In plain text
Balance = S(1+r)^(n) + C × ((1+r)^(n)-1) ÷ (r)
What is a Roth IRA?
A Roth IRA is a retirement account that you fund with money you have already been taxed on. Your investments grow without yearly tax, and qualified withdrawals in retirement are not taxed. Not everyone can contribute directly, because the right to contribute depends on your income and filing status.
How do I use it?
Enter the amount already in the account, the amount you plan to add each year, and the years until you plan to start withdrawing. Enter the return you assume and the tax rate you expect to pay on withdrawals from a traditional account. The results show the projected Roth balance, the total you put in, the growth, and how the same savings compare after tax in a traditional IRA.
How does the calculation work?
The balance grows each year by the assumed return. The starting amount compounds for all the years, and each yearly contribution compounds for the years left after it is added. The traditional comparison takes the same balance and subtracts the tax rate you expect to pay when you withdraw.
The comparison assumes the same yearly amount goes into each account. In practice a traditional contribution may be larger, because it is made before tax, so the comparison is a simplified one.
Why is the expected tax rate so important?
The Roth and traditional accounts differ mainly in when you pay tax. A Roth pays tax on the money you put in, and a traditional account taxes the withdrawals. If you expect a higher tax rate in retirement, the Roth tends to come out ahead. If you expect a lower rate, the traditional account may come out ahead.
What limits apply?
The IRS sets a yearly limit on how much you can put into IRAs, and the limit changes from time to time. The calculator checks your yearly contribution against the limit used when the page was last updated, for savers below the catch-up age. Older savers may add a catch-up amount, which the calculator does not include.
Eligibility also depends on your income and filing status. Check the current figures on the IRS website before you contribute.
What can the result not tell me?
The calculator uses a steady return, so it does not show the ups and downs of the market. It does not model inflation, changes in tax law, taxes on investment gains outside the account, or the rules for early withdrawals. Qualified withdrawals depend on your age and how long the account has been open.
Treat the result as an estimate, and check the rules for your own account with your provider or a tax professional.
Is a Roth always the better choice?
Not always. A Roth fits people who expect their tax rate to be higher later, or who want flexibility in retirement. A traditional account may suit people who expect a lower rate later, or who need the tax break now. Many people hold both, which spreads the tax treatment across their retirement income.
