Financial options calculator

Credit Card Repayment, Retirement and Taxable Investments Compared

The calculators that follow are personal finance calculators which look at the post-tax value at withdrawal of one post-tax dollar invested by the various means available to the typical investor in the United States. The calculations are based on the marginal (the last) dollar invested and withdrawn. The value at withdrawal of many of the investments depends on the current tax rates and the anticipated tax rate at withdrawal.

The calculator at this page provides the federal marginal tax rates and short and long term investment tax rates. Please consult your state tax web pages for state short and long term tax rates. Table 3 of this document has some of the state tax rates.

The first calculator provides the post tax value at withdrawal of each dollar invested in 401-K with and without matching, Roth and education IRA’s (529 education savings), credit card repayment and bank savings accounts and CD’s.

Assumptions for 401-K, Roth and education IRAs calculations include the assumption that monies are taxed by your state in the same manner as the federal. For 401-K: deposits are tax free and withdrawals are taxed at the withdrawal state and federal tax rates. For Roth and 529 plans assumptions are that post-tax dollars are invested and withdrawals are tax free.

The value of Bank Savings (such as Bank CDs, money markets or saving’s accounts) at withdrawal are underestimated as they are calculated under the assumption that the withdrawal tax rates are in effect only in the last one year prior to withdrawal and that the current tax rate holds till that time. Credit cards are like Roth IRAs as the ‘income’ (reduction in balances) is tax free while payments made are from post-tax dollars. For more on credit cards see the following page.

There are four default scenarios. You can alter the blue cells and enter your own scenario. When marginal rates at withdrawal (retirement) are lower than marginal tax rates when investing, the 401-K investment is the better than the Roth option. Scenario 1 looks at such a case. The values of the investments are highest for the 401-K investments. In this scenario one dollar is worth $5.22, $3.48 and $2.85 for the matched 401-k, unmatched 401-k and the Roth respectively.

When marginal rates at withdrawal are higher than the marginal rates when investing, as in scenario two, Roth and 529 educational plans can be much better investments than an unmatched 401-K. You can have higher marginal rates at withdrawal, for instance, if you anticipate paying for a child’s education during your peak income earning years. Similarly contributions to Roth IRA’s are good investments in lower income years in your career such as those early in one’s career. In scenario two one dollar is worth $3.51, $2.34 and $2.85 for the matched 401-k, unmatched 401-k and the Roth/education IRA respectively.

The third scenario looks at credit card debt. Your ‘return’ for repaying your credit card is your annual APR on the card. The credit card rates tend to be higher than returns you would get from most other investments. The default example has an interest rate of 12% which can be compared against the more typical rate of earnings on investments of about 6% in scenarios one and two. It is worthwhile to compare the credit repayment alternative to other investments. In many cases, except sometimes for the matched 401-K, credit repayment is likely to be the better option. Compared to the 6% return options in scenarios one and two the 12% APR for credit leads to one dollar returning $7.69 versus $5.22 and $2.85 for the matched 401-k (scenario one) and the Roth (scenario two) respectively.

The fourth option looks at various bank savings. A more realistic 3% return is used in this scenario.  As bank deposits to the tune of $250,000 are federally insured this option leads to stable secure returns. Similarly credit card APR tend to stay the same or increase and repaying credit cards remains preferable even if one has a credit card with APR closer to about the 6% in scenario one and two.

Edit the blue cells in the spreadsheet and enter your data and the calculations will refresh. If you appreciate our efforts and would like to make a voluntary contribution of any amount to help us maintain and improve this site please do so at this link.

The second calculator in this page looks at taxable and tax-exempt non-retirement investments. The calculator at this page provides the federal short term and long term gains marginal tax rates which you need for the calculator that follows.  Please consult your state government tax web pages for state rates. Table 3 of this document has some information on the state tax rates.

The second calculator calculates the value of a one dollar investment in tax exempt municipal securities which are federally exempt or federal as well as state exempt, in taxable investments in bonds, stocks and mutual funds and employee stock ownership plans (ESOP).

This second calculator requires the dividend return as a percent of total return, qualified dividends as a percent of the total dividend and the federal and state short and long term tax rates. As noted earlier, look at this page for details on your long and short term rates. If a $1000 investment is worth $1100 a year later and the annual dividend was $40 then the dividend return as a percent of the total return is 40%. A qualified dividend is awarded on domestic and qualifying foreign assets held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. It is taxed at the long term rates (as opposed to the short term rates for ordinary dividends- see tax publication 550 for further details) and thus needs to enter the calculations. Mutual fund annual capital gains distributions are also taxed at the long term rates. For our example if $20 of $40 were qualified dividends (plus mutual fund annual capital gains distributions which are taxed at the same rate as qualified dividends) then the qualified dividends/distributions as a percent of total dividends is 50%. Look for these numbers in your annual bonds and stock and mutual fund statements. Enter typical data over a number of years.

There are four default scenarios as well in this second calculator. You can alter the blue cells and enter your own scenario. The first scenario looks at a municipal bond fund with a return of 4.5%, 60% dividend as a percent of the typical return and 70% as qualified dividends. One dollar now is worth $2.1 in 18 years for a federal and state tax exempt fund and $1.82 for a fund which is only federally exempt.

The second scenario looks at a taxable mutual fund returning 6%, 10% dividend as a percent of total return and 50% qualified dividends. One dollar is worth $2.33 in 18 years. The third scenario looks at a taxable high dividend yield mutual fund returning 6%, 40% dividend as a percent of total return and 50% qualified dividends. One dollar is worth $2.01 in 18 years.

Employee stock ownership plans (ESOPs) typically allow one to purchase company stock at a discount.  If the stock is held long term most of the dividends can be assumed to be qualified dividends. Scenario four looks at an ESOP discounted to 85% of original value, a 30% dividend as a percent of total return and 90% qualified dividends. One dollar is worth $2.75 in 18 years.

Edit the blue cells in the spreadsheet and enter your data and the calculations will refresh. If you appreciate our efforts and would like to make a voluntary contribution of any amount to help us maintain and improve this site please do so at this link.

I saved the calculations I did when I worked out the equations for this spreadsheet and reproduce them below. This page of this website is dedicated to the Indian mathematician Ramanujam who is said to have scribbled many of his profound insights on the back of an envelope.