Tax-Adjusted Investment Projections: Real After-Tax Returns

Most compound-interest calculators implicitly assume tax-free growth. That's appropriate for some qualified Roth and HSA uses, but taxable brokerage accounts can have tax drag from dividends, interest and realized gains. The size depends on the account, holdings, turnover, tax rates and withdrawal timing; here's how to model those assumptions separately.

Three account types, three different math

(1) Roth: qualified withdrawals can be tax-free when the account and distribution rules are met. (2) Traditional 401(k)/IRA: growth is generally tax-deferred, but withdrawals can be taxable under the rules that apply to you. (3) Taxable brokerage: dividends, interest and realized gains can create tax drag. Model the rate, tax basis, withdrawal timing and account rules explicitly.

The adjustment for taxable accounts

Use a range rather than a universal drag percentage. A stock-heavy account may receive qualified dividends and defer much of its capital-gains tax until sale; bond income, turnover, distributions and local taxes can change the result. Run a lower-return sensitivity and identify which tax assumptions produced it, instead of automatically subtracting 0.5–1% from every portfolio.

The adjustment for tax-deferred accounts

Run the calculator at the stated gross rate, then apply an explicit withdrawal-tax scenario. The effective rate can differ from a marginal bracket because of deductions, other income, filing status, required distributions, state taxes and the type and timing of withdrawals. A $1,000,000 balance multiplied by a 22% illustrative rate is $780,000 after that one assumption, not a universal after-tax value.

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

With multiple accounts, you can compare where tax-inefficient assets, broad index funds and cash sit, subject to liquidity, risk, fees and available investments. Any tax benefit is scenario-dependent; model the holdings, distributions, tax rates and withdrawal order instead of assuming a fixed annual saving.

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 and account-specific holding periods. These can move the result in either direction, so treat the rate and withdrawal-tax adjustments as sensitivity inputs rather than a precision estimate.