Roth vs. Traditional IRA Calculator
Use this calculator to compare the potential after-tax value of contributing to a Roth IRA versus a Traditional IRA, considering your current and future tax rates, investment growth, and time horizon.
Understanding Roth vs. Traditional IRA
Deciding between a Roth IRA and a Traditional IRA is a critical financial planning decision that can significantly impact your retirement savings. The primary difference lies in when your contributions are taxed: either now (Traditional) or in retirement (Roth).
Traditional IRA
With a Traditional IRA, your contributions are often tax-deductible in the year you make them. This means you get an immediate tax break, reducing your taxable income in the present. Your investments grow tax-deferred, meaning you don't pay taxes on the gains until you withdraw the money in retirement. At that point, all withdrawals (contributions and earnings) are taxed as ordinary income at your then-current marginal tax rate.
Best for: Individuals who expect to be in a higher tax bracket now than they will be in retirement. The immediate tax deduction is more valuable when your current tax rate is high.
Roth IRA
A Roth IRA works differently. Your contributions are made with after-tax dollars, meaning you don't get an upfront tax deduction. However, your investments grow tax-free, and qualified withdrawals in retirement are completely tax-free. This includes both your contributions and all the earnings.
Best for: Individuals who expect to be in a lower tax bracket now than they will be in retirement. Paying taxes on your contributions now, when your rate is lower, means you avoid paying taxes on potentially much larger withdrawals when your rate might be higher.
Key Factors in Your Decision
- Current vs. Future Tax Bracket: This is the most significant factor. If you anticipate a higher tax bracket in retirement, Roth is generally more advantageous. If you're in a high tax bracket now and expect a lower one in retirement, Traditional might be better.
- Income Limits: Roth IRAs have income limitations for direct contributions. If your income is too high, you might need to consider a "backdoor Roth" strategy. Traditional IRAs also have income limits for tax deductibility if you're covered by a workplace retirement plan.
- Access to Funds: Roth IRA contributions can be withdrawn tax-free and penalty-free at any time, as they've already been taxed. Earnings, however, are subject to rules. Traditional IRA withdrawals before age 59½ are generally subject to taxes and penalties.
- Required Minimum Distributions (RMDs): Traditional IRAs have RMDs starting at age 73 (as of 2023), meaning you must start withdrawing money whether you need it or not. Roth IRAs do not have RMDs for the original owner, offering more flexibility for estate planning.
How This Calculator Works
This calculator helps you visualize the potential after-tax wealth generated by each IRA type. It assumes that any immediate tax savings from a Traditional IRA contribution are reinvested and grow at the same rate as the IRA itself, and are also taxed at your expected retirement tax rate. This provides a more comprehensive comparison of the total after-tax funds available to you in retirement under each scenario.
By adjusting your current and expected retirement tax rates, you can see how changes in your tax situation might sway the advantage from one IRA type to the other.
Disclaimer: This calculator provides estimates for illustrative purposes only and should not be considered financial advice. Tax laws are complex and can change. Consult with a qualified financial advisor or tax professional for personalized guidance.