Tax-Deferred vs Taxable Investment Comparison

Tax-deferred vs taxable investment comparison (after-tax value)

This calculator compares two common ways people invest long term: putting money into a tax-deferred account (where contributions reduce taxable income today and the account grows without annual tax), versus putting money into a taxable investment account (where you invest after-tax money and may owe tax along the way). The goal is simple: estimate which option leaves you with more spendable money after taxes at the end of your time horizon.

The primary use case is deciding where to put your next contribution when you have a fixed gross amount available from your salary or business income. In the tax-deferred scenario, the calculator assumes the full gross amount is contributed because you are not paying tax on that contribution today. In the taxable scenario, the calculator assumes you first pay your current marginal income tax, and then invest what is left.

Results are shown as an after-tax ending value for each path, plus a difference so you can see the size of the advantage. The calculator also gives a small breakdown of taxes paid in the taxable account (dividend taxes during the years and capital gains tax at the end) and the estimated tax paid at withdrawal for the tax-deferred account. This is not a personal tax filing tool. It is a decision aid to compare the two account types under a consistent set of assumptions.

Assumptions and how to use this calculator

• Contributions are treated as end-of-year deposits for simplicity. Real contributions made throughout the year will slightly change results.
• The “expected annual return” is treated as a total return before fees. If you enter a dividend yield, the remaining return is treated as price growth.
• Taxable account dividends are taxed each year at the dividend tax rate, and the remaining dividend amount is reinvested, increasing cost basis.
• Capital gains tax is applied once at the end on the taxable account’s gain (ending value minus cost basis). Loss harvesting, exemptions, and timing strategies are ignored.
• Tax-deferred withdrawals are taxed once at the withdrawal tax rate. Early withdrawal penalties, contribution caps, and specific country rules are not modeled.

Common questions

Why does the tax-deferred option often look better in this calculator?

Two effects can compound over time. First, the tax-deferred path invests the full gross contribution, while the taxable path invests a smaller after-tax amount. Second, tax-deferred growth is not reduced by annual dividend taxes. The larger starting base and cleaner compounding can produce a meaningful gap, especially over long periods.

What if my withdrawal tax rate is higher than my current tax rate?

If you expect to be taxed at a higher rate later, the tax-deferred advantage can shrink or even reverse. This calculator makes that sensitivity visible. If the withdrawal tax rate is materially higher than your current rate, it can reduce the after-tax value of the tax-deferred option even if growth is higher along the way.

What should I enter for dividend yield and dividend tax rate?

If you are unsure, leave the advanced section blank. The calculator defaults dividend yield to 2% and dividend tax rate to your current tax rate. If you know your portfolio is dividend-heavy, increase the dividend yield. If your dividends are typically taxed at a special rate, enter that rate instead of using your marginal income tax rate.

Does this include inflation?

No. Outputs are shown in nominal currency. If you want a rough inflation adjustment, reduce the expected annual return by your inflation estimate before running the comparison. Keep the approach consistent across both options so you are still comparing apples to apples.

When might a taxable account be the better choice?

A taxable account can win when your future withdrawal tax rate is much higher than today, when your taxable investing has unusually low tax drag (for example, low dividends and low realized gains), or when you cannot use tax-deferred accounts effectively due to access restrictions or contribution limits. This calculator intentionally focuses on the account type comparison itself, not eligibility rules or contribution caps.