Roth IRA or Traditional IRA?

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.

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RESULTS_MSG How was this calculated?

Step 1: First we found the value of a Roth IRA if you contributed ANNUAL_CONTRIBUTION per year for YEARS_UNTIL_RETIREMENT years earning an assumed RATE_OF_RETURN per year. This equaled TOTAL_ROTH. Since withdrawals from a Roth IRA are not taxed, the total value remains TOTAL_ROTH.

Step 2: We then computed the totals for a Traditional IRA. Again we determined the value of ANNUAL_CONTRIBUTION per year for YEARS_UNTIL_RETIREMENT years earning an assumed RATE_OF_RETURN per year. This is the same amount as the Roth IRA total, IRA_TOTAL_BF_TAX. However, tax deductible contributions and all earnings in a Traditional IRA are taxable when they are withdrawn. After taxes, the value of your Traditional IRA account would be IRA_TOTAL_AF_TAX.

Step 3: Finally, if you had any tax-deductible Traditional IRA contributions we need to determine the value of investing this tax savings and add this amount to the Traditional IRA total. If we forget this step, our comparison will not be equal (we would in effect be contributing more to our Roth IRA than the Traditional IRA). If your tax savings was invested for YEARS_UNTIL_RETIREMENT years at an assumed rate of RATE_OF_RETURN, this returns a total of TOTAL_TAXABLE after taxes.

Results Summary
&NBSP;	Traditional IRA	Roth IRA
Total contributions MSG_CONTRIBUTE_LBL	TOTAL_CONTRIBUTIONS	TOTAL_CONTRIBUTIONS
Total before taxes	IRA_TOTAL_BF_TAX	TOTAL_ROTH
Value of investing tax savings	+ TOTAL_TAXABLE	+ 0
Taxes for IRA at retirement	- IRA_TOTAL_TAXES	- 0
Value at retirement (age AGE_OF_RETIREMENT)	TOTAL_IRA	TOTAL_ROTH
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Your input values

Input Summary
Annual contribution* MSG_CONTRIBUTE_LBL	ANNUAL_CONTRIBUTION	Current age	CURRENT_AGE
Years until retirement	YEARS_UNTIL_RETIREMENT	Age of retirement	AGE_OF_RETIREMENT
Expected rate of return	RATE_OF_RETURN	Adjusted gross income	ADJUSTED_GROSS_INCOME
Current tax rate	CURRENT_TAX_RATE	Retirement tax rate	RETIREMENT_TAX_RATE
Are you married?	MARRIED_YESNO	Employer plan?	EMPLOYER_YESNO
Traditional IRA deductible percent	DEDUCTIBLE_PERCENT**	Traditional IRA total non-deductible contributions	TOTAL_NONDEDUCT**

IRA Balances by year

**REPEATING GROUP**

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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 2004, the maximum IRA annual contribution is $3,000 per individual. It is important to note that this is the maximum total contributed to all of your IRA accounts. This maximum will increase gradually to $5,000 by 2008. The table below summarizes IRA annual contribution limits.

Year	IRA contribution limit
2002-2004	$3,000
2005-2007	$4,000
2008 and after*	$5,000

*Beginning in 2009, the contribution limit will adjust annually for inflation in $500 increments

If you are 50 or older you can make additional "catch-up" contributions of $500 more than the normal limits in 2002 through 2005. Starting in 2006, the "catch-up" amount will increase to $1,000. 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. For the purposes of this calculator, we assume that your income does not limit your ability to contribute to a Roth IRA. The table below summarizes the income "phase-out" ranges for Roth IRAs.

Tax filing status	Income Phase-Out Range
Married filing jointly or Head of household	$150,000 to $160,000
Single	$95,000 to $110,000
Married filing separately	$0 to $10,000

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 dependant on the type of investments you select. From January 1970 to December 2003, the average compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 11.7% per year. During this period, the highest 12-month return was 64%, and the lowest was -39%. Savings accounts at a bank pay as little as 1% or less. It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are 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.

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 2004, for single tax filers with an employer sponsored retirement plan, an IRA contribution is fully tax-deductible if your income is below $45,000. It is then prorated between $45,000 and $55,000. If your income is over $55,000 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 65,000 and $75,000. The phase-out ranges are scheduled to increase over the next few years. The table below summarizes the deduction phase-out for 2003 - 2007.

Traditional IRA Deduction Income Phase-Out Ranges
Year	Single Taxpayers	Married Taxpayers Filing Jointly
2003	$40,000-$50,000	$60,000-$70,000
2004	$45,000-$55,000	$65,000-$75,000
2005	$50,000-$60,000	$70,000-$80,000
2006	$50,000-$60,000	$75,000-$85,000
2007	$50,000-$60,000	$80,000-$100,000

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 $150,000 to $160,000. 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.