- A Roth IRA is a retirement account offering tax relief at retirement through tax-free qualified withdrawals.
- Roth IRA and traditional IRA calculators can give you a better idea of how your contributions will grow to help you understand your retirement progress.
- By using a more complex Roth IRA calculator, you can determine if your retirement would be better served by converting your traditional IRA into a Roth. See a tax adviser for more guidance.
For some, retirement can feel like it’s a long way off. For others, retirement is right around the corner. No matter where you are in your retirement journey, it’s important to make sure you’re saving in the most optimal way for your situation.
Saving for retirement in an individual retirement account (IRA) is a common choice for many, but which one, traditional or Roth? Is a Roth IRA the better choice for you? And do you have enough saved up for retirement at your current stage? All these questions and more can be answered with the right IRA calculators, so let’s get started. First, we’ll examine what a Roth IRA is and how it compares to a traditional IRA.
What Is a Roth IRA?
When planning for retirement, you’ll commonly encounter two IRA accounts: traditional and Roth IRAs.
A Roth IRA is a type of retirement account that involves paying taxes on your contributions during the year they’re made. This means you pay whatever income taxes you owe according to the current tax rate schedule, and then make your IRA contribution.
The benefit here is that your qualified withdrawals at retirement won’t be taxed, and you essentially have tax-free growth from the moment the contribution is made. If you wind up in a much higher tax bracket during your time of retirement, this can save you thousands, as you get tax-free distributions versus the taxed distributions of a traditional IRA. For individuals with a long time to save for retirement and for those who think they may be in a higher income tax bracket once retired, a Roth IRA can often be a great choice.
A traditional IRA is another type of retirement account that offers immediate tax relief but taxed down the road. Traditional IRA contributions aren’t taxed and reduce your taxable gross income by the amount of your total contributions for the year. This means your contributions result in an IRA deduction that, in some cases, puts you in a lower tax bracket. The IRA also allows non-deductible traditional IRA contributions that use after-tax dollars but offer no tax benefit except for tax-deferred growth.
The downside to a traditional IRA is that IRA withdrawal rules mean your money will be taxed at income tax rates, which can put added financial stress on you during retirement. In short, you’re trading a tax-deductible contribution and tax relief now for a cost later.
Roth IRA Eligibility
A Roth IRA can do wonders for your finances during retirement, but not everyone is eligible for this retirement plan. There are a few financial considerations that come into play when looking at Roth IRA eligibility. If you meet all of the following, you could be a great Roth IRA candidate:
- Your income must be no greater than $137,000 if single or $203,000 if married.
- You must have earned income, as only earned income may be contributed.
Beyond these two points, eligibility is fairly open; unlike a traditional IRA — and since Roth IRA contributions are made up of after-tax money — it doesn’t matter if you are covered by a retirement plan at work. If you fit this criteria and have yet to open a Roth IRA, read our guide on opening a Roth IRA here.
Roth IRA 2019 Contribution Limits
While a Roth IRA does allow tax-free qualified withdrawals, there’s a catch: your annual contribution amount is limited for each tax year. To make sure you maximize contributions without going over the limit, it’s important to be mindful of the Roth IRA contribution limits. Make sure you check the limits every year, as they can fluctuate from one year to the next. You also need to be sure of your tax filing status.
For 2019, the Roth IRA contribution limits are:
- Filing Single, Head of Household: Your modified adjusted gross income (MAGI) must be at or below $122,000 to contribute the full $6,000.
- Married Filing Jointly or Qualified Widow: Your MAGI must be at or below $193,000 to contribute the full $6,000.
- Married Filing Separately: Your MAGI must be at or below $10,000 to contribute the full $6,000.
Once you break over those income caps, you must phase out your contributions, with each higher income tier having a lower allowable contribution up to a hard cutoff limit at which point you must stop contributing. If you qualify, you can also contribute an additional $1,000 if you’re age 50 or older as part of your retirement catch-up. Again, these annual contribution limits are the maximum total amount you can contribute each tax year. If you go over this amount, an excise tax of 6% will be applied as long as that amount is in the account.
Even for high-income individuals, paying an excise tax is essentially throwing money away. If you regularly go over your contribution limit, shift that additional contribution money elsewhere. If you’re employed, your employer’s 401(k), 457 or 403(b) plan would be a logical choice, especially if your employer offers a matching contribution. A taxable account with a brokerage doesn’t have the tax advantages of an IRA, although you pay generally lower tax rates on your capital gains if you hold on to your investments for at least one year before you sell. Consult with a financial advisor first to determine what will give you the greatest total value for your retirement.
What Is an IRA Calculator?
IRA calculators will help you determine a number of things, such as how much you need to save each year to hit your retirement goal, how early you can possibly retire if you up your savings, and so on. Many IRA calculators will also have form fields for your portfolio’s risk level. For example, you may have a higher risk investment portfolio that could deliver higher expected rates of return but could also face a larger potential loss of principal.
A Roth IRA calculator, like many retirement calculators, can help you determine how much you will have saved up for retirement based on annual contributions. Here’s one you can use to get started. Some calculators will allow you to put in your estimated tax rates at retirement to give you an idea of your potential tax savings at retirement. Other Roth IRA calculators will help guide you on your choice of whether a traditional or Roth IRA is the best choice for you.
Using IRA calculators, whether they are for traditional or Roth IRAs, is an important part of retirement planning as they give you an idea of where you are right now with your savings and where you’ll be in X years if you keep saving at your current rate. This information can help you realize whether you need to catch up or reassure you that you’re on the right path.
Using an IRA Calculator
Consider the following points and determine what it is you want to know so you can pick the right calculator to answer your Roth IRA questions.
How much will you have at your current trajectory?
Consider your current age, your contributions and when you plan on retiring. Unlike basic financial calculators, IRA calculators can use this information to help you understand where you’re at with savings, where you’ll be in X years, and if you need to boost contributions. You can even set your estimated annual rate of return based on your investment style or portfolio type to get an idea of whether or not you should consider a portfolio more suitable for your goals.
If you use a calculator and realize your current investments don’t match your risk tolerance or expected rate of return to meet your goals, speak with a financial advisor at your bank or brokerage and see if there’s another way your money could be invested. A robo-advisor might be a good match for you if you’re just starting out or looking for investment guidance and don’t need the hand-holding of a human advisor. There will be fees involved but retirement is ultimately composed of long-term investments that need adjustments as your goals change, so the cost of investment guidance now can be worth it later.
Should you have a traditional or Roth IRA?
If you’re unsure about whether you should be using a Roth or traditional IRA, there’s a way to solve for that, too. Use both a Roth and traditional IRA calculator to get estimates on what your current contributions, whether after-tax or before taxes, would equate to in retirement terms. Both types of retirement accounts offer different perks, but one may be a better fit for you than the other.
You can also use some types of IRA calculators to determine your contribution limits for your current income, which will help you determine if you qualify for the traditional IRA or Roth IRA. These calculators can even help you stay abreast of contribution limit increases as they’re generally updated to match the current limits set by the IRS. This helps you ensure you’re meeting the maximum annual IRA contribution cap and getting all you can by the end of the year. It’s easy to leave your contribution at whatever rate it was left at during your last adjustment, but limits can and will change. Even if you just made your last contribution recently, it never hurts to check the limits.
Similarly, this same information can help you determine if you’re in the phase-out range and need to lower your contributions as you reach higher income levels, and if tax laws have possibly changed your tax bracket. Try this IRA contribution calculator from Fidelity Investments.
With some calculators, such as this one from American Funds, you can also input your current and predicted income tax rates to determine how much you could be gaining or losing by using one retirement account over the other.
Is it worth converting your traditional IRA into a Roth IRA?
As mentioned above, it’s possible your money would go farther in a different type of retirement account, even after you’ve already contributed to your IRA over the years. There are more complex calculators that determine if it might be worth converting part or all your traditional IRA into a Roth IRA, in essence paying the ordinary income tax now on the amount you convert for the expected savings from tax-free withdrawals upon retirement.
If you’re thinking about converting your traditional IRA into a Roth, it’s important to understand how this calculation works. When you enter your information into a conversion calculator, the tool will calculate the income tax you owe for converting the funds into the Roth. Remember that a traditional IRA is taxed at withdrawal. If you are using the traditional IRA funds to pay for the income taxes, those funds will also incur the 10% penalty applied by the IRA withdrawal rules.
Then the Roth IRA conversion calculator estimates and compares the tax impact on your retirement for both your hypothetical Roth IRA (with the funds converted from your traditional IRA, less the taxes and penalties paid) and your potential Roth IRA tax savings upon withdrawal, compared with the traditional IRA had you left it alone. These calculations allow you to make an educated decision about the Roth conversion using the output values for both account types. Try this conversion calculator from Charles Schwab or this calculator by Merrill Edge. Roth IRA conversions can be tricky, so have a discussion with your tax adviser before making any moves.
Calculating a Better Retirement
There’s no right or wrong choice when it comes to Roth IRAs versus traditional IRAs. Ask yourself what matters to you now. Are you interested in tax savings today? Or do you think you’ll be in a higher income bracket at retirement and would prefer those savings later?
An IRA calculator will help you determine where you are today and where you can be in your financial plan, but ultimately you control your retirement. Use the knowledge and guidance you gain from these detailed calculation results, and speak with a financial advisor to create your path to an optimal retirement.
Want to learn more about your retirement options? Read up on how an IRA compares to a 401(k), one of the more popular employer plans available.