Roth Ira vs Traditional Ira Calculator

Roth IRA vs. Traditional IRA Calculator

Enter your details and click 'Calculate Comparison' to see the results.

function calculateIRAComparison() { var annualAfterTaxContribution = parseFloat(document.getElementById('annualAfterTaxContribution').value); var currentTaxRate = parseFloat(document.getElementById('currentTaxRate').value); var retirementTaxRate = parseFloat(document.getElementById('retirementTaxRate').value); var yearsUntilRetirement = parseInt(document.getElementById('yearsUntilRetirement').value); var annualGrowthRate = parseFloat(document.getElementById('annualGrowthRate').value); var resultDiv = document.getElementById('iraResult'); // Input validation if (isNaN(annualAfterTaxContribution) || annualAfterTaxContribution <= 0 || isNaN(currentTaxRate) || currentTaxRate 100 || isNaN(retirementTaxRate) || retirementTaxRate 100 || isNaN(yearsUntilRetirement) || yearsUntilRetirement <= 0 || isNaN(annualGrowthRate) || annualGrowthRate < 0) { resultDiv.innerHTML = 'Please enter valid positive numbers for all fields. Tax rates should be between 0 and 100.'; return; } // Convert percentages to decimals var currentTaxRateDecimal = currentTaxRate / 100; var retirementTaxRateDecimal = retirementTaxRate / 100; var growthRateDecimal = annualGrowthRate / 100; // — Roth IRA Calculation — // Roth contributions are after-tax, and withdrawals are tax-free. // We use the annualAfterTaxContribution directly. var rothFV = 0; for (var i = 0; i < yearsUntilRetirement; i++) { rothFV = (rothFV + annualAfterTaxContribution) * (1 + growthRateDecimal); } var rothFinalValue = rothFV; // This is the after-tax value // — Traditional IRA Calculation — // To compare apples-to-apples, we need to find the pre-tax contribution // that would result in the same after-tax cost as the Roth contribution. // If you contribute $X after-tax to Roth, you'd need to contribute $X / (1 – currentTaxRate) pre-tax to Traditional // to have the same impact on your current take-home pay. var traditionalPreTaxContribution = annualAfterTaxContribution / (1 – currentTaxRateDecimal); var traditionalFVPreTax = 0; for (var j = 0; j 0) { recommendation = 'Based on these assumptions, the Roth IRA is projected to provide a higher after-tax value in retirement.'; resultColor = '#28a745'; // Green } else if (difference < 0) { recommendation = 'Based on these assumptions, the Traditional IRA is projected to provide a higher after-tax value in retirement.'; resultColor = '#007bff'; // Blue } else { recommendation = 'Based on these assumptions, both IRAs are projected to provide a similar after-tax value in retirement.'; resultColor = '#6c757d'; // Grey } resultDiv.innerHTML = `

Projected After-Tax Retirement Value:

Roth IRA: $${rothFinalValue.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2})} Traditional IRA: $${traditionalFinalValueAfterTax.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2})} ${recommendation} Note: This calculation assumes you contribute the same after-tax amount to either account. For Traditional, this means a higher pre-tax contribution to achieve the same after-tax cost. `; }

Understanding Roth vs. Traditional IRA

Deciding between a Roth IRA and a Traditional IRA is a crucial financial planning decision that primarily hinges on your current tax situation versus your expected tax situation in retirement. Both offer significant tax advantages for retirement savings, but they differ in when those tax benefits are realized.

Traditional IRA

A Traditional IRA allows you to contribute pre-tax dollars, meaning your contributions may be tax-deductible in the year they are made. This can lower your taxable income now. Your investments grow tax-deferred, meaning you don't pay taxes on the gains until you withdraw the money in retirement. At that point, both your contributions and earnings are taxed as ordinary income.

Best for: Individuals who expect to be in a higher tax bracket now than they will be in retirement. The immediate tax deduction is more valuable when your current tax rate is high.

Roth IRA

A Roth IRA works in the opposite way. You contribute after-tax dollars, meaning your contributions are not tax-deductible. However, your investments grow tax-free, and qualified withdrawals in retirement are completely tax-free. This means you never pay taxes on the earnings, provided you meet certain conditions (e.g., account open for 5 years, age 59½ or older).

Best for: Individuals who expect to be in a lower tax bracket now than they will be in retirement, or those who anticipate tax rates will be higher in the future. Paying taxes now at a lower rate to avoid them entirely later can be a powerful strategy.

How This Calculator Works

This calculator helps you compare the potential after-tax value of investing the same after-tax dollar amount into either a Roth or Traditional IRA. Here's what each input means:

• Annual After-Tax Contribution: The amount of money you are willing to set aside for retirement each year, after your current taxes have been paid.
• Current Marginal Tax Rate (%): Your current income tax bracket. This affects the tax deduction benefit of a Traditional IRA.
• Expected Retirement Marginal Tax Rate (%): The tax bracket you anticipate being in when you withdraw funds in retirement. This affects the tax on Traditional IRA withdrawals.
• Years Until Retirement: The number of years your investments will grow.
• Annual Investment Growth Rate (%): Your estimated average annual return on investment.

The calculator determines the equivalent pre-tax contribution for a Traditional IRA that would cost you the same after-tax dollars as your Roth contribution. It then projects the future value of both accounts and calculates their after-tax worth at retirement, allowing for a direct comparison.

Example Scenario:

Let's say you can contribute $6,500 annually after taxes. Your current marginal tax rate is 24%, and you expect it to drop to 15% in retirement. You have 30 years until retirement, and you anticipate an average annual growth rate of 7%.

• Roth IRA: You contribute $6,500 after-tax. This grows tax-free.
• Traditional IRA: To have the same after-tax cost of $6,500, you would contribute $6,500 / (1 – 0.24) = $8,552.63 pre-tax. This amount grows tax-deferred, and then 15% is taxed upon withdrawal.

By inputting these numbers into the calculator, you can see which option yields a higher net after-tax value in retirement, helping you make an informed decision.

Disclaimer: This calculator provides estimates based on the information you provide and simplified assumptions. It is not financial advice. Tax laws can change, and individual circumstances vary. Consult with a qualified financial advisor and tax professional before making investment decisions.