Traditional IRA vs. Roth IRA Comparison
Comparison of Traditional IRA and Roth IRA options for young investors, including contribution limits, tax implications, and potential investment growth scenarios. For a more detailed analysis, refer to the original article linked in the spreadsheet. For assistance or questions, contact the author at matt@momanddadmoney.com.
Content article
In this comparison of Traditional IRA and Roth IRA, the data illustrates the growth of balances over a 30-year period, showcasing how different retirement accounts can impact long-term savings.
Starting with the first year, a Roth IRA balance begins at $9,818, while a Traditional IRA starts higher at $11,550, reflecting the pre-tax contributions that characterize Traditional IRAs. By the end of the second year, the Roth balance grows to $20,126, and the Traditional balance increases to $23,678. This trend continues, with the Roth IRA reaching $30,950 in year three compared to the Traditional IRA's $36,411. As the years progress, the gap between the two accounts narrows, with the Roth IRA balance at $54,248 in year five and the Traditional IRA at $63,821.
By year 10, the Roth IRA grows to $123,483, while the Traditional IRA reaches $145,275. The disparity continues to show that while the Traditional IRA starts with a higher balance, the Roth IRA's tax-free growth becomes significant over time. By year 30, the final balances are $652,263 for the Roth IRA and $767,369 for the Traditional IRA, demonstrating that the Traditional IRA still holds an advantage in terms of total balance at retirement.
Examining the tax implications, the current age of the individual is 37, with a wage income of $53,000 and one dependent. In retirement, at age 67, the Roth IRA generates $26,091 in income, while the Traditional IRA provides $30,695. Notably, the federal tax owed on the Roth IRA income is $0, whereas the Traditional IRA incurs a tax of $748. The marginal tax rate for the Roth IRA in retirement is 10%, while it remains at 15% for the Traditional IRA. The effective tax rates reflect this disparity, with the Roth IRA at 0.00% and the Traditional IRA at 2.44%.
The notes section highlights that Social Security benefits are estimated using the Social Security Administration's quick calculator, and tax estimates are based on TurboTax's TaxCaster. The effective tax rate in retirement is calculated as a percentage of IRA withdrawals, emphasizing the importance of understanding tax implications when planning for retirement.