This free online calculator will instantly calculate a side-by-side comparison of future retirement account balances so you can quickly decide which is better for you, a Roth IRA or a Traditional IRA.
If you're not sure what a Traditional IRA is, or what a Roth IRA is, or what their respective advantages, disadvantages, and purposes are, it may help to read through the top of the page before using the Roth vs. traditional IRA calculator.
Note that if you would like to calculate the net-effects of converting a traditional IRA to Roth, please visit the Roth IRA Conversion Calculator.
A traditional Individual Retirement Account (IRA) is an investment (stocks, bonds, mutual funds, cds, etc.) wherein your contributions serve to reduce your taxable income (deductible) 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Contributions and earnings are added to your ordinary income at the time they are distributed (withdrawn) and are therefore fully taxable based on your tax bracket at the time of the withdrawals.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 a 10% early withdrawal penalty.
I know first-hand how expensive an early withdrawal from a traditional IRA can be. Believe me, it's no fun to see money evaporate into thin air.
So unless you know with absolute certainty that you will never have to make an early withdrawal from your IRA to cover an unexpected financial emergency, I would think twice about choosing a traditional IRA.
In my opinion, your money is safer from stiff penalties if you pay the taxes up front by choosing to fund a Roth IRA (the economic meltdown of 2009 is a case in point). After all, if you have the funds to contribute to an IRA in the first place, then you also have the funds to pay the taxes on them upfront.
A Roth IRA is an individual retirement account wherein your contributions do not serve to reduce your taxable income (non-deductible) in the year they are recorded.
In other words, you will have already paid income taxes on your contributions based on your tax bracket at the time of each contribution.
The earnings from a Roth IRA grow tax-free so qualified distributions (withdrawals) are not taxed.
The main advantage to a Roth IRA is that once you have kept a contribution for the "seasoning period" (5-years the last time I checked), you can withdraw the contribution without tax (you already paid the taxes) or penalties.
The main disadvantage of a Roth is that your contributions will not lower your tax liability for the year they are recorded.
The main purpose of a Roth IRA is to enable you to withdraw funds from your retirement account during your retirement without having to pay any tax on the withdrawals -- including the earnings.
A second purpose of a Roth is to enable you to leave your retirement funds for your heirs. This is because a Roth doesn't have the minimum distribution requirements imposed by a Traditional IRA.
A third potential purpose of a Roth IRA is if you believe you will be in a higher tax bracket after retirement, paying taxes on your contributions now might make more sense.
In order to compare Roth versus Traditional IRAs, we must account for the differences in tax payments.
Since contributions to Roth IRAs are not deductible from taxable income, then in order to make, say a $1,000 contribution, you must pay the taxes on the $1,000 out of your other income.
So if you are in a 25% tax bracket, this means you will need to pay $250 in taxes, plus contribute the $1,000.
On the other hand, if you contributed the $1,000 to a Traditional IRA, you would not need to pay the $250 in taxes until you actually withdraw the contribution.
Therefore when comparing the two, we assume that if you chose to fund the Traditional IRA you would then invest the $250 tax savings that would have otherwise gone to pay taxes on the Roth IRA contribution.
Here is a quick-reference chart highlighting the differences between a traditional IRA and a Roth IRA:
|Contributions are ...||Deductible||Non-deductible|
|Earnings are ...||Tax Deferred||Tax Exempt|
|Qualified withdrawals are ...||Fully Taxable||Tax Free|
Given the above differences, comparing the two becomes somewhat complicated. Luckily, you have free access to the calculator on this page that greatly simplifies the comparison process.
Please keep in mind that investing and saving for retirement is only half the equation. After all, if your retirement debt payments add up to your retirement income you will still be left without a retirement income
Therefore your retirement might be better served by using the extra money for paying off high interest debt (Invest in Your Debt Calculator).
With that, let's use the Roth vs Traditional IRA Calculator to calculate the net-effects of choosing to contribute to one versus the other.
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Annual contribution amount (pre-tax dollars): Enter the pre-tax dollar amount of your planned contributions to a retirement investment. The maximum annual IRA contribution was $5,500 per spouse ($6,500 if age 50 or older) the last time this calculator was updated, therefore the maximum entry in this field is $13,000.
Current age: Enter your current age.
Retirement age: Enter the age you plan to retire at.
Rate of return on investment (%): Enter the before-tax annual percentage rate you expect to earn on your investments between now and when you retire.
Current marginal tax rate (%): Enter your current marginal tax rate as a percentage (for .15, enter 15). Marginal tax rates are typically 10%, 15%, 25%, 28%, 33%, 35%, or 39.6%. If you are not sure which tax bracket you are in, please refer to the Federal Tax Brackets chart at the bottom of the page.
Marginal tax rate at retirement (%): Enter the marginal tax rate you expect to be paying at retirement age. Please enter as a percentage (for .15, enter 15).
Total of contributions: The results on this line are the total of your contributions between now and when you retire. Both results should be equal.
Balance at retirement: The left-hand column is the estimated future value of a Traditional IRA. The right-hand column is the estimated future value of a Roth IRA.
Taxes due if withdrawn at retirement: The left-hand column is the amount of taxes that would be due on your Traditional IRA if you withdrew the funds at retirement, since tax on both contributions and earnings are deferred until the funds are withdrawn. The right-hand column is zero, since you would have already paid taxes on the Roth IRA contributions, and the earnings are tax exempt.
Value of invested tax savings: The left-hand column is the future value of the invested tax savings you may realize by choosing a Traditional IRA instead of Roth IRA. If you choose a Roth IRA you will be paying taxes on the contributions, which could be invested if you instead choose to contribute to a traditional IRA. Of course, this is not applicable to the right-hand, Roth IRA column.
Net withdrawal at retirement: The left-hand column is the estimated after-tax value of your IRA, including the value of the invested tax savings. The right-hand column is the estimated after-tax value of a Roth IRA.
Net comparison: Both columns show the gain or loss that will be realized by choosing one over the other. The figures should both have the same absolute value, but the more favorable option will be positive, while the less favorable option will be negative.
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 Roth vs Traditional IRA 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|