Which retirement account is right for you?

An IRA calculator is designed to help you project the future value of your account and potential tax savings available with a Traditional vs. Roth IRA, based on factors such as:

• Current Age: The earlier you start, the more time your investments have to grow.
• Annual Contributions: The amount you contribute yearly, which is capped by IRS limits.
• Expected Rate of Return: Your investments' annual return will be. For reference, the S&P 500 has historically returned 9.9% (7.22% when adjusted for inflation) over the last 30 years (source: https://www.macrotrends.net/2526/sp-500-historical-annual-returns)
• Years to Grow: The number of years before you plan to retire.
• Tax-Free Growth: Understand the tradeoffs between making after-tax or pre-tax contributions as it relates to account growth and taxation:

1. Contributions

2. Taxes

3. Withdrawals

1. Gather Necessary Information

Before using the calculator, have the following details handy:

• Current IRA balance (if any)
• Current Traditional IRA balance (if any)
• Current income and tax bracket
• Annual contribution amount
• Estimated rate of return
• Number of years until retirement

2. Input the Data

Most calculators allow you to enter:

• Initial balance: The total amount of money you currently have saved or available to invest in your retirement account. This includes any previous contributions and earnings.
• Annual contribution: The amount you plan to contribute each year (up to the limit).
• Expected rate of return: A percentage that reflects your investment strategy.
• Annual drawdown: How much you plan to withdraw from your retirement account each year during your retirement. 
• Retirement age: The number of years until you expect to retire.

3. Review the Results

Once you've entered your data, the IRA calculator will display:

• Projected Balance: The estimated amount in your IRA at retirement.
• Potential Tax Savings: The potential tax savings available with a Roth IRA‍
• Account Balance Over Time: Shows the difference in your account balance between a Roth vs. Traditional IRA.

To show how an IRA calculator works, let’s look at a few scenarios:

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Example 1: Starting Early

• Age: 25
• Starting Balance: $0
• Annual Contribution: $7,000
• Expected Rate of Return: 7%
• Years to Retirement: 40 years
• Drawdown Percent: 4%

With this scenario, your IRA could grow to $2.5 million by the age of 65. By using a Roth IRA, you could potentially save $770k when taking distributions during retirement. 

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Example 2: Starting Later

• Age: 40
• Starting Balance: $0
• Annual Contribution: $7,000
• Expected Rate of Return: 7%
• Years to Retirement: 25 years
• Drawdown Percent: 4%

If you start at 40, your IRA could grow to $703k by the age of 65. By using a Roth IRA, you could potentially save $215k when taking distributions during retirement. 

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Example 3: High vs. Low Return Rates

• Age: 35
• Initial Investment: $10,000
• Annual Contribution: $6,000
• Return Rates: 5% vs. 8%
• Years to Retirement: 30 years
• Drawdown Percent: 4%

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At a 5% return, the balance at age 65 would be around $678,00 with a IRA. You could save $207,000 during your retirement years by using a Roth IRA.

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At a 8% return, the balance at age 65 would be around $1.3 million with a IRA. You could save $398,000 during your retirement years by using a Roth IRA.

How is the Roth IRA potential tax savings calculated?

This calculator estimates the amount of assets at retirement age using a constant rate of return while adjusting the annual contributions based on inflation. At the retirement age, it assumes a constant withdrawal percentage for each year of retirement through age 85. It further assumes that accumulation in a Traditional IRA will require a 25% higher withdrawal each year to satisfy a 20% income tax.

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Who is a Traditional IRA best suited for?

An individual who expects to be in the same or lower tax bracket when starting to take withdrawals.

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Who is a Roth IRA best suited for?

An individual who expects to be in a higher tax bracket when starting to take withdrawals.

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What happens after five years in a Roth IRA?

You can withdraw your contributions at any time, for any reason, without taxes or penalties. However, if you want to withdraw earnings tax-and-penalty free, the withdrawal must meet two conditions:

• Five-Year Rule: you must have held the Roth IRA for at least five years
• Qualified Event: you must be either 59 ½ or older, permanently disabled, a first-time homebuyer (with a $10,000 lifetime limit), or withdrawing the funds by your beneficiary after your death.

If you don’t meet both of these requirements, the earnings are subject to both income tax and a 10% early withdrawal penalty.

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