Roth IRA Calculator

How does a Roth IRA differ from a Traditional IRA or a regular taxable account?

Roth IRA:

1. Tax Treatment: Contributions to a Roth IRA are made with after-tax dollars. This means you pay taxes on the money you put in, but in most cases, you don't pay any taxes on withdrawals made after age 59½, provided the account has been open for at least 5 years. This includes both the contributions and any earnings.

2. Contribution Limits: There are annual limits to how much you can contribute to a Roth IRA, which may change based on IRS guidelines. As of 2023, the limit was $6,500 for individuals under 50 and $7,500 for those 50 and older.

3. Income Limits: There are income restrictions that can reduce or eliminate your ability to contribute to a Roth IRA based on your Modified Adjusted Gross Income (MAGI).

4. Required Minimum Distributions (RMDs): Roth IRAs do not have RMDs during the owner's lifetime, allowing for potential tax-free wealth to be passed to heirs.

Traditional IRA:

1. Tax Treatment: Contributions to a Traditional IRA can be tax-deductible, meaning you can reduce your taxable income for the year you make the contribution. However, when you start taking distributions in retirement, those withdrawals are taxed as ordinary income.

2. Contribution Limits: Like the Roth, the Traditional IRA has annual contribution limits set by the IRS.

3. Tax Deduction Limits: The ability to deduct contributions can be limited if you or your spouse have access to a workplace retirement plan and your income exceeds certain levels.

4. Required Minimum Distributions (RMDs): Unlike the Roth, Traditional IRAs require the owner to start taking minimum distributions by April 1 of the year following the year they turn 72.

Regular Taxable Account:

1. Tax Treatment: Contributions are made with after-tax dollars, and there's no tax deduction when you contribute. While the account grows, any dividends, interest, or capital gains are subject to taxes in the year they're received. This contrasts with the tax-deferred growth of both Roth and Traditional IRAs.

2. Contribution Limits: There are no limits to the amount you can contribute to a regular taxable account.

3. Flexibility: You can withdraw funds at any time without penalty, making this account more liquid than both Roth and Traditional IRAs, which have specific conditions for penalty-free withdrawals.

4. Long-Term Capital Gains: If you sell investments that you've held for more than a year at a profit, you'll be taxed at the long-term capital gains rate, which can be lower than your ordinary income tax rate.

How often should I use the Roth IRA Calculator?

It's advisable to use the Roth IRA Calculator annually or whenever there's a significant change in your financial situation. Regular check-ins ensure you're on track with your retirement goals and allow you to adjust contributions or investment strategies if needed.