Compare an IRA rollover with cashing out a retirement plan, including taxes, penalties, investment growth, tax drag, and future withdrawal tax over time.
IRA Rollover vs Cash-Out Formula
A rollover preserves the full pre-tax balance for retirement growth, while a cash-out begins with the amount left after tax and penalty.
Cash available to invest:
Cash_{today}=Balance*(1-Tax-Penalty)
Rollover after tax:
Rollover_{after-tax}=Balance(1+r_R)^n(1-T_R)
Taxable investment future value:
CashFuture=Cash_{today}[1+r_C(1-TaxDrag)]^n
Variables:
- rR is rollover return
- rC is taxable investment return
- TR is retirement withdrawal tax
- TaxDrag is the share of annual return lost to taxes
- n is years
Comparison mode reports both future values. Return-needed mode solves for the gross taxable return that matches the rollover.
The cash-out side assumes every dollar left after tax and penalty is invested.
Set the penalty to zero only when an applicable exception has been confirmed.
Cash Remaining from $100,000
Immediate proceeds depend heavily on tax and penalty.
| Income tax | Penalty | Cash remaining |
|---|---|---|
| 22% | 10% | $68,000 |
| 24% | 10% | $66,000 |
| 32% | 10% | $58,000 |
| 24% | 0% | $76,000 |
Example Problems
Example 1: Compare future values.
Compare a $100,000 rollover at 7 percent with $66,000 invested after a 24 percent tax and 10 percent penalty.
Example 2: Solve for return.
Find the taxable-account return needed for the smaller starting amount to match the rollover after tax drag.
Frequently Asked Questions
Does a direct rollover create current tax?
A properly executed direct rollover generally preserves tax deferral; the model assumes the full balance rolls over.
Why include tax drag?
Taxable interest, dividends, and realized gains can reduce the annual compounding rate.
Is the early-withdrawal penalty always due?
No. Age and statutory exceptions can change the rate; enter the rate that applies to the scenario.
