|
|
|
|
|
|
An IRA can be an effective retirement tool. There are two basic types of Individual
Retirement Accounts (IRA): the Roth IRA and the Traditional IRA. Use this tool to
determine which IRA may be right for you.
|
Definitions
|
- Current age
- Your current age.
- Annual contribution
- The amount you will contribute to an 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 age 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.
You can no longer make contributions to a traditional IRA in the year you reach
70 1/2.
It is important to note that Roth IRA contributions are limited for higher incomes.
If your income falls in a "phase-out" range you are allowed only a prorated Roth
IRA contribution. If your income exceeds the phase-out range, you do not qualify
for any Roth IRA contribution. The table below summarizes the income "phase-out"
ranges for Roth IRAs.
|
Tax filing status
|
2009 Income Phase-Out Range
|
|
Married filing jointly or Head of household
|
$166,000 to $176,000
|
|
Single
|
$105,000 to $120,000
|
|
Married filing separately
|
$0 to $10,000
|
|
*For the purposes of this calculator, we assume are not Married filing separately
and contributing to a Roth IRA.
|
*For the purposes of this calculator, we assume are not Married filing separately
and contributing to a Roth IRA.
- 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.
- 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 64.
- Current tax rate
- The current marginal income 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
- Your adjusted gross income from your taxes. This
is used to calculate whether you are able to deduct your annual contributions from
your income tax statement.
- Are you 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.
- 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 your IRA.
- IRA total after taxes
- For the Roth IRA, this is the total value of the
account. For the Traditional IRA, this is the sum of two parts: 1) The value of
the account after you pay income taxes on all earnings and tax-deductible contributions
and 2) what you would have earned if you had invested (in an ordinary taxable account)
any income tax savings.
Please note, for distributions to include earnings that are tax free the Roth IRA
must be opened for 5 tax years. Eligible tax free distributions include those taken
for death or disability, after age 59 1/2, or for a first time home purchase.
|
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.
|
|
|