Roth Ira

So, when would you need a calculator for a Roth IRA? Well, question number one: what is a Roth IRA? The best way to answer that is to look at the basics, what is an IRA? Back in 1978, Congress was looking for ways to encourage people to save money for their retirement. It was decided to give people a way to save that also lowered their federal and state taxes. The result of all their efforts was the Tax Reform Act. Contained within Section 401, paragraph (k) was a provision for the creation of tax-deferred savings accounts, the Individual Retirement Account (IRA). The plans became known as "401(k)'s", for an obvious reason.

The plans are made up of four features. First, a worker puts in a portion of the monthly salary, up to a maximum of fifteen percent, and a maximum of $15,000 per year. Next, the money is taken out of their paycheck before taxes are calculated. As such, it is removed before they even get their check, meaning before they can even spend it.

So, it is rather a painless means of saving for retirement. Third, while not always true, the employer may match some portion of what the worker puts into the account. And finally, the money is given over to a third party to invest in stocks, bonds etc. based on selections the employee makes from a list of available investment options.

The difference with a Roth? There is no tax deduction for the money put into the retirement account, but all the money that comes out at the end is tax free provided certain rules are followed. First, the recipient must be older than age 59 years and six months. Second, the Roth IRA must have been owned by the retiree for at least five years. Not a bad situation. For most upper income taxpayers, it is a much better deal.

So, now comes the use of the Roth IRA Calculator. A worker has to ask themselves: is converting to a Roth the way to go? Is it better than a standard Individual Retirement Account? The first step in making that decision is for the worker to estimate certain aspects of their life and income.

They have to look at the number of years they have left to retirement, what tax rate they are going to be paying when they retire, and a rough estimate of how much they will put into the IRA during their working years. After that, they can go to any of several Roth IRA Calculators that are available online. They will help the worker figure out if converting from a standard IRA to a Roth IRA is the right way to go.

After entering all the necessary data, the calculator gives a comparison value between the two different accounts. If the Roth IRA has a higher value, then converting to it will be beneficial.