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.
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 2005, the
maximum annual IRA contribution is $4,000 per individual. It is important to
note that this is the maximum total contributed to all of your IRA accounts.
This maximum will increase to $5,000 by 2008. The table below summarizes IRA
annual contribution limits.
| Year |
IRA contribution limit |
| 2005-2007 |
$4,000 |
| 2008 and after* |
$5,000 |
| *Beginning in 2009, the contribution limit will adjust annually
for inflation in $500 increments |
If you are 50 or older you can make additional "catch-up" contributions
of $500 more than the normal limits in 2002 through 2005. Starting in 2006,
the "catch-up" amount will increase to $1,000. 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. For the purposes of
this calculator, we assume that your income does not limit your ability to
contribute to a Roth IRA. The table below summarizes the income "phase-out" ranges
for Roth IRAs.
| Tax filing status |
Income Phase-Out Range |
| Married filing jointly or Head of household |
$150,000 to $160,000 |
| Single |
$95,000 to $110,000 |
| Married filing separately |
$0 to $10,000 |
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 2004,
the average compounded rate of return for the S&P 500, including reinvestment
of dividends, was approximately 11.5% per year. During this period, the highest
12-month return was 64%, and the lowest was -39%. Savings accounts at a bank
pay as little as 1% or less. It is important to remember that future rates
of return can't be predicted with certainty and that investments that pay higher
rates of return are 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.
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 2005, for single
tax filers with an employer sponsored retirement plan, an IRA contribution
is fully tax-deductible if your income is below $50,000. It is then prorated
between $50,000 and $60,000. If your income is over $60,000 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 70,000 and $80,000. The phase-out ranges are scheduled to increase
over the next few years. The table below summarizes the deduction phase-out
for 2003 - 2007
| Traditional IRA Deduction Income Phase-Out Ranges |
| 2003 |
$40,000-$50,000 |
$60,000-$70,000 |
| 2004 |
$45,000-$55,000 |
$65,000-$75,000 |
| 2005 |
$50,000-$60,000 |
$70,000-$80,000 |
| 2006 |
$50,000-$60,000 |
$75,000-$85,000 |
| 2007 |
$50,000-$60,000 |
$80,000-$100,000 |
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 $150,000 to $160,000. 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.
Information and interactive calculators are made available to you as self-help
tools for your independent use and are not intended to provide investment advice.
We can not and do not guarantee their applicability or accuracy in regards
to your individual circumstances. All examples are hypothetical and are for
illustrative purposes. We encourage you to seek personalized advice from qualified
professionals regarding all personal finance issues.
