Tax-adjusted investment projections — how to model real after-tax returns

Most compound interest calculators implicitly assume tax-free growth. That's correct for Roth IRAs, Roth 401(k)s, and HSAs used for medical expenses. It's wrong by 15-30% for taxable brokerage accounts. Here's how to adjust your inputs manually so the projection actually matches reality.

Three account types, three different math

(1) Roth (tax-free): no adjustment needed. Use the calculator as-is. (2) Traditional 401(k)/IRA (tax-deferred): no adjustment to growth, but reduce the final balance by your future tax bracket on withdrawal — typically 22% × final balance for middle earners. (3) Taxable brokerage: adjust the rate of return downward to account for ongoing tax drag.

The adjustment for taxable accounts

For a stock-heavy taxable account held long-term, expect tax drag of about 0.5-1.0% per year — qualified dividends taxed at 15%, no capital gains taxes until you sell. For a bond-heavy account or one that trades frequently, drag rises to 1.5-2.5% — interest taxed as ordinary income annually. Practical rule: subtract 0.5-1% from your nominal return rate. So 8% becomes 7-7.5%.

The adjustment for tax-deferred accounts

Run the calculator at the full rate (e.g., 7% real). Then take the final balance and subtract your expected withdrawal-period tax rate. Most retirees fall into 12% or 22% brackets. So a $1,000,000 traditional 401(k) is really $780,000 after-tax. This is why Roth conversions during low-income years are so valuable.

Worked example: $500/month for 30 years at 7%

Tax-free Roth: $612,000. End of story. Traditional 401(k) at 22% withdrawal rate: $612,000 grows the same way, but you pay $135,000 in future taxes. Net: $477,000. Taxable account with 0.7% drag: re-run at 6.3% real return → $549,000. No further deduction; you've already paid tax along the way (and capital gains when you sell at low LTCG rates). The Roth and taxable end up close. The traditional looks worst — but only because it gave you tax savings during contribution years. If you reinvested those savings, traditional roughly ties Roth.

Why account location matters more than people think

Same investment, same return rate, same time horizon. Different tax wrapper. A 30-year-old maxing a Roth IRA every year for 35 years ends with ~$1.2M tax-free. The same person investing the same amount in taxable ends with ~$960K after taxes. The tax wrapper is worth $240K — for free.

Asset location: the advanced move

Once you have multiple accounts, place tax-inefficient assets (bonds, REITs, high-dividend funds) inside Roth/Traditional, and tax-efficient assets (broad index funds) inside taxable. This minimizes drag where it hits hardest. The savings are usually 0.2-0.5% per year — small annually but ~$80K over 30 years on a $500K portfolio.

Things our calculator doesn't model

State taxes, NIIT (3.8% on high earners), AMT, RMD-driven tax bracket creep in retirement, Social Security taxation thresholds. These matter a few percentage points in either direction. For the 90% case, "subtract 0.5-1% per year for taxable, 22% off the end for traditional" gets you within 5% of reality.