 days. But similar funds are fine (VTI instead of VOO, for example).
HSA: The Triple Tax Advantage
Health Savings Accounts offer three tax benefits: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. It's the only account with all three advantages—sometimes called the "Stealth IRA."
2024 HSA Limits
Invest instead of spending for maximum wealth building
Estimated Tax Planning
If you have self-employment income or don't have enough withholding, you may owe estimated taxes quarterly. But savvy tax planning uses this: maximize 401(k) and SEP-IRA contributions to lower estimated taxes.
- •Quarterly planning: Adjust contributions each quarter based on earnings
- •SEP-IRA: Freelancers can contribute up to 25% of income (2024: $69,000 max)
- •Solo 401(k): Combine employee and employer contributions for more savings
Key Takeaway: Tax Optimization Is Wealth Building
Every dollar saved in taxes is a dollar that continues compounding. Over 30 years, $3,000 in annual tax savings— achieved through strategic use of 401(k)s, Roth conversions, HSAs, and tax-loss harvesting—compounds to over $250,000 in additional wealth. Tax planning isn't about tax evasion; it's about intelligently using government-provided accounts and strategies to build wealth faster. Start with: maximize 401(k) match → max 401(k) → max Roth IRA → max HSA → tax-loss harvest taxable accounts. These moves alone can save $50K-100K+ over a career while actually simplifying your finances.