Step 1: First we found the value of a Roth IRA if you contributed ANNUAL_CONTRIBUTION per year for YEARS_UNTIL_RETIREMENT years earning an assumed RATE_OF_RETURN per year. This equaled TOTAL_ROTH. Since withdrawals from a Roth IRA are not taxed, the total value remains TOTAL_ROTH.
Step 2: We then computed the totals for a Traditional IRA. Again we determined the value of ANNUAL_CONTRIBUTION per year for YEARS_UNTIL_RETIREMENT years earning an assumed RATE_OF_RETURN per year. This is the same amount as the Roth IRA total, IRA_TOTAL_BF_TAX. However, tax deductible contributions and all earnings in a Traditional IRA are taxable when they are withdrawn. After taxes, the value of your Traditional IRA account would be IRA_TOTAL_AF_TAX. The Roth Account value at retirement assumes you take a qualified distribution from your account. This account distribution, including any investment earnings, may be tax-free if you meet the following criteria: you are at least 59 ï¿½ , deceased or disabled; and your first contribution to the Roth account was made at least five tax years earlier than the date of the distribution.
Step 3: Finally, if you had any tax deductible Traditional IRA contributions we need to determine the value of investing this tax savings and add this amount to the Traditional IRA total. If we forget this step, our comparison will not be equal (we would in effect be contributing more to our Roth IRA than the Traditional IRA). If your tax savings was invested for YEARS_UNTIL_RETIREMENT years at an assumed rate of RATE_OF_RETURN, this returns a total of TOTAL_TAXABLE after taxes.
|Traditional IRA||Roth IRA|
|Total before taxes||IRA_TOTAL_BF_TAX||TOTAL_ROTH|
|Value of investing tax savings||+ TOTAL_TAXABLE||+ 0|
|Taxes for IRA at retirement||- IRA_TOTAL_TAXES||- 0|
|Value at retirement (age AGE_OF_RETIREMENT)||TOTAL_IRA||TOTAL_ROTH|
|Years until retirement||YEARS_UNTIL_RETIREMENT|
|Age of retirement||AGE_OF_RETIREMENT|
|Expected rate of return||RATE_OF_RETURN|
|Adjusted gross income||ADJUSTED_GROSS_INCOME|
|Current tax rate||CURRENT_TAX_RATE|
|Retirement tax rate||RETIREMENT_TAX_RATE|
|Are you married?||MARRIED_YESNO|
|Traditional IRA tax deductible portion (DEDUCTIBLE_PERCENT**)||MAXIUMUM_DEDUCTIBLE_CONTRIBUTION|
|Traditional IRA total non-deductible contributions||TOTAL_NONDEDUCT|
|Maximum ROTH contribution for 2013***||ROTH_MAXIMUM|
If you are 50 or older you can make an additional 'catch-up' contribution of $1,000. The 'catch-up' contribution amount of $1,000 remains unchanged for 2013. 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. The table below summarizes the income 'phase-out' ranges for Roth IRAs.
Starting in 2010 high income individuals will have the option to make non-deductible Traditional IRA contributions and then immediately convert them to a Roth IRA. This can effectively eliminate the income phase-out for Roth IRA contributions. This option for Roth IRA contributions may or may not be available in later years depending on future changes to the IRA law. This calculator assumes that you will not be taking advantage of this option.
|Tax filing status||2013 Income Phase-Out Range|
|Married filing jointly or head of household||$178,000 to $188,000|
|Single||$112,000 to $127,000|
|Married filing separately**||$0 to $10,000|
**For the purposes of this calculator, we assume you are not Married filing separately and contributing to a Roth IRA.
It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally 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. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.
In 2013, for single tax filers with an employer sponsored retirement plan, an IRA contribution is fully tax deductible if your income is below $59,000. It is then prorated between $59,000 and $69,000. If your income is over $69,000 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 $95,000 and $115,000.
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 $178,000 to $188,000. Second, if you are married filing separately and have an employer sponsored retirement plan, the income phase-out is from $0 to $10,000.
Please note, for distributions to include earnings that are tax free the Roth IRA must be opened for 5 tax years. Eligible tax free distributions include those taken for death or disability, after age 59-1/2, or for a first time home purchase.
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