Understanding Roth vs Traditional IRA
What is a Roth IRA in General Terms
A Roth IRA is a retirement account where you contribute after-tax dollars (money you've already paid taxes on). The contributions and investment earnings grow tax-free, and qualified withdrawals in retirement are tax-free. The key benefit is that you pay taxes now at your current tax rate, and if your tax rate is lower now than it will be in retirement, you may come out ahead. However, Roth IRAs have income limits that may restrict your ability to contribute.
What is a Traditional IRA in General Terms
A Traditional IRA is a retirement account where you may be able to contribute pre-tax dollars (money you haven't paid taxes on yet), potentially reducing your taxable income now. The contributions and investment earnings grow tax-deferred, and withdrawals in retirement are taxed as ordinary income. The key benefit is that you may get a tax deduction now and pay taxes later, potentially at a lower rate in retirement. However, Traditional IRAs have income limits for deductibility and are subject to required minimum distributions (RMDs) starting at age 73.
How This Tool Compares Roth Versus Traditional Under Simple Assumptions
This calculator compares Roth and Traditional IRA scenarios using simplified assumptions: flat tax rates you provide (one rate now, one rate in retirement), constant annual contributions, and a constant expected return. It models how balances grow over time and estimates after-tax values at retirement by applying your tax rate assumptions. It shows which path (Roth or Traditional) results in a higher after-tax value under these specific assumptions. The comparison is sensitive to your tax rate assumptions, time horizon, and expected returns.
Why Tax Rate Assumptions Matter
The comparison between Roth and Traditional IRAs largely depends on whether your tax rate now is higher or lower than your tax rate in retirement. If you expect your tax rate to be lower in retirement, Traditional may be advantageous (you get a deduction now and pay taxes later at a lower rate). If you expect your tax rate to be higher in retirement, Roth may be advantageous (you pay taxes now at a lower rate and withdraw tax-free later). However, predicting future tax rates is uncertain, and actual tax outcomes depend on many factors beyond this simplified model.
Important Limitations and What This Tool Does Not Cover
This calculator is a simplified educational tool and does not reflect the full complexity of IRA rules and tax law. It does not account for: income phaseouts for contributions, required minimum distributions (RMDs), early withdrawal penalties, tax bracket changes over time, deductions that affect your actual tax rate, employer retirement plan participation affecting Traditional IRA deductibility, or other detailed IRS rules. It uses flat tax rates and constant assumptions, which may not reflect your actual situation. Always consult official IRS resources or qualified tax professionals for personalized advice.
Note: This calculator is for educational purposes only and does not provide personalized financial, tax, or investment advice. It does not determine IRA eligibility, reflect all tax rules, or recommend which account type you should choose. Always consult with qualified financial advisors, tax professionals, and official IRS resources for advice specific to your situation.
Frequently Asked Questions
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