Roth Ira Calculator

Most people have three options available to them for retirement savings—traditional saving methods, tax deferred savings such as traditional IRA and 401k plans, and Roth IRAs which offer tax-free withdrawals. All have different benefits, but also carry different drawbacks and requirements. A Roth IRA calculator can help investors figure out if a Roth IRA is the right investment vehicle for them.

To understand how savings and tax deferral work together, one needs to understand the three types of money that are involved in a retirement savings plan. The first is the money that is deposited into the account which is also referred to as capital. The second is any dividends or interest. These are funds which are paid out on a regular basis. The third is capital gains, which is any increase in the value of the investment. This becomes “realized” income only when the asset is sold. As an example, consider purchasing ten shares of a given stock, which each cost roughly $50.00 and offer an average dividend of roughly $4.00 per year, and holding it for ten years. One would invest $500 in capital and receive $40.00 per year in cash income from the dividends. If BP goes up to $80 per share in ten years, one could then sell the 10 shares for $800 and realize a capital gain of $300.00.

In a non-tax advantaged savings plan, one would have $350 to invest, after paying 30% in state and federal income tax on the $500 in income. This would purchase 7 shares, which would generate $19.60 in income per year, after 30% tax, which would have to be paid every year. After ten years, one would realize a gain of $225.00 after paying 25% in capital gains taxes. In other words, $500 in pre-tax income would turn into $771.00 in after-tax dollars in 10 years.

With a traditional IRA or 401K, one could invest the entire $500. In 10 years, one would have $500 in capital, $300 in capital gain and $400 in dividends, but one would have to pay the taxes on the income at 30% and on the capital gain at 25%, yielding $855.00.

In a Roth IRA, one would have to pay taxes on the invested capital, leaving $350 with which to buy 7 shares. Since the $280 in dividends and $210 in capital gains would be tax free, at the end of the day, one would end up with $840 in after tax dollars.

A Roth IRA calculator would help one to understand this. It would also show the instances where one can increase one’s yield from a Roth IRA can also be higher than that from a traditional 401K or IRA. Because these scenarios can be quite complicated, using a calculator can be extremely instructive. Having the help of a qualified and licensed investment professional can also make this decision-making process much easier.