Fun with Taxes - IRA Calculator

Are you wondering which IRA would provide the greatest long-term returns to you? How much you're allowed to contribute? Whether you should convert your traditional IRA to a Roth IRA? Fire up our IRA calculators to get the answers.

Here's how they work: Click on one of the three tabs to select a calculator. Then input your information and click "Submit" to view the results. If you're unsure whether you're eligible to contribute to an IRA, your first stop should be our eligibility calculator. You can, however, start with any of the three. As you roll your cursor over the input and output questions, explanatory text will appear to the left of the calculators. As you select your input numbers, please keep the following limits in mind: For current and retirement tax rates, you may choose any figure between zero and 99%. For rate of return, you may choose from a range of 1% to 30%. For years to retirement, you may input any number between 5 and 75. A complete list of the assumptions that underlie these calculators is available here.

Assumptions

We've designed our calculators in such a way that they are easy to use, but still allow you flexibility in choosing your preferred rate of return (1% to 30%), tax rates (0 to 99%), and time period (5 to 75 years). However, no IRA calculator can account for every possible variable--we had to make certain assumptions in the calculations. If your situation is particularly complex or unusual, you may want to consult with a tax advisor or financial planner who specializes in IRA matters.

Comparison calculator

In the results, the final value for each investment account represents the total, after-tax value of a lump sum distribution from each account at end of the selected time period.

Roth IRAs

No taxes are deducted.

Traditional,
deductible IRAs

The entire balance of the account is taxed at your selected retirement tax rate. We then add the future value of your tax savings. (See Tax Savings below.)

Taxable
Investment Account

For comparison purposes, you can calculate the future value of money invested in a taxable investment account. This account compounds at the same rate of return you select for your IRA accounts, minus 10%. This is to account for the taxable distributions that would be made from such an account. The final value of this account is then adjusted for the capital gains taxes you would pay if you liquidated the account. We assume that all capital gains are long term, and we tax them at your selected retirement tax rate or 20%, whichever is less. (If you input 0% as your current tax rate, the rate of return for the taxable investment account is the same as that of your IRA accounts.)

Tax Savings

The final value of a traditional, deductible IRA assumes that you are investing your tax savings each year. For example, if you're in the 28% tax bracket, a $2,000 contribution to a deductible IRA results in a $560 tax savings. Our calculator assumes that you invest that money (for both your initial and any subsequent contributions) in a taxable investment account at the end of each year. We use the same rate of return for this account as you select for your IRA account, but diminish that rate by 10% to account for taxable distributions. All capital gains are taxed at your selected retirement tax rate or 20%, whichever is less. If you did not invest this tax savings, the final value of your traditional, deductible IRA would be the same as that of a traditional, nondeductible IRA.

Conversion Calculator

If you convert a traditional IRA to a Roth IRA, you'll have to pay taxes on any deductible contributions, as well as any gains for the account. Therefore, when comparing the future values of a Roth IRA and the traditional IRA, the future values of these taxes must be considered. The value shown for the Traditional IRA in the first section includes the value of these tax savings whereas the value shown for the Traditional IRA in the second area does not. Tax savings here are calculated in the same way as the tax savings in the comparison calculator.

The future values for the Traditional IRA and Roth IRA are computed in the same way as described for the comparison calculator.

One Final Note

Keep in mind that any withdrawals before the age of 59 1/2 could result in penalty taxes. Our calculators do not factor in any of these penalties. Another factor to consider is that you must begin withdrawals from a traditional IRA by the age of 70 1/2, while no such requirement exists for the Roth IRA.

This IRA calculator was originally designed by David Harrell. It was updated by Mark Wright, C.F.A., who is Tools Editor for Morningstar.com. He can be reached at mark.wright@morningstar.com.

Last Revised: February 19, 2004

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