Traditional IRA vs Roth IRA

What This Calculator Does

This calculator empowers you to compare the potential benefits of Traditional IRA and Roth IRA accounts to determine which may be more advantageous for your retirement goals. By entering your unique information, such as age, tax rates, contributions, and investment expectations, you can quickly see which IRA type aligns best with your financial strategy. The tool provides a clear recommendation, a breakdown of the Roth IRA advantage, and the break-even tax rate to help you make informed decisions for your retirement planning.

How to Use This Calculator

1. Enter your Current Age and the Retirement Age you plan to stop working.
2. Input your Current Tax Rate (the percentage you pay on income today) and your Expected Retirement Tax Rate (what you anticipate paying after you retire).
3. Fill in your Annual Contribution amount, which is the yearly amount you expect to invest in your IRA.
4. Specify your Expected Annual Return (average yearly investment growth rate) and Expected Inflation Rate (anticipated yearly rise in living costs).
5. Click the calculate button to view your personalized results, including the recommended IRA type, the Roth IRA advantage (potential after-tax value difference), and the break-even tax rate.
6. Review the output to understand which IRA may be more beneficial based on your assumptions, and adjust any values to see how different scenarios affect your results.

Definitions of Key Terms

Current Age

Your age today, which helps determine your investing time horizon until retirement.

Retirement Age

The age at which you plan to begin withdrawing funds from your IRA.

Current Tax Rate

The percentage of your income that you currently pay in federal or state income taxes.

Expected Retirement Tax Rate

Your projected income tax rate after you retire, which can impact the after-tax value of withdrawals.

Annual Contribution

The amount of money you plan to contribute each year to your IRA account.

Expected Annual Return

The average percentage rate you expect your investments to grow each year, before adjusting for inflation.

Expected Inflation Rate

The anticipated rate at which prices for goods and services will rise, reducing your purchasing power over time.

Recommended IRA Type

The IRA option (Traditional or Roth) that is projected to provide the greatest after-tax retirement income based on your inputs.

Roth IRA Advantage

The calculated difference in after-tax retirement value between a Roth IRA and a Traditional IRA, showing how much more (or less) you may have with a Roth account.

Break-Even Tax Rate

The retirement tax rate at which both IRA types would provide the same after-tax value, helping you evaluate the impact of future tax changes.

Calculation Methodology

This calculator estimates your potential IRA balances at retirement and their after-tax values, using your contributions, investment growth rate, and tax assumptions. The formulas below outline how the calculator models each scenario:

YearsToRetirement = Retirement Age - Current Age

Future Value of Contributions (FV) = Annual Contribution × [ ( (1 + (Expected Annual Return / 100))^YearsToRetirement - 1 ) / (Expected Annual Return / 100) ]

Traditional IRA After-Tax Value at Retirement = FV × (1 - (Expected Retirement Tax Rate / 100))

Roth IRA After-Tax Value at Retirement = FV × (1 - 0) 
  (since qualified Roth withdrawals are tax-free)

Roth IRA Advantage = Roth IRA After-Tax Value at Retirement - Traditional IRA After-Tax Value at Retirement

Break-Even Tax Rate = 100 × [1 - (Roth IRA After-Tax Value at Retirement / FV)]

All calculated values are adjusted for the Expected Inflation Rate to reflect real (inflation-adjusted) retirement purchasing power.

Each step uses your inputs to project the future value of your contributions, then adjusts for taxes and inflation. The calculator assumes consistent annual contributions and a constant rate of return and inflation.

Practical Scenarios

• Young Professional in a Low Tax Bracket: Alex, age 25, expects to earn more in the future and assumes their tax rate will be higher in retirement. The calculator may recommend a Roth IRA to take advantage of today’s low tax rate and tax-free withdrawals later.
• Mid-Career Saver Nearing Retirement: Pat, age 50, expects to retire at 65 and projects a lower tax rate in retirement. The Traditional IRA may be recommended, as they could benefit from current tax deductions and lower taxes on withdrawals.
• Stable Career with Uncertain Tax Future: Jamie, age 40, is unsure whether tax rates will rise or fall over the next 25 years. The calculator’s break-even tax rate helps Jamie see at what point either account becomes more favorable, allowing for flexible decision-making.
• Maximizing Retirement Contributions: Taylor, age 35, wants to maximize annual IRA contributions and see the long-term impact of different growth rates and inflation. Using the calculator, Taylor can explore how investment returns and inflation affect the real value of retirement savings.

Advanced Tips & Best Practices

• Review and Update Your Inputs Annually: Tax rates, income, and contribution amounts can change. Regularly revisiting your data ensures your projections stay relevant and accurate.
• Consider Employer Retirement Accounts: If you have access to a workplace 401(k) or similar plan, compare its features and tax advantages to your IRA options for a comprehensive retirement approach.
• Account for State Taxes: This calculator focuses on federal rates, but state income taxes can also impact your retirement outcome. Adjust your inputs or consult a tax advisor for a more detailed analysis.
• Factor in Required Minimum Distributions (RMDs): Traditional IRAs require withdrawals starting at age 73 (as of 2024). Roth IRAs do not have RMDs during the owner’s lifetime, providing more flexibility for estate planning.
• Model Multiple Scenarios: Try different combinations of tax rates, investment returns, and inflation rates to see how sensitive your retirement outcome is to these assumptions.

Frequently Asked Questions (Optional)

Can I contribute to both a Traditional IRA and a Roth IRA?

Yes, you can contribute to both in the same year as long as your combined contributions do not exceed the annual IRS limit and you meet eligibility requirements for each account.

How accurate are these projections?

The calculator provides estimates based on your inputs and reasonable assumptions. Actual returns, tax rates, and inflation may differ, so use results as a planning guide rather than a guarantee.

What if tax laws change in the future?

Future tax laws can impact the relative benefits of Traditional and Roth IRAs. The break-even tax rate feature helps you assess how much changes in tax rates would affect your decision.