Reviewed by:
Michael Villarica
CTO
Compliance Oversight by:
MCO
MyComplianceOffice
Traditional IRA Calculator
When it comes time to save for retirement, how does an individual or family know which investment vehicle to use or how much is needed in contributions to save enough for a comfortable retirement? A retirement calculator such as the one above can help answer this question in a fast and accurate manner. This calculator will highlight the compounded investment power of the traditional IRA and demonstrate if this investment vehicle is a right fit. This calculator will also determine the required yearly contribution needed to retain a set preferred yearly withdrawal amount, as well as provide the value of the investment account at retirement.
Traditional IRA Overview
Individual retirement accounts (IRAs) are tax-deferred investment accounts. A traditional IRA, specifically (Individual Retirement Account), can have its contributions deducted from one’s current yearly tax return, which reduces an individual’s taxable income. These tax benefits provide more significant long-term incentives to investing and can be opened at most banks, robo-advisor services, and online brokers.
Traditional IRA Calculator Values
The following instruction will demonstrate how to properly use the traditional IRA calculator to calculate one’s yearly contribution, yearly withdrawal amount, and total value at retirement. Visible are current values that can be changed.
- Return on Investment During Retirement
- Yearly Contribution
- Years of Contribution
- Years of Withdrawals
- Yearly Rate of Return
These are the values one would input into the calculator in order to receive the following retirement metrics:
- Yearly Contribution
- Value at Retirement
- Yearly Withdrawal
- Tax on Withdrawal
- Take Home Amount on Yearly Basis
How to Use a Traditional IRA Calculator
Tax Bracket Percentage
To begin, start by inputting the tax bracket percentage during retirement. This number is a percentage and is based on the income level and filing status of the individual. Information on where to find this information can be found at taxfoundation.org. This tax percentage is important within the traditional IRA calculation as it can determine how much may be taken from the overall take-home yearly amount. Because traditional IRAs are taxed after the fact during retirement, that is the major contributor to taxes, while a Roth IRA would tax during the contribution.
Contribution and Withdrawal
Next, input a comfortable yearly contribution amount that fits in with the financial budget set for the year as well as the years of planned contribution. One should input roughly the amount of years left from the current year all the way to retirement. This way one is able to save and invest all the way up until the year they leave the workforce setting themselves up for a secure and successful financial future.
After, input the years of withdrawal into the calculator. This should be an estimate of the number of years one expects to have during retirement. A good rule of thumb is to set aside roughly 30 years of withdrawals to make sure that funds do not run out ahead of time and that some funds could also be passed down to relatives and next of kin.
Yearly Rate of Return
Lastly, input the expected yearly rate of return. A typical average rate of return is often considered to be 7%, so this would be a great percentage to include if one is expecting an average return. A poor return on investment or a return from a portfolio that is compromised of low-risk assets could see an average rate of return of 5%, while a portfolio of high-risk assets could see an average rate of return of 10%. Figuring out the risk appetite of one’s portfolio is important in order to input an accurate rate of return into the calculator and retain accurate results.
Output
After the final input has been entered, click submit to receive the calculation result. First, one would see the yearly contribution copied and linked from the initial input to demonstrate the value of contribution compared to the overall value at retirement. The value at retirement is the following input that exhibits the full balance at retirement. From there an individual can see how much they are able to withdraw per year as well as the amount they are taxed on withdrawal. Because this is a traditional IRA, one will be taxed at retirement, while a Roth IRA would not have this tax. Lastly, the yearly withdrawal is subtracted from the tax on that withdrawal to achieve the final yearly take-home amount that individuals would receive following this investment plan.
This calculator is the perfect tool to determine the required yearly contribution needed to achieve the desired yearly withdrawal amount. Check out the Roth IRA calculator to compare the two investment vehicles and see which suits investment needs better.
FAQs
With traditional IRAs, one is investing more upfront than one would with a typical brokerage account. This means that the more one invests now, and over the subsequent years, the more they have to withdraw when they are ready to retire.
The distributions for traditional IRAs will be taxed at one’s designated income tax rate at the time the withdrawal is made during retirement; however, if the distributions are taken out prior to the age of 59 ½, a 10% federal tax penalty applies, as this is before retirement age.
Traditional IRAs are best for older individuals who are earning more money now than they would during retirement. It is a good choice to use a traditional IRA when one thinks their tax rates are going to fall in the future so that one can pay lower rates on future withdrawals.
For traditional IRAs, when one puts money towards the fund, the subsequent contributions can lower one’s adjusted gross income. This can help lower taxable income and put one into a lower tax bracket.
Traditional IRAs come with FDIC insurance in most instances, especially when using a large brokerage account. As a result, one is guaranteed not to lose the insured portion of one’s account in the event of a banking crisis.
Distributions from a traditional IRA are only fully or partially taxable during the year of distribution. Inputting funds into the account will lower one’s taxable income as these contributions will not be taxed. Only deductible contributions and distributions are fully taxable upon withdrawal.
One can use traditional IRA funds to pay for qualified college expenses. These can be paid without incurring the early distribution penalty, however, taxes will be paid upon distribution. One can set up to $10,000 from a traditional IRA toward the purchase of one’s first home.
There is no limit on the amount of times a traditional IRA can be withdrawn per year, however, it is essential to consider the tax implications of each withdrawal.
This material contains opinions of the author, but not necessarily those of Arrowroot Family Office LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Arrowroot Family Office, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.