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Roth IRA vs Taxable Brokerage
Same savings, same market — the after-tax verdict over your horizon.
X VS Y COMPARISON · MONEY · RETIREMENT
Roth IRA vs Taxable Brokerage: Which Wins?
Same money, same market, different tax treatment — and the gap is enormous. At the defaults — $7,500 a year for 30 years at 8%, 2% dividend yield, 15% federal + 5% state on gains — the Roth IRA finishes at $849,624.08, tax-free on the way out. The taxable brokerage account finishes at $676,784.51 after $112,946.13 of capital-gains tax: the Roth wins by $172,839.57. But the Roth has a velvet rope — the $7,500 annual cap and the $153,000–$168,000 income phaseout for singles in 2026 — while the brokerage account takes unlimited money from anyone. Below: the 2026 rules that drive it, the worked example line by line, the exact tie nobody talks about, and the backdoor Roth escape hatch.
How the two accounts price 30 years
Same $7,500 a year, same 8% return, different tax machinery:
| Account | 30-year math (defaults) |
|---|---|
| Roth IRA | $7,500/yr annuity at 8% = $849,624.08 — qualified withdrawals tax-free |
| Taxable brokerage | $7,500/yr at an effective 7.6% (8% minus the annual dividend tax) = $789,730.64, then $112,946.13 of capital-gains tax on the gains = $676,784.51 |
The taxable account pays tax twice: the 2% dividend yield is taxed every year (20% combined federal + state at the defaults), and the remaining gains are taxed again when you sell. Each year's dividend tax is money that never compounds — and the final capital-gains bill lands on whatever managed to grow. The Roth skips both: pay tax on the way in, never again.
The worked example: $172,839.57, line by line
$7,500 a year, 30 years, 8% return, 2% dividend yield, 15% federal + 5% state:
Roth path: $7,500 × 30 = $225,000 contributed (after-tax dollars). Compounded at 8% with zero tax friction: $849,624.08. Of that, $624,624.08 is growth — and because the account is 5+ years old and you're 59½, every dollar of it comes out tax-free. That is the entire trick: three decades of compounding with nobody taking a cut.
Taxable path: the same $225,000, the same 8% — but the 2% dividend yield loses 20% to tax each year, so the effective growth rate is only 7.6%: $789,730.64. Then the gains — $564,730.64 — face capital-gains tax at 15% federal + 5% state: $112,946.13. Net to you: $676,784.51. The Roth wins by $172,839.57.
The exact tie: drop into the 0% capital-gains bracket (single filers under $48,350 of taxable income in 2026) with no state tax, and the gap is $0.00 — a perfect tie. Tax drag is a function of your tax rate, not a property of the account.
The high earner: add the top 20% federal rate, 5% state, and the 3.8% Net Investment Income Tax, and the gap balloons to $240,239.05. The richer the saver, the more the Roth is worth.
Output · formula · meaning
| Output | Formula | What it means |
|---|---|---|
| Roth IRA value | $A/yr annuity at r% for n years, tax-free | $849,624.08 at the defaults — the qualified-withdrawal value. |
| Taxable net value | Same annuity at (r − div-yield × dividend-tax), minus LTCG tax on gains | $676,784.51 at the defaults — after both tax bills. |
| The gap | Roth value − taxable net value | $172,839.57 at the defaults — the Roth ahead. |
| Final capital-gains tax | Taxable gains × (fed LTCG + state + NIIT) | $112,946.13 at the defaults — the second tax bill. |
Who uses this
- Savers maxing their 401(k): the Roth IRA vs brokerage question is literally the next $7,500 decision — run it before January's contribution.
- Young high earners: decades of compounding make the Roth's tax-free growth the most valuable thing you can buy in your 20s and 30s.
- Near-phaseout earners: if your MAGI is approaching $153,000 single / $242,000 joint, this tells you what the backdoor Roth is worth saving.
- Early retirees: the Roth's contribution-withdrawal flexibility (contributions out anytime, tax- and penalty-free) plus the 0%-bracket tie make it the bridge-account of choice.
Accuracy & limitations
Uses 2026 federal figures (IRS IR-2025-111): $7,500 Roth IRA limit ($8,600 at 50+), phaseouts of $153,000–$168,000 single / $242,000–$252,000 joint. The tax-drag model is a simplification — it assumes the dividend yield is constant, all dividends are qualified, gains are all long-term, and the whole taxable balance is liquidated in one year (real sales can be spread across years and brackets). Ignores expense ratios, the 0%-bracket threshold inflation, state-specific quirks (nine states have no income tax), the pro-rata rule on backdoor Roths, and investment risk. Not tax or financial advice.
Cite this calculatorBright Side Kit. “Roth IRA vs Taxable Brokerage: Which Wins?.” brightoolbox.com, 2026.
Bright Side Kit. "Roth IRA vs Taxable Brokerage: Which Wins?." https://brightoolbox.com/roth-ira-vs-taxable-brokerage/ Accessed October 23, 2026.Frequently asked questions
What is the difference between a Roth IRA and a taxable brokerage account?
A Roth IRA holds after-tax contributions that grow and come out tax-free in retirement (account 5+ years old, age 59½+) — but contributions are capped at $7,500 a year in 2026 and phased out above certain incomes. A taxable brokerage account has no caps, no income limits, and no withdrawal rules — but dividends are taxed every year and gains are taxed when you sell. The Roth is a velvet-rope tax shelter; the brokerage is the unlimited overflow lot.
What are the 2026 Roth IRA contribution limits and income phaseouts?
For 2026: $7,500 under age 50, $8,600 at 50 or older (the $1,100 catch-up, now inflation-indexed). You need earned income at least equal to your contribution, and the $7,500 covers all your IRAs combined. Direct contributions phase out at $153,000–$168,000 MAGI for singles and heads of household, $242,000–$252,000 for married filing jointly, and $0–$10,000 for married filing separately. Above those ranges, the backdoor Roth is the workaround.
What is the backdoor Roth IRA?
A two-step workaround for earners above the phaseout: contribute $7,500 to a traditional IRA (nondeductible at high incomes) and convert it to a Roth — conversions have no income limit. The catch is the pro-rata rule: if you already hold pre-tax IRA money, part of every conversion is taxable. It works cleanest when your only IRA money is the new contribution.
What is tax drag, and how big is it?
Tax drag is the annual tax bite on a taxable account's distributions that reduces its compounding rate. At the calculator's defaults — a 2% dividend yield taxed at 20% combined — the drag is 0.4 percentage points a year (8% becomes 7.6%). Over 30 years that shaves roughly $60,000 off the balance before the final capital-gains bill even lands. Higher yields, higher brackets, and the 3.8% NIIT all widen it.
When does a taxable account beat a Roth IRA?
Three cases. 1) You're in the 0% capital-gains bracket — the calculator shows an exact tie at the defaults. 2) You've already maxed the Roth's $7,500 cap — the overflow has nowhere else to go. 3) You need the money before 59½ for non-qualified reasons and can't wait out the Roth's earnings rules (though Roth contributions can be withdrawn anytime, tax- and penalty-free). The taxable account also wins on flexibility: no earned-income requirement, no five-year clock.
Do I need earned income to contribute to a Roth IRA?
Yes — your contribution can't exceed your earned income (wages, salaries, self-employment income) for the year. Earn $4,000 and your limit is $4,000, even though the statutory cap is $7,500. A non-working spouse can still contribute via a spousal IRA based on the working spouse's income. The taxable brokerage account has no such requirement.
What happens if I save more than $7,500 a year?
Only $7,500 fits in the Roth — the rest goes to the taxable account automatically, where it's taxed along the way. The calculator models this: the Roth leg is capped and the overflow stays in taxable math. High savers should think in layers: 401(k) match, then HSA, then Roth IRA to the cap, then the taxable brokerage for everything above.
Are Roth IRA withdrawals really tax-free?
Qualified withdrawals — yes: the account must be open 5+ years and you must be 59½ or older (or meet an exception like disability or a first-home purchase up to $10,000). Contributions can be withdrawn anytime, tax- and penalty-free, since you already paid tax on them. Nonqualified earnings withdrawals face income tax plus a 10% penalty. And unlike traditional IRAs, Roths have no required minimum distributions in your lifetime.