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Which is better: a Roth IRA or a 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 calculator to determine which IRA is right
for you.
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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 2003, the maximum IRA annual contribution is $3,000
per individual. It is important to note that this is the
maximum total contributed to all of your IRA accounts.
This maximum will increase gradually to $5,000 by 2008.
The table below summarizes IRA annual contribution limits.
| Year |
IRA
contribution limit |
| 2002-2004 |
$3,000 |
| 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.
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 dependant on the type of investments you select.
For example, for the last thirty years the average annual
rate of return for domestic equity stocks has been about
10%. Savings accounts at a bank pay as little as 2%.
- 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 401k 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 2003, for single tax filers with
an employer sponsored retirement plan, an IRA contribution
is fully tax-deductible if your income is below $40,000.
It is then prorated between $40,000 and $50,000. If
your income is over $50,000 and you have a 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 60,000
and $70,000. The phase-out ranges are scheduled to increase
over the next few years. The table below summarizes
the deduction phase-out for 2002 - 2007.
Traditional IRA Deduction
Income Phase-Out Ranges |
| Year |
Single
Taxpayers |
Married
Taxpayers Filing Jointly |
| 2003 |
$40,000-$50,000 |
$60,000-$70,000 |
| 2004 |
$45,000-$55,000 |
$65,000-$75,000
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| 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 a 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 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.
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