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Total Tax-Free Earnings: $
How to Use the Roth IRA Calculator
The Roth IRA calculator is a powerful financial tool designed to help you project the future value of your retirement savings. Unlike traditional IRAs, Roth IRAs grow tax-free, meaning the final number you see is exactly what you get to keep in retirement. By entering your current status and future plans, you can visualize how small changes in contributions or market performance can drastically alter your golden years.
To get an accurate result, you will need to provide the following information:
- Current Age & Retirement Age
- The number of years between these two points determines your investment horizon. The longer the time, the more "compounding" can work its magic.
- Starting Balance
- This is the amount of money currently sitting in your Roth IRA account.
- Annual Contribution
- The amount you plan to deposit each year. Note that the IRS sets annual limits (e.g., $7,000 for 2024, or $8,000 if age 50+).
- Expected Annual Return
- The average yearly growth rate you expect from your investments. While the stock market historically averages around 7-10%, conservative investors may choose lower figures.
The Power of Tax-Free Compounding
The math behind our Roth IRA calculator relies on the formula for the future value of a series of payments (an annuity) combined with the future value of a lump sum. The most significant advantage of the Roth IRA is that all earnings are exempt from federal taxes upon withdrawal, provided you meet certain requirements (typically being over 59½ and having held the account for 5 years).
Future Value = Initial Balance × (1 + r)n + Annual Contribution × [((1 + r)n – 1) / r]
- r: Annual expected rate of return (decimal)
- n: Number of years until retirement
- Initial Balance: Your current account value
- Annual Contribution: Your recurring yearly investment
Roth IRA Calculation Example
Scenario: Let's say you are 25 years old and want to retire at age 65. You have a starting balance of $2,000 and plan to contribute $500 per month ($6,000 per year). You expect a 7% average annual return.
Step-by-step projection:
- Timeframe: 65 – 25 = 40 years.
- Growth on Start: $2,000 growing at 7% for 40 years = $29,949.
- Growth on Contributions: $6,000/year for 40 years at 7% = $1,197,811.
- Total: $29,949 + $1,197,811 = $1,227,760.
- Result: Your tax-free nest egg is $1,227,760.
Frequently Asked Questions
What is the Roth IRA contribution limit for 2024?
For the 2024 tax year, the contribution limit for individuals is $7,000. If you are age 50 or older, you are allowed a "catch-up" contribution of an additional $1,000, bringing the total limit to $8,000. These limits are periodically adjusted by the IRS for inflation.
Are there income limits for a Roth IRA?
Yes. To contribute directly to a Roth IRA, your Modified Adjusted Gross Income (MAGI) must be below certain thresholds. For 2024, the phase-out range for single filers is $146,000 to $161,000. For those married filing jointly, the range is $230,000 to $240,000. If your income exceeds these limits, you might consider a "Backdoor Roth IRA."
Should I choose a Roth IRA or a Traditional IRA?
A Roth IRA is generally better if you expect to be in a higher tax bracket in retirement than you are now. Because you pay taxes on the money before it enters the Roth IRA, all future growth is tax-free. A Traditional IRA provides an immediate tax deduction but requires you to pay income tax on withdrawals later in life.
Can I withdraw my money early?
One unique feature of the Roth IRA is that you can withdraw your contributions (the money you put in) at any time, for any reason, without taxes or penalties. However, withdrawing earnings before age 59½ usually triggers a 10% penalty and taxes, unless you meet specific exceptions like a first-time home purchase or certain medical expenses.