This calculator calculates and displays the estimated Roth IRA balance at retirement and compares it with a hypothetical Traditional IRA to show potential tax advantages. Additional features include estimating the after-tax value of a Traditional IRA, the value of investing annual tax savings, and the combined after-tax value of a Traditional IRA and a standard brokerage account.
Guide to Using This Calculator
Inputs Explained
- Current Age: Your current age.
- Desired Retirement Age: The age at which you plan to retire.
- Annual Contributions: How much you plan to contribute to your Roth IRA annually.
- Starting Balance: The current balance of your Roth IRA if you have one.
- Annual Catch Up Contributions: Additional contributions allowed for individuals aged 50 and older.
- Expected Return Rate (%): The annual rate of return you expect your investments to earn.
- Current Tax Rate (%): Your current tax rate, used for calculating tax savings on Traditional IRA contributions. This should be your marginal tax rate.
- Tax Rate at Retirement (%): The ordinary income tax rate you expect to pay on withdrawals from a Traditional IRA in retirement.
- Capital Gains Rate at Retirement (%): The capital gains tax rate you expect to pay on investments in retirement.
Outputs Explained
- Estimated Roth IRA Balance at Retirement: The projected balance of your Roth IRA at retirement based on the inputs.
- Comparison with a Traditional IRA: A comparison of the estimated Roth IRA balance with what a Traditional IRA might yield, factoring in retirement tax rates.
- After-Tax Value of a Traditional IRA: The projected after-tax balance of a Traditional IRA at retirement.
- Additional Savings in a Standard Brokerage Account: Estimates potential additional savings by investing annual tax savings in a brokerage account.
- Combined After-Tax Value: The combined value of a Traditional IRA and savings from a brokerage account, after taxes.
- Investing Outside Retirement Accounts: The estimated after-tax value if the same amounts were invested in a standard brokerage account, showing the range between ordinary income and capital gains rates.
The calculator also visualizes the growth of the Roth IRA balance over time through a chart and provides a detailed yearly breakdown of contributions, investment growth, and balances.
Important Things To Know About IRAs
Traditional IRA
- Tax Deductions: Contributions to a Traditional IRA may be tax-deductible in the year you make them, depending on your income, filing status, and whether you or your spouse are covered by a retirement plan at work.
- Taxes on Withdrawals: Distributions in retirement are taxed as ordinary income.
- Required Minimum Distributions (RMDs): You must start taking distributions from your account by April 1 following the year you turn 72 (as per the latest IRS guidelines).
- Income Limits: There are no income limits for contributing, but there are limits that determine whether your contribution is deductible if you (or your spouse) have a retirement plan at work.
Roth IRA
- Tax Deductions: Contributions are made with after-tax dollars and are not tax-deductible.
- Tax-Free Withdrawals: Qualified distributions in retirement are tax-free, as long as you’ve held the account for at least five years and you’re at least 59½ years old.
- No RMDs: There are no required minimum distributions during the lifetime of the original owner, making it possible to leave the money to grow tax-free for your heirs.
- Income Limits: There are income limits for contributing to a Roth IRA. If you earn above a certain amount, you may be partially or fully phased out from contributing.
Commonalities
- Contribution Limits: As of the last update, both Roth and Traditional IRAs have the same contribution limits. The total contribution limit for 2023 is $6,000, or $7,000 if you’re age 50 or older.
- Penalty for Early Withdrawal: Generally, taking distributions before age 59½ may result in a 10% early withdrawal penalty, though there are exceptions to this rule for both account types.
- Investment Options: Both accounts typically offer a range of investment options, including stocks, bonds, mutual funds, and ETFs.
Choosing between a Roth IRA and a Traditional IRA depends on your current tax rate, expected tax rate in retirement, and financial goals. A Roth IRA may be more beneficial if you expect to be in a higher tax bracket in retirement, while a Traditional IRA could be advantageous if you expect to be in a lower tax bracket or you value the tax deduction now.
To learn more about this you can also read our guide on the differences between a Roth IRA and a Traditional IRA.
How to Open a Roth IRA
Our step by step guide will walk you through all the steps required to actually open a Roth IRA account.
More Information about IRAs
Your Estimated Roth IRA Balance at Retirement:
Comparison with a Traditional IRA:
If you invested identical amounts in a Traditional IRA, account balance at retirement would also be . However, withdrawals from a Traditional IRA are taxed at your ordinary income tax rate in retirement so the after-tax value will be less.
After-Tax Value of a Traditional IRA:
With a retirement tax rate, the after-tax value of your Traditional IRA would be . This lower value, compared to a Roth IRA, is due to the effective reduction in your contribution amount. Contributing annually to a Traditional IRA saves you on your taxes each year, thus costing you only out of pocket. This tax savings means you're effectively contributing less to a Traditional IRA when compared to a Roth IRA.
Fair Comparison Method:
For a fair comparison, you should consider the value of the annual tax savings over time and add that value to your after tax IRA balance at retirement.
Additional Savings in a Standard Brokerage Account:
By investing annual tax savings, you could accumulate an additional after tax value between and by retirement. The difference in the range of values is due to how much of your investments would be treated as ordinary income or capital gains.
Combined After-Tax Value:
The sum of your Traditional IRA and the brokerage account would be between and after taxes.
Investing Outside Retirement Accounts:
Investing the same amounts in a standard brokerage account would result in an after-tax value ranging from (if taxed at ordinary income rates) to (if taxed at capital gains rates).
| Age | Total Contributions | Investment Growth | Roth IRA Balance |
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