This online IRA Savings Comparison Calculator will forecast the growth of a Traditional IRA, and then compare the tax-deferred results to the growth of a non-qualifying investment.
When planning for your retirement it is important to understand the difference between a tax-deferred investment and non tax-deferred investment. In the case of an Individual Retirement Account (IRA), not only are your contributions deductible from your taxable income in the year they are made, but the earnings also grow on a tax-deferred basis.
In the case of a non tax-deferred investment, the contributions you make will be with after-tax dollars, and the earnings will be added to your annual taxable income. This means that you are giving up the opportunity to earn interest on the funds that will be used to pay the taxes. As the calculator on this page will attempt to point out, the foregone interest on non-deferred taxes can be substantial over the long run.
Please keep in mind that the results of this calculator are merely estimates. Be sure to consult a qualified tax professional before making any investment decisions.
Also keep in mind that you might be better off to first pay off any high interest debt you have, and then use the freed-up payment amounts to contribute to your retirement investment.
With that, let's use the IRA Savings Comparison Calculator to forecast the value at retirement, and then compare the results to a non-qualifying investment.
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Traditional IRA: Basically, a traditional Individual Retirement Account is an investment (stocks, bonds, mutual funds, cds, etc.) wherein your contributions serve to reduce your taxable income for the year contributions are recorded. The earnings from an IRA grow on a tax-deferred basis until you begin to take qualified distributions (after age 59-1/2). Contributions and earnings are added to your ordinary income at the time they are distributed (withdrawn) and are therefore fully taxable based on your tax bracket at the time of the withdrawals. Minimum distributions are required at age 70-1/2. Distributions taken prior to your qualifying age will incur taxes and early withdrawal penalties (typically 10% of the amount withdrawn). Please consult a qualified tax professional for up-to-date Individual Retirement Account information, such as contribution limits, etc. (if you notice any out-of-date material in the calculator, please let me know).
Pre-Tax vs After-Tax Deposits: In the amortization schedule created above, you will note that in the case of your Individual Retirement Account, the annual contributions are equal to the entry you made at the top of the calculator (pre-tax). In the case of the non-qualifying investment, the annual contributions are less than the entry you made at the top of the calculator (after-tax). This is because you will be paying income taxes on your non-qualifying contributions as you make them, thereby losing the opportunity to earn interest on the income taxes being paid.
Federal Tax Bracket: These were the latest federal tax brackets as of the last edit of this page (02/28/2014). You can use this table as a guide for deciding which tax bracket percentage to enter into the calculator.
|Federal Tax Brackets||Single||Married Filing Jointly|
|10% Tax Bracket||$2,250 - $11,325||$8,450 - $26,600|
|15% Tax Bracket||$11,325 - $39,150||$26,600 - $82,250|
|25% Tax Bracket||$39,150 - $91,600||$82,250 - $157,300|
|28% Tax Bracket||$91,600 - $188,600||$157,300 - $235,300|
|33% Tax Bracket||$188,600 - $407,350||$235,300 - $413,550|
|35% Tax Bracket||$407,350 - $409,000||$413,550 - $466,050|
|39.6% Tax Bracket||Over $409,000||Over $466,050|