Calculating Roth IRA Funds and Annual Income
This calculator can be used to estimate the funds in a Roth IRA at retirement and the potential annual income generated by those funds. The calculator only needs six inputs, including:
- The user’s current age, or the age when funding the Roth IRA will begin
- The user’s desired retirement age; this is also the age when funding the Roth IRA stops
- Life expectancy of the user, which is used to calculate the number of years the annual income is needed, and the funds depleted
- The current amount of funds in a Roth IRA account, if any
- The annual contribution being made to the Roth IRA
- The expected annual rate of return realized on the funds in the Roth IRA
The calculator then provides the user with two outputs:
- The balance of funds in the Roth IRA account when the retirement age is reached, and new funding is no longer supplied
- The amount of annual income generated by the funds until the life expectancy age is reach. At this point there will be no more money in the Roth IRA fund
The advantages of a Roth IRA
In the United States, there are two types of Individual Retirement Arrangements (IRAs). The traditional IRA, which is a tax-advantaged retirement savings plan where the contributions to the account can be tax deductible. Contributions to a Roth IRA are not tax deductible, but qualified distributions can be tax free. This is the biggest advantage of a Roth IRA versus a traditional IRA. While there are a number of exceptions, a qualified distribution is (generally) one taken after age 59 1/2.
Using our Roth IRA funds and annual income calculator
The first set of variables used by the calculator deal with age. One of the first sub-calculations has to do with the length of time contributions will be made to the account, which is found by subtracting the Retirement Age from the Current Age. The Life Expectancy variable is used to figure out how many years of annual income needs to be generated. For example, if the Retirement Age is 65 and the Life Expectancy is 85, then the Roth IRA funds need to provide 85 minus 65, or 20 years of annual income.
The next set of variables supply the data needed to determine how large the Roth IRA funds will grow. One of the age sub-calculations tells us how many years of contributions will occur. The Annual Contribution tells us how large each contribution will be each year. The Current Roth IRA Funds value is needed in case the user has already been contributing to their account. Finally, to calculate the fund’s growth over time, we need an estimate of the Rate of Return on Funds.
Interpreting the calculator’s results
The calculator provides two estimates, both of which are sensitive to the Rate of Return on Funds value. Since we know the annual contribution, number of years over which the contributions occur, the funds already in the account, and the annual rate of return on the funds in the account, the future value of the account can be found. Once that value is calculated, we can use the number of years over which the funds will be distributed, along with the rate of return on the remaining funds in the account, to determine how much money can be withdrawn from the account each year. It is important to note the terminal value of the Roth IRA fund is zero, meaning once the last withdrawal is made at the life expectancy age, there are no more funds in the account.