What is the IRA Calculator?
The IRA Calculator is a comprehensive financial tool designed to help you project your retirement wealth. It evaluates and compares three major methods of saving: Traditional IRAs (including SEP and SIMPLE IRAs), Roth IRAs, and regular taxable savings accounts. By comparing these side-by-side on an after-tax basis, you can visually determine which account type yields the highest net worth by your retirement age.
In the United States, an Individual Retirement Account (IRA) offers substantial tax benefits designed by the IRS to incentivize retirement savings. Choosing the right type of IRA largely depends on your current marginal tax rate versus your expected tax rate during retirement.
How to Use This Calculator
To accurately gauge your future retirement balance, you need to input a few key variables. Our calculator adjusts equivalent starting balances and contributions so the comparisons represent a true "apples-to-apples" scenario.
- Current Balance: The total amount you currently have invested in your retirement account.
- Annual Before-Tax Contribution: The amount of pre-tax income you plan to deposit every year. The calculator automatically adjusts this for Roth and Taxable accounts to reflect the post-tax equivalent.
- Expected Rate of Return: A conservative estimate of how your investments will grow annually. Historically, a diversified portfolio yields between 5% and 8%.
- Current Age & Retirement Age: Defines the timeline (number of years) your money has to grow and compound.
- Current Marginal Tax Rate: Your highest tax bracket today. This is used to determine how much a pre-tax contribution actually "costs" you out of pocket.
- Expected Tax Rate in Retirement: The estimated tax bracket you will fall into once you stop working and begin taking distributions.
The Formula / The Science
Comparing Traditional, Roth, and Taxable accounts isn't as simple as running a compound interest formula. We have to account for when the government takes its share.
Traditional IRA Growth
Contributions go in before tax, and the balance grows tax-deferred. The total accumulation is given by the standard Future Value of an Annuity formula. However, upon withdrawal, the entire balance is taxed at your retirement rate:
FVAfterTax = FVBeforeTax × (1 - Tretire)
Roth IRA & Taxable Savings Growth
For a fair comparison, the starting balance (B) and contribution (C) are reduced by your current tax rate (Tcurrent). A Roth IRA grows tax-free, so the final balance is entirely yours. A Regular Taxable account, however, suffers from "tax drag"—the annual growth is reduced because you pay taxes on capital gains/dividends each year.
Taxable Effective Return = r × (1 - Tcurrent)
Frequently Asked Questions
The general rule of thumb is: If you expect your tax rate to be lower in retirement than it is today, a Traditional IRA usually results in more wealth. If you expect your tax rate to be higher in retirement, a Roth IRA is generally the better choice.
To provide a fair, "apples-to-apples" comparison, the calculator assumes your initial inputs are pre-tax dollars. Since Roth and Taxable accounts require after-tax dollars, the calculator reduces the starting balance and annual contributions by your current marginal tax rate to simulate what you could actually afford to invest after paying the IRS today.
SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) IRAs are specialized retirement plans for small business owners and self-employed individuals. They function similarly to Traditional IRAs in terms of tax-deferred growth but allow for significantly higher contribution limits.
This depends on how you enter the rate. If you input a nominal rate (e.g., 8%), the final numbers will not account for inflation. If you want to see your results in "today's purchasing power," you should input a real rate of return (e.g., subtracting an estimated 2-3% inflation from your expected nominal return).
While they experience tax drag and usually result in the lowest final balance, taxable brokerage accounts offer complete liquidity. Unlike IRAs, which carry early withdrawal penalties if accessed before age 59½, you can withdraw from a taxable account at any time without penalty, making them ideal for mid-term financial goals.