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.
You can quickly begin calculating your expected rate of return on a Roth IRA if you have key data points available. These include information such as your current Roth IRA balance, your annual contribution amount, the number of years remaining before you begin withdrawals, and your expected rate of return, among other information.
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.
Assessing the Marginal Tax Rate
While in 2018 the highest marginal tax rate is 37 percent – down from 39.6 percent in 2017 – the Internal Revenue Service only allows full Roth IRA contributions from couples filing jointly with annual income up to $189,000. At that income level, your marginal tax rate is 32 percent in 2018 – that's the tax rate in the income bracket from $157,500 up to $200,000. The equivalent marginal rate in 2017 is 28 percent, which is the rate for the income bracket $91,901 to $191,650.
Evaluating an 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 1928 through 2017, for example, the S&P 500 returned an annual average of around 10 percent, including dividends and before inflation. You could use 10 percent, but for many reasons, very few investors, even professional fund managers, equal the average. Adjusted for inflation, the historical average is closer to 7 percent, which might be a more reasonable assumption.
Exploring 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 32 percent, and expected rate of return of 7 percent, the calculator determines that at retirement you will have $933,475. If you change the return rate to 7.5 percent, you will have $1,053,884. If you start the same program at age 35, you will have $655,124. By changing variables in the calculator, you can quickly determine how much you will have for retirement in your Roth IRA.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.