Roth IRA or Traditional IRA?

An IRA can be an effective retirement tool. There are two basic types of Individual Retirement Accounts (IRA): the Roth IRA and the Traditional IRA. Use this tool to determine which IRA may be right for you.

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Definitions

Current age

Your current age.

 

Annual contribution

The amount you will contribute to an IRA each year. This calculator assumes that you make your contribution at the beginning of each year. In 2008 and 2009, the maximum annual IRA contribution is $5,000 per individual. It is important to note that this is the maximum total contributed to all of your IRA accounts. The contribution limit, beginning in 2009, increases with inflation in $500 increments. An annual change to the contribution limit only occurs if the cumulative effect of inflation since the last adjustment is $500 or more.

In 2008 and 2009, if you are age 50 or older, you can make an additional "catch-up" contribution of $1000. In order to qualify for the "catch-up" contribution, you must turn 50 by the end of the year in which you are making the contribution.

You can no longer make contributions to a traditional IRA in the year you reach 70 1/2.

It is important to note that Roth IRA contributions are limited for higher incomes. If your income falls in a "phase-out" range you are allowed only a prorated Roth IRA contribution. If your income exceeds the phase-out range, you do not qualify for any Roth IRA contribution. The table below summarizes the income "phase-out" ranges for Roth IRAs.

 

Tax filing status	2009 Income Phase-Out Range
Married filing jointly or Head of household	$166,000 to $176,000
Single	$105,000 to $120,000
Married filing separately*	$0 to $10,000

*For the purposes of this calculator, we assume are not Married filing separately and contributing to a Roth IRA.

 

Expected rate of return

The annual rate of return for your IRA. This calculator assumes that your return is compounded annually and your contributions are made at the beginning of each year. The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com). During this period, the highest 12-month return was 61%, from June 1982 through June 1983. The lowest 12-month return was -39%, which happened twice, once from September 1973 to September 1974 and again from November 2007 to November 2008. Savings accounts at a bank may pay as little as 1% or less but carry significantly lower risk of loss of principal balances.

It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

 

Age of retirement

Age you wish to retire. This calculator assumes that the year you retire, you do not make any contributions to your IRA. So if you retire at age 65, your last contribution happened when you were actually 64.

 

Current tax rate

The current marginal income tax rate you expect to pay on your taxable investments.

 

Retirement tax rate

The marginal tax rate you expect to pay on your investments at retirement.

 

Adjusted gross income

Your adjusted gross income from your taxes. This is used to calculate whether you are able to deduct your annual contributions from your income tax statement.

 

Are you married?

Check the box if you are married. This is used to determine whether you can deduct your annual contributions from your taxes.

 

Employer plan?

Check the box if you have an employer sponsored retirement plan, such as a 401(k) or pension. This is used to determine if you can deduct your annual contributions from your taxes.

 

Total non-deductible contributions

The total of your Traditional IRA contributions that were deposited without a tax deduction. Traditional IRA contributions are normally tax-deductible. However, if you have an employer sponsored retirement plan, such as a 401(k), your tax deduction may be limited.

In 2009, for single tax filers with an employer sponsored retirement plan, an IRA contribution is fully tax-deductible if your income is below $55,000. It is then prorated between $55,000 and $65,000. If your income is over $65,000 and you have an employer sponsored retirement plan, such as a 401(k), you receive no tax deduction. For married couples, the same rules apply except the deduction is phased out between $89,000 and $109,000.

This calculator automatically determines if your tax deduction is limited by your income. However, there are two unusual situations not automatically accounted for where additional tax phase-outs are applied. First, if your spouse has an employer sponsored retirement plan but you do not, your tax deduction is phased out from $166,000 to $176,000. Second, if you are married filing separately and have an employer sponsored retirement plan, the income phase-out is from $0 to $10,000.

 

Total contributions

The total amount contributed to your IRA.

 

IRA total after taxes

For the Roth IRA, this is the total value of the account. For the Traditional IRA, this is the sum of two parts: 1) The value of the account after you pay income taxes on all earnings and tax-deductible contributions and 2) what you would have earned if you had invested (in an ordinary taxable account) any income tax savings.

Please note, for distributions to include earnings that are tax free the Roth IRA must be opened for 5 tax years. Eligible tax free distributions include those taken for death or disability, after age 59 1/2, or for a first time home purchase.