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401(k) Challenges

This Calculator Helps You Decide Whether to Invest in a 401(k), IRA, or Both

Should you invest in a 401(k) or IRA? Betterment’s calculator helps you do the math and decide.

Articles by Alex Benke, CFP®

By Alex Benke, CFP®
VP of Advice and Investing, Betterment  |  Published: February 24, 2016

Betterment’s calculator can help you decide whether to invest in an employer-sponsored retirement plan, a traditional or Roth IRA, or both.

The calculator considers IRA income eligibility, employer plan matching benefits, and current and future tax rates.

It’s also a preview of Betterment’s RetireGuide, which provides detailed guidance, and syncs with external accounts. RetireGuide is easy to set up and is available to Betterment customers at no additional cost.

There are a number of tax-advantaged retirement accounts available to U.S. investors. Which do you qualify for, and which account should you have?

Use Betterment’s retirement savings calculator to help you answer those questions and decide.

How We Built the Calculator

This calculator aims to answer three important questions regarding your individual situation:

  1. How much can you contribute to each type of Individual Retirement Account (IRA) account for the current tax year?
  2. If you have an employer-sponsored plan, such as a 401(k) (most common), 403(b) or 457(b) (less common), should you invest in this plan, or an IRA, or both?
  3. Which account is likely to be the most tax-efficient for contributions?

Below, we take a deeper dive.

How Much Can You Contribute to Each Type of IRA?

The contribution rules for IRA accounts can be difficult to follow.

Your age, tax filing status, modified adjusted gross income (MAGI), and whether your employer (or spouse’s employer) offers a retirement plan are all factors when determining IRA eligibility and the impact on your taxes.

Our calculator starts by figuring out how much you and your spouse can contribute to these account types:

Roth IRA: You contribute to a Roth IRA with after-tax dollars. You do not pay any taxes on dividends, capital gains, or withdrawals (as long as you are older than 59 and a half, and have the account for at least five years).

Traditional IRA: You make tax-deductible contributions to a traditional IRA with pre-tax dollars if you meet the eligibility criteria. There are no taxes on dividends and capital gains, but you will pay taxes on qualified withdrawals in retirement.
Note: If you don’t qualify to deduct contributions to a traditional IRA, you can still contribute to a traditional IRA, but with after-tax dollars. Non-deductible contributions still benefit from tax-sheltered growth (which is growth without dividend and capital gains taxes) and may be a good candidate for a Roth conversion.

For the purposes of this calculator, we did not consider the less common Simplified Employee Pension IRA (SEP IRA) and Simple IRA account types.

Should You Invest in Your Employer’s Retirement Plan, an IRA, or Both?

If your employer offers a retirement plan, such as a 401(k), 403(b), or 457(b), it can be an excellent way to invest for the future.

As you might expect, not all employer-sponsored plans are equal. Some plans may offer more generous employer matches, profit-sharing, and lower-cost investment options than others. Some employer-sponsored plans even offer investing advice for participants.

If your employer offers a match, then it almost always makes sense to contribute to a plan.

For example, the most common scheme (and default for the calculator) exists where the employer matches 50% of your total contributions, for up to 6% of your salary.1 Many employers also opt for a discretionary match or profit sharing option, which is reviewed annually to determine option amounts, renewal, or discontinuation.

While the maximum allowable annual contribution for employees is $18,000, an employer can contribute up to an additional $35,000, for a total of $53,000 in retirement savings per year.2

If you’re investing in your company’s 401(k) plan, you should find out how much you’re paying in fees. According to research by Brightscope, the cheapest 10% of plans have a total fee of 0.37%, while the most expensive 10% of plans cost 1.55%. Fees depend on a number of factors, including: your company’s size, who your company’s chosen to manage your 401(k) plan, and the products and level of investment advice offered. Many plans don’t even offer advice without charging additional costs. Employers often cover portions of fees on behalf of their employees, helping them save more for retirement.

Typically, the driving factor in how much a plan costs is its asset size; employees of Fortune 50 companies may pay lower fees than those who work for smaller businesses.

Betterment for Business: A 401(k) by Betterment

Betterment for Business offers the only 401(k) that includes personalized investment advice for all participants.

If you’re an existing Betterment customer and you also contribute to an employer-sponsored Betterment 401(k), then you can manage both accounts from a single Betterment dashboard.

Betterment’s 401(k) invests in a portfolio of completely independent funds, which means our compensation is not impacted by the funds we select for plan contributors. Through our affiliated registered investment advisor, Betterment LLC, our transparent guidance comes at no extra cost, hidden fees or conflicts of interest.

As a result, employees receive an investment selection that’s truly in their best interest, and employers aren’t at the mercy of conflicted providers whose fees are subsidized by fund providers.

Our included advice sets us apart from traditional 401(k) providers. As employees contribute to their 401(k) plans, we help ensure that they are invested in a globally diversified portfolio of ETFs. As with all Betterment accounts, we continuously adjust portfolios and rebalance investments to help ensure 401(k) plan contributors are taking on the right level of risk for their retirement time horizons.

Which Account Types Are Most Tax-Efficient?

When you’ve provided the relevant information and details about your employer plan, our calculator will prioritize each account type for you.

For each, we calculate what your eventual after-tax return amount will be when you withdraw the funds in retirement.

This after-tax return calculation has a number of components.

Current and Future Tax Rates

Based on your current household income, filing status, and ZIP code, we calculate your current federal, state, and capital gains tax rates.

We then estimate your future tax rates based on your current income and tax bracket (you can override this estimate if you’d like, in the advanced view). Your current and future tax rates help define which types of tax advantages you should prefer this year.

As a general rule, if your future tax rate will be lower, it is likely more efficient to use traditional accounts to save taxes at a higher rate now, and withdraw later in retirement at the lower rate.

If your future tax rate will likely be the same or higher, it is generally more efficient to use a Roth account and forgo a deduction now so withdrawals will be tax-free in retirement. This general rule may be affected by the accounts for which you are eligible.

Investment Returns Net of Fees

We assume all of the investments in this calculation are similar to the retirement portfolio Betterment would construct for someone with your current age and retirement age. You can see the specific investment mix for your situation on the calculator’s advanced view under “Taxes, Investments, and Fees.”

If you have an employer plan we ask you to provide the average expense ratio of the investments and the plan management expense. We have defaulted these values to industry averages. For the taxable and IRA accounts we use the applicable fees for a Betterment portfolio (0.09% to 0.12% for the average expense ratio of the investments and 0.15% for the management fee). With the portfolio and fee information we calculate an average annual expected return net of fees.3

Employer-Matched Contributions

If your employer matches your contributions, this immediately raises the return on your investment. It almost always makes sense to contribute at least enough to get the employer match.

With each account type, you pay taxes at different points. Traditional accounts start with a tax deduction, grow tax free, and owe income tax in retirement. Roth accounts use taxed contributions, grow tax free, and owe no income tax in retirement. Taxable accounts use after-tax contributions and pay tax on dividends and capital gains. We normalize each of these scenarios by projecting an after-tax rate of return for each account type.

Once we have the after-tax returns for each account type we take your annual savings goal and start filling up each contribution type in priority order.

Want a More Detailed Calculation? Set Up RetireGuide

Betterment’s retirement savings calculator is a simplified version of RetireGuide, which is available for no additional fee for all Betterment account holders.

Betterment’s RetireGuide recommends how much you may need to save for retirement based on your income—including Social Security income—as well as 401(k)s, IRAs and other savings, and when and where you plan to retire.

RetireGuide also syncs with non-Betterment account balances, including your spouse’s investment account holdings, if applicable, and you can revise your criteria easily.

If you have a Betterment account, you can get started with RetireGuide by clicking “Set up plan” next to any retirement account on your Summary page. If you don’t yet have a retirement account, choose “Set up plan” from the dropdown on the Advice tab.

1Exhibit 4.7, pg. 25. Annual Defined Contribution Benchmarking Survey, Ease of Use Drives Engagement in Saving for Retirement

2IRS Press Release: IRS Announces 2016 Pension Plan Limitations; 401(k) Contribution Limit Remains Unchanged at $18,000 for 2016

3We’ve updated our pricing structure since this article was published. Learn more at

This article and the Calculator provided are intended for educational purposes only. The information provided is educational in nature, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions, or be relied upon as tax advice. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment’s charges and expenses. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature.

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