Roth vs Traditional IRA Calculator

Roth vs Traditional IRA Calculator

This calculator is designed to help you understand the different outcomes of choosing a Roth IRA versus a Traditional IRA for your retirement savings. By inputting your annual contribution, assumed growth rate, current tax rate, tax rate at retirement, and the number of years until retirement, the calculator will provide you with an estimate of the future value of both types of IRAs. Unlike many calculators available online, this one considers the tax savings at the time of contribution for a Traditional IRA, which can be reinvested and grow over time, potentially altering the end result significantly.

• Roth IRA: Contributions are made with after-tax dollars and qualified distributions are tax-free.
• Traditional IRA: Contributions may be tax-deductible, lowering your taxable income, and distributions are taxed as ordinary income in retirement.
• Income Limits: Roth IRAs have income limits for eligibility; Traditional IRAs do not, but the tax deductibility of contributions may be limited if covered by a workplace retirement plan.
• Withdrawal Rules: Roth IRAs do not have required minimum distributions (RMDs) during the owner's lifetime, allowing for continued growth; Traditional IRAs require RMDs starting at age 72 (as of 2023).
• Tax Rate Considerations: Roth IRAs are more advantageous if you expect to be in a higher tax bracket in retirement; Traditional IRAs are beneficial if you expect to be in a lower tax bracket.
• Flexibility: Roth IRAs offer more flexibility for early withdrawals of contributions (subject to certain rules).

A common oversight of other online calculators is the assumption that the tax benefit received from a Traditional IRA contribution disappears, rather than considering that it can be reinvested. The proper comparison between Traditional and Roth IRAs involves accounting for the initial tax savings that a Traditional IRA can provide. This is crucial as the upfront tax deduction for Traditional IRA contributions effectively allows you to invest more than the nominal contribution limit.

Example:

Suppose you contribute $6,000 to a Traditional IRA and you are in the 22% tax bracket. This contribution could effectively save you $1,320 in taxes ($6,000 x 22%). Instead of merely pocketing that saving, if you invest it, those $1,320 could also grow over time. If you had chosen a Roth IRA, that $1,320 would go to taxes, and you would lose out on its potential growth. Our calculator factors in this important element by calculating the future value of those tax savings when reinvested, offering a more accurate comparison between the two IRA options.

NOTE: Yes the totals are the same! Factors like future tax changes can sway results in unpredictable ways. Regardless, the key is to start investing. Both IRAs offer growth potential, and maxing one out and investing is what counts most for retirement savings.