For many Americans, an individual retirement account, or IRA, represents years of hard work and future planning. Regular contributions to an IRA throughout your working adult years can yield significant dividends when it comes time to retire. Depending upon your specific lifestyle preferences, you may have set your sights on a specific sum with regards to your IRA balance. Whether you have $500,000 or $3 million in your retirement account, you can use a series of simple retirement calculator techniques to determine to what extent you can rely on these funds during your golden years.
Your IRA account can help you prepare for a rewarding retirement that also carries with it a high degree of financial security. If you have $3 million in your IRA, you should be able to enjoy substantial annual distributions throughout your golden years.
The Basics of IRA Accounts
Before you begin to calculate your IRA goals, your first step should be to determine how your IRA is currently being taxed. After all, tax obligations can consume a significant portion of your earnings. Although both Roth IRA and traditional IRAs require you to pay taxes on your funds, these accounts assess your tax burden at different points in your account timeline.
With a traditional IRA, individuals can contribute up to the maximum annual limit into their account without having to pay tax on these funds. This is due to the fact that a deduction is available that effectively offsets any tax burden that would have occurred. When the account holder begins taking withdrawals, however, they will be required to pay tax on these funds according to their current income tax bracket.
Roth IRAs assess taxes in an entirely different fashion, as Roth IRA account owners are required to pay taxes on their contributions upfront. This means that the tax return they file each year will take into account contributions to a Roth IRA and tax this income accordingly. While this may initially seem to be a disadvantage compared to a traditional IRA, Roth IRA account owners have the unique benefit of not being required to pay tax on withdrawals once they reach their eligible withdrawal period.
Examples of IRA Taxation in Action
The advantages of a Roth IRA become apparent when an individual contributor reaches their eligible withdrawal period and is currently in a higher tax bracket than they were when they first started contributing to their account. Because they are allowed to withdraw their funds without any tax burden, Roth IRA account holders are effectively able to pay a significantly lower tax rate on the bulk of their contributions than they would if they were contributing to a traditional IRA.
If, for example, a traditional IRA account owner reached a noticeably higher tax bracket by the age of 59 1/2 when penalty-free withdrawals are allowed, they would be required to pay their current income tax rates on funds they contributed when they were earning significantly less money and, thus, were in a lower tax bracket.
Understanding Required Distributions
According to IRS guidelines, individuals must begin taking distributions from their traditional IRA account when they reach the age of 70 1/2. With a Roth IRA, there are no required distributions during the life of the owner. That being said, distributions must be made once the original account owner passes away.
The IRS provides detailed worksheets that explain in depth how the required minimum distribution, or RMD, is calculated. It is important to note that your individual RMD obligations will be influenced by whether or not you have named a spouse as the sole beneficiary to your account. The current RMD worksheet can be found here.
Working With a $3 Million Retirement
Once you have assessed your current tax obligations, your next step is to determine exactly how your IRA funds can be distributed over the rest of your life without falling into financial hardship or depleting the account entirely.
The most accurate and time-efficient means of calculating your retirement preparedness is to use a retirement calculator. These tools take into account not only the size of your current account balance, but also your current age, the anticipated rate of return on your IRA, your anticipated expenses and other important parameters.
One excellent example of an IRA retirement withdrawal calculator is provided by Bankrate. Here, account holders can gain access to detailed reporting that assesses the expected balance of your IRA account over the lifespan of the account holder, as well the required minimum distributions which must be made.
Thinking Further About Your Account
If you currently have $3 million, take a moment to explore the RMDs associated with this account balance. Knowing that this is the mandatory minimum that must be withdrawn on a yearly basis, ask yourself whether or not you feel comfortable living on this sum. If the RMD is more than the sum you anticipated you would require during retirement, the chances are very good that your IRA will be sufficient during this period of your life. If it is not, take a moment to tweak the distribution calendar, inputting a higher yearly withdrawal.
This alteration to the annual distribution will obviously impact the overall balance of your account in both the short and long term. That being said, this experimentation will allow you to determine just how long you can anticipate living on your IRA based on your own income preferences.
Consulting With an Expert
Before you begin to finalize your plans for IRA distributions, it may be in your best interest to consult with a financial advisor and a retirement expert. These individuals often have extensive experience with IRA planning and can work with you to fine-tune not only your goals for your IRA but also your realistic expectations for how these funds can facilitate your lifestyle moving forward.
A financial advisor can provide a powerful knowledge resource for you in the event that you are still several years away from the RMD period and are hoping to maximize your returns. Based on your current age and your risk tolerance, your financial advisor can devise a plan that is tailor-made for your own financial profile. Perhaps most importantly, your financial advisor can help determine whether or not your specific retirement savings plans are adequate to achieve your goals, and can recommend immediate courses of action to remedy any problems or unnecessary risks they may identify. This type of counsel could provide immense benefits for those who are entering the world of IRAs at a later point in life and could benefit from expert insight.
In the event that you do not choose to consult with a financial advisor, you can still take advantage of a variety of informational resources across the internet. A trove of informative content is currently available that can assist you with virtually any topic relating to the role of your IRA in your upcoming retirement.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.