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Traditional IRA Calculator
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Contributing to a Traditional IRA can create a current tax deduction, plus it provides
for tax deferred growth. While long term savings in a Roth IRA may produce better
after tax returns, a Traditional IRA may be an excellent alternative if you qualify
for the tax deduction.
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Definitions
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- Annual contribution
- The amount you will contribute to your Traditional
IRA each year. This calculator assumes that you make your contribution at the beginning
of each year. In 2008 and 2009, the maximum annual IRA contribution is $5,000 per
individual. It is important to note that this is the maximum total contributed to
all of your IRA accounts. The contribution limit, beginning in 2009, increases with
inflation in $500 increments. An annual change to the contribution limit only occurs
if the cumulative effect of inflation since the last adjustment is $500 or more.
In 2008 and 2009, if you are 50 or older, you can make an additional "catch-up"
contribution of $1000. In order to qualify for the "catch-up" contribution, you
must turn 50 by the end of the year in which you are making the contribution.
- Expected rate of return
- The annual rate of return for your IRA. This calculator
assumes that your return is compounded annually and your contributions are made
at the beginning of each year. The actual rate of return is largely dependent on
the type of investments you select. From January 1970 to December 2008, the average
annual compounded rate of return for the S&P 500, including reinvestment of dividends,
was approximately 9.7% (source: www.standardandpoors.com). During this period, the
highest 12-month return was 61%, from June 1982 through June 1983. The lowest 12-month
return was -39%, which happened twice, once from September 1973 to September 1974
and again from November 2007 to November 2008. Savings accounts at a bank may pay
as little as 1% or less but carry significantly lower risk of loss of principal
balances.
It is important to remember that these scenarios are hypothetical and that future
rates of return can't be predicted with certainty and that investments that pay
higher rates of return are generally subject to higher risk and volatility. The
actual rate of return on investments can vary widely over time, especially for long-term
investments. This includes the potential loss of principal on your investment. It
is not possible to invest directly in an index and the compounded rate of return
noted above does not reflect sales charges and other fees that funds and/or investment
companies may charge.
- Current age
- Your current age.
- Age of retirement
- Age you wish to retire. This calculator assumes that
the year you retire, you do not make any contributions to your IRA. So if you retire
at age 65, your last contribution happened when you were actually age 64.
- Current tax rate
- Your current marginal tax rate you expect to pay on your
taxable investments.
- Retirement tax rate
- The marginal tax rate you expect to pay on your investments
at retirement.
- Adjusted gross income
- What you anticipate your income to be. This is used
to calculate whether you are able to deduct your annual contributions from your
taxes. It is important to note that there are no income limits preventing you from
contributing to a Traditional IRA. Annual income only affects your ability to make
a tax deductible contribution.
- Married
- Check the box if you are married. This is used to determine whether
you can deduct your annual contributions from your taxes.
- Employer plan
- Check the box if you have an employer sponsored retirement
plan, such as a 401(k) or pension. This is used to determine if you can deduct your
annual contributions from your taxes. For more information on how an employer plan
can affect your IRA tax deduction, see the definition for non-deductible contributions,
directly below.
- Total non-deductible contributions
- The total of your Traditional IRA contributions
that were deposited without a tax deduction. Traditional IRA contributions are normally
tax-deductible. However, if you have an employer sponsored retirement plan, such
as a 401(k), your tax deduction may be limited.
In 2009, for single tax filers with an employer sponsored retirement plan, an IRA
contribution is fully tax-deductible if your income is below $55,000. It is then
prorated between $55,000 and $65,000. If your income is over $65,000 and you have
an employer sponsored retirement plan, such as a 401(k), you receive no tax deduction.
For married couples, the same rules apply except the deduction is phased out between
$89,000 and $109,000.
This calculator automatically determines if your tax deduction is limited by your
income. However, there are two unusual situations not automatically accounted for
where additional tax phase-outs are applied. First, if your spouse has an employer
sponsored retirement plan but you do not, your tax deduction is phased out from
$166,000 to $176,000. Second, if you are married filing separately and have an employer
sponsored retirement plan, the income phase-out is from $0 to $10,000.
- Total contributions
- The total amount contributed to this IRA.
- IRA total before taxes
- Total value of your IRA at retirement before taxes.
- IRA total after taxes
- Total value of your IRA at retirement after taxes
are paid.
- Total taxable account
- Total value of your savings, at retirement, if the
after tax contribution amount is deposited into a taxable account. This value, which
we call your "Taxable Account Deposit" is calculated by assuming you could save
an amount equal to the after tax cost of contributing to a Traditional IRA. Your
"Taxable Account Deposit" then is equal to your Traditional IRA contribution minus
any tax savings. For example, assume you have a 30% combined state and federal tax
rate. If you contribute $2000 to a Traditional IRA and qualify for the full $2000
tax deduction, the value of your tax deduction is $2000 X 30% or $600. The after
tax cost of contributing to your Traditional IRA would then be $2000 minus $600
or $1400. If you do not qualify for tax deductible Traditional IRA contributions,
your "Taxable Account Deposit" will be the same as your Traditional IRA contribution.
In addition, all earnings in your taxable account are assumed to be taxable in the
year they are earned.
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Information and interactive calculators are made available
to you as self-help tools for your independent use and are not intended to provide
investment advice. We can not and do not guarantee their applicability or accuracy
in regards to your individual circumstances. All examples are hypothetical and are
for illustrative purposes. We encourage you to seek personalized advice from qualified
professionals regarding all personal finance issues.
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