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Taxable vs. Tax-Deferred vs. Tax-Free Calculator

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It's no surprise that taxes impact investment returns. But it’s important to understand that the impact depends on your account type in addition to your overall income tax bracket.

Use this calculator to compare three account types that have different tax treatments.

  • Taxable accounts. Earnings are subject to tax annually in the year paid.

  • Tax-deferred accounts. Earnings grow tax-free until you withdraw those earnings at a later date.

  • Tax-free accounts (also called tax-exempt accounts). No income taxes are imposed on earnings when certain requirements are met.

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How Do Tax-Deferred and Tax-Free Accounts Work?

Just as it sounds, a tax-deferred account means you may not pay income taxes during the year on earnings and growth (or on contributions made during the year). Instead, the tax liability will be deferred until a later date, usually when you withdraw money from the account. Traditional IRAs and employer-sponsored retirement plans such as 401(k)s and 403(b)s are the most popular examples of tax-deferred accounts.

Tax-deferred accounts may also offer income tax deductions on annual contributions made by certain qualifying investors. Employee contributions to a 401(k) or a 403(b) can be made pre-tax, so they can lower taxable income now. The growth and earnings in general are not subject to tax as they are earned, but the distributions are taxable in the year taken out.

Individuals can contribute up to $22,500 in 2023 to their employer sponsored plans. Participants age 50 or over at the end of the calendar year also may make catch-up contributions up to $7,500 in 2023.

Annual Limit

Catch-up Contribution Limit

Employer-Sponsored Plans






When money is withdrawn from a tax-deferred account, the taxable portion is treated as ordinary income. However, penalties may also apply if money is withdrawn before reaching age 59½ unless certain exceptions apply.

A tax-free account means that generally, no income taxes are owned when you withdraw funds from your account. Consider Roth IRAs and Roth 401(k) accounts in employer-sponsored plans (if available), where the contributions are made on an after-tax basis, and the earnings, growth and withdrawals are income tax-free when certain rules are met. In addition, Roth IRAs are not subject to required minimum distributions (RMDs) during the owner’s lifetime. And starting in 2024, Roth 401(k) accounts will not be subject to RMDs during the owner’s lifetime.

While tax-free accounts do not offer an upfront tax deduction, it’s important to consider the long-term benefit of their tax-free growth. You won’t experience annual income tax (as with taxable accounts,) or even a delayed income tax liability (as with tax-deferred accounts) when you withdraw the funds in the future. Working with a financial advisor can help you determine which retirement plan best suits your situation.

A Health Savings Account (HSA) is another popular tax-exempt account. HSAs are only available to eligible individuals who are enrolled in a qualifying high-deductible health plan and are not covered by another non-high deductible health plan.

HSAs are unique in offering a triple tax benefit: an income tax-deduction in the year of contribution, tax-deferred growth and income-tax-free distributions at the time of withdrawal for qualified expenses. Contributions to an HSA are tax-deductible (or made on a pre-tax basis through an employer-sponsored cafeteria plan), and the earnings grow tax-deferred. Withdrawals to pay for qualified medical expenses are not taxed—a key benefit of this tax-advantaged account.

The maximum HSA contribution for 2023 is $3,850 if you have individual high-deductible health plan coverage and $7,750 if you have family high-deductible health plan coverage. Participants age 55 and older may contribute an additional $1,000.

Withdrawals (contributions and earnings) that are not used for qualified medical expenses will be taxed as ordinary income and subject to an additional penalty of 20% (the penalty does not apply once the HSA owner reaches age 65, but nonqualified withdrawals are still subject to ordinary income taxes). When the owner of the HSA dies, a surviving spouse may continue receiving this preferred tax treatment with a spousal rollover, provided the surviving spouse was the designated beneficiary on the HSA.

What Is a Taxable Account?

A taxable account, such as a taxable investment or brokerage account, does not have any of the tax benefits that a tax-deferred or tax-free account offers. Read more about the types of investment distributions and how they are taxed.

You should consult with your investment and tax advisor on how to invest in your taxable account to potentially maximize your returns while you minimize your income tax.

Can I Have a Tax-Deferred Traditional IRA or Roth IRA if I Have a Retirement Plan at Work?

Many workers participate in employer-sponsored retirement plans like 401(k)s or 403(b)s. You are able to contribute to a traditional IRA even if you qualify for a 401(k) or 403(b), but the contribution limits are lower.

You may be able to deduct those IRA contributions on your taxes or decide to contribute to a Roth IRA. The answer depends on your income, and your tax rate now and later.

If I Max Out One Type of IRA, Can I Still Contribute to Another Type of IRA?

For 2023, you may be able to contribute up to a total of $6,500 in a Roth and/or traditional IRA if the saver or spouse has earned income. Those over age 50 may also be able to contribute an extra $1,000 per year. If you max out your traditional IRA, you will not be able to contribute to a Roth IRA.

If you want to contribute to both types of accounts, you will have to monitor your contributions to ensure you do not go over the annual limit. Also, annual limits may increase due to inflation from year to year, as determined by the IRS, so you should also review those to see if you can increase your contributions. Remember that you can contribute an extra $1,000 annually once you turn 50.

Should You Have Both a Tax-Deferred and Tax-Free Account?

If you're wondering what kind of account you should contribute to and invest in, the best answer is, “it depends.” In general, you may want to add tax diversification to your investment repertoire, where you have assets invested in all three account types discussed above (i.e., taxable, tax-deferred and tax-free). This should allow you to be more in control over your tax situation now and in the future. However, tax rates and rules change frequently, and no one knows for certain what the rules will look like in the future.

Call us or request a call to talk to an American Century representative to help you determine how to best allocate your investments and accounts to achieve investment and tax diversification. The answer varies depending on your personal financial situation, age, desired retirement age and current tax bracket now and later among many factors.

Looking to Keep More of What You Earn?

Get more information about how tax rules can affect your investments.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.

Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.

Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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