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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 2007, the maximum annual
IRA contribution is $4,000 per individual. It is important
to note that this is the maximum total contributed to
all of your IRA accounts. This maximum will increase to
$5,000 in 2008. Beginning in 2009, the contribution limit
will adjust annually for inflation in $500 increments.
| Year |
IRA
contribution limit |
| 2005-2007 |
$4,000 |
| 2008
and after* |
$5,000 |
*Beginning in 2009, the contribution limit will adjust
annually for inflation in $500 increments
In 2007, if you are 50 or older, you can make an additional
"catch-up" contribution of $1000. 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.
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 |
$156,000
to $166,000 |
| Single |
$99,000 to $114,000 |
| 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. From January 1970 to December
2006, the average compounded rate of return for the S&P
500, including reinvestment of dividends, was approximately
11.5% per year (source: www.standardandpoors.com). During
this period, the highest 12-month return was 61%, and
the lowest was -39%. Savings accounts at a bank pay as
little as 1% or less.
It is important to remember that future rates of return
can't be predicted with certainty and that investments
that pay higher rates of return are 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 additional sales charges and
fees that funds may charge.
- 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 401(k) or pension. This is used to determine
if you can deduct your annual contributions from your
taxes.
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- 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 2007, for single tax filers with an employer sponsored
retirement plan, an IRA contribution is fully tax-deductible
if your income is below $52,000. It is then prorated
between $52,000 and $62,000. If your income is over
$62,000 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 $83,000 and $103,000.
Traditional IRA Deduction
Income Phase-Out Ranges |
| Year |
Single
Taxpayers |
Married
Taxpayers Filing Jointly |
| 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 $156,000 to $166,000. Second, if you are married
filing separately and have an employer sponsored retirement
plan, the income phase-out is from $0 to $10,000.
- 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 is 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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