IRA Calculator

What is an Individual Retirement Account (IRA)?

An Individual Retirement Account (IRA) is a tax-advantaged investment vehicle designed to help individuals build long-term wealth for retirement. Unlike employer-sponsored retirement plans, an IRA is opened directly with a brokerage, bank, or mutual fund provider, giving you complete freedom over your investment portfolio. This calculator projects compound account growth, immediate tax savings, and net after-tax spendable retirement income across Traditional, Roth, SEP, and SIMPLE IRAs based on IRS rules for the 2025 tax year.

If you already participate in an employer retirement program, coordinate your IRA with the 401(k) calculator to capture full company matching before allocating additional dollars to an IRA. For savers pursuing financial independence, your projected IRA nest egg feeds directly into the FIRE calculator and the early retirement calculator. If you want to know when your invested assets can grow to your target without adding another dollar, check the Coast FIRE calculator. To evaluate how income tax deductions alter your annual tax bracket, use the income tax calculator, or project generalized compounding with the investment calculator and the future value calculator. To factor in the eroding effect of rising prices on your purchasing power, evaluate your savings with the inflation calculator.

Traditional IRA vs. Roth IRA: How the tax mechanics differ

The most important decision for IRA investors is choosing between Traditional (pre-tax) and Roth (post-tax) contributions. Both accounts shelter your dividends, bond interest, and capital gains from annual taxes, but the timing of the tax deduction is fundamentally different.

1. Traditional IRA (Tax-deferred)

With a Traditional IRA, contributions may be deductible from your gross taxable income in the year you make them. If you contribute $7,000 and your current marginal tax rate is 24%, you save $1,680 in federal income taxes immediately. Your investments grow tax-deferred until retirement. When you withdraw funds in retirement (after age 59½), every dollar is taxed as ordinary income at your future marginal tax rate.

2. Roth IRA (Tax-free growth and withdrawals)

With a Roth IRA, you contribute post-tax dollars: there is no immediate tax deduction today. However, all investments grow completely tax-free, and qualified withdrawals made in retirement are 100% tax-free. Additionally, Roth IRAs do not impose required minimum distributions (RMDs) during the original owner's lifetime, providing unmatched estate planning and tax diversification flexibility.

Which IRA yields higher spendable wealth?

Comparing Traditional and Roth accounts comes down to the relationship between your current marginal tax rate and your expected retirement tax rate.

• Current tax rate higher than retirement tax rate: Traditional IRA generally wins. By taking the deduction today at your high tax bracket and withdrawing at a lower bracket in retirement, you pocket the tax arbitrage difference.
• Current tax rate lower than retirement tax rate: Roth IRA generally wins. Paying taxes at your lower current rate shelters decades of subsequent investment gains from ever being taxed.
• Tax rates are identical: If your tax rate remains constant and you invest your Traditional tax savings, both accounts yield identical after-tax purchasing power. However, because statutory limits apply equally to pre-tax and post-tax dollars, a $7,000 Roth contribution effectively shelters more purchasing power inside the tax wrapper than a $7,000 Traditional contribution.

SEP IRAs and SIMPLE IRAs for self-employed and small businesses

If you work as an independent contractor, freelancer, or small business owner, the IRS allows higher annual contribution limits through specialized retirement arrangements.

A SEP IRA (Simplified Employee Pension) allows self-employed individuals to contribute up to 25% of net self-employment earnings, capped at a substantial $70,000 for 2025. All employer contributions are tax-deductible to the business and grow tax-deferred.

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is tailored for businesses with 100 or fewer workers. Employees can defer up to $16,500 in 2025, plus a $3,500 catch-up for individuals age 50 and older, with mandatory employer contributions (either a dollar-for-dollar 3% match or a 2% non-elective contribution).

Mathematical modeling of IRA compound growth

Compound interest inside a tax-sheltered IRA compounds without annual dividend and capital gains tax drag. Assuming an initial balance PV, recurring annual contribution C, annual return r, and n years to retirement, the ending balance with mid-year contributions is computed as:

For a Traditional IRA, the net spendable amount at retirement after ordinary income tax rate $t_r$ is:

For a Roth IRA, qualified distributions are completely tax-free:

Frequently asked questions