Roth IRA Calculator Rate of Return

by Patrick Gleeson

    A Roth IRA is a type of individual retirement account that allows you to invest after-tax money each year and to withdraw both money and earnings tax free from age 59 1/2 on. Calculating how much you will have in retirement can be complicated with a Roth, but a Roth tax calculator, whether found online or as a component in a financial planning software package, makes it easy. You can treat return on investment as a variable to determine the amount available at retirement, or you can set different retirement amounts to determine what return rate that amount requires.

    Variables in a Roth Calculator

    Roth IRA calculators, whether found online or as a module in financial planning software, allow you to determine how much you will have for retirement at an age you specify. To make the calculation, plug in these variables: starting balance -- how much you have in your Roth IRA now; annual contribution -- how much money you're going to put in each year; current age; retirement age; expected rate of return on investment; and your marginal tax rate.

    Marginal Tax Rate

    While in 2013 the highest marginal tax rate is 39.6 percent, the Internal Revenue Service only allows full Roth IRA contributions from couples filing jointly with annual income up to $178,000. At that income level, your marginal tax rate is 28 percent -- that's the tax rate in the income bracket from $142,000 up to $178,000. Consulting a marginal tax rate calculator available on the Internet indicates that your average tax rate -- the tax rate you pay on every dollar of income -- is 17.93 percent.

    Expected Rate of Return

    You can estimate the expected rate of return on equities in a Roth IRA in a couple of different ways. One way is to assume that your investment return will equal the historical average of the S&P 500 over a long period. From 1950 through 2009, for example, the S&P 500 returned an annual average of 11 percent, including dividends and before inflation. You could use 11 percent, but for many reasons, very few investors, even professional fund managers, equal the average. CalPERS, the very large California Public Employees Pension System, expects an average return of 7.25 percent on stocks over 10 years, which might be a more reasonable assumption.

    Sample Calculations

    Assuming a starting balance of $5,000, annual contributions of $5,500, current age of 29, retirement age of 65, marginal tax rate of 28 percent, and expected rate of return of 7.25 percent, the calculator determines that at retirement you will have $991,793. If you change the return rate to 7.75 percent, you will have $1,120,294. If you start the same program at age 35, you will have $688,255. By changing variables in the calculator, you can quickly determine how much you will have for retirement in your Roth IRA.

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    About the Author

    Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and co-manages a small stock investment fund.

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