Are you contributing to a traditional individual retirement account (IRA)? If the answer is yes, congratulations, you’ve taken a big step towards building a financially secure retirement. Use our traditional IRA calculator to see how much your nest egg will grow by the time you reach retirement.
Traditional IRA Calculator Details
To get the most benefit from this calculator, you should use data that reflects your current financial situation. If you don’t have that information ready, here are the default assumptions we use.:
- Retirement Age: 66. People typically retire at this age in the U.S., according to Transamerica and Aegon research.
- Rate of Return: 9%. The returns you can expect from your IRA depends on your investment choices. We chose a default average return of 9% to reflect the historical long-term averages of portfolios with majority stock allocations. If you’re getting closer to retirement or you prefer a more conservative allocation, we suggest changing the rate of return to 8%, the long-term historical annual average for portfolios with a 60/40 mix of stocks and bonds.
Understanding the Traditional IRA
Anyone can save for retirement and enjoy the tax benefits of a traditional IRA. You can also opt for a Roth IRA if you’d prefer tax free income in retirement instead of an up-front tax break. Here are a few other IRA concepts you should know:
- Tax-advantaged retirement accounts. People use this term a lot when talking about IRAs. Tax-advantaged accounts provide special tax benefits when you save for retirement. This can help you grow wealth faster than if you invested with a taxable investment account, which requires you pay taxes on any income you receive or investment gains you cash out. Both traditional and Roth IRAs allow you to avoid taxes as long as you hold the money in your account. Because you got a tax break on it when you contributed, traditional IRA money may be subject to taxes when you withdraw it.
- Contribution limits. Unfortunately, there are limits to how much you can save in an IRA. Currently you can save $6,000 a year—or $7,000 if you’re 50 or older. Notably, you cannot contribute more than your taxable earned income for the year. So if you only earned $3,000, that’d be your IRA contribution limit for the year. If you want to invest even more for retirement, make use of a workplace plan like a 401(k), a taxable investment account or an annuity.
- Compound returns. Compounding is when your investment returns earn you even more returns over time. Here’s how it works: When you invest $500 and earn a 10% annual return, your balance grows by $50 to $550 after the first year. Then, in the next year, assuming you get the same rate of return, your balance grows to $605, an $55 gain. Imagine that little extra umph playing out over years or decades—that’s how compounding can help you build a comfortable retirement nest egg, even with smaller contributions.
- Retirement age. You can retire whenever you want, of course, but the government has a couple of thoughts about when you should consider hanging up your spurs. From the government’s perspective, 62 is the official age when you can begin claiming Social Security benefits. It’s also worth noting that 59 ½ is when you can start withdrawing from your IRA penalty free.
Traditional IRA FAQs
Who Can Contribute to a Traditional IRA?
Anyone who earns an income in the current tax year can contribute to a traditional IRA. If you didn’t earn an income, you may be able to make contributions through a spousal IRA.
Can I Deduct Traditional IRA Contributions on My Taxes?
If you don’t have access to a retirement plan, like a 401(k), at work, you can deduct your full contributions from your taxable income at tax time. If you are covered by a plan at work (even if you don’t participate), your ability to deduct your traditional IRA contributions may be limited—or outright prohibited.
Check out the table below to determine how your traditional IRA contributions may be impacted by income limits. And if you have any questions about your ability to deduct traditional IRA contributions from your taxes, please speak with a tax professional.
Traditional IRA Tax Deduction Income Limits in 2021 and 2022
| Your filing status | Your 2021 income | Your 2022 income | You qualify for: |
|---|---|---|---|
| Single, head of household or qualifying widow(er) | Less than $66,000 | Less than $68,000 | A full deduction up to the contribution limit |
| Single, head of household or qualifying widow(er) | $66,000 to $76,000 | $68,000 to $78,000 | A partial deduction |
| Single, head of household or qualifying widow(er) | More than $76,000 | More than $78,000 | No deduction |
| Married filing jointly or qualifying widow(er) | Less than $105,000 | Less than $109,000 | A full deduction up to the contribution limit |
| Married filing jointly or qualifying widow(er) | $105,000 to $125,000 | $109,000 to $129,000 | A partial deduction |
| Married filing jointly or qualifying widow(er) | More than $125,000 | More than $129,000 | No deduction |
| Married filing separately | Less than $10,000 | Less than $10,000 | A partial deduction |
| Married filing separately | More than $10,000 | More than $10,000 | No deduction |
Are There Age Limits to Contribute to a Traditional IRA?
As of 2020, you can contribute to a traditional IRA no matter how old you are.
When Can I Withdraw Money from My Traditional IRA?
Starting at age 59 ½, you can make penalty-free withdrawals from your traditional IRA. You will still, however, owe taxes based on your current income tax bracket. If you make withdrawals before 59 ½, you may owe a 10% penalty on top of any taxes you owe, with certain exceptions, like medical or financial hardship.
Do I Have to Make Withdrawals from My Traditional IRA?
If you have enough money in other accounts to cover your expenses, you don’t have to touch the money in your traditional IRA until you reach age 72. That’s when you must begin mandatory withdrawals of a percentage of your traditional IRA balance called “required minimum distributions,” or RMDs.
More From Advisor
- How To Calculate Your Personal Inflation Rate
- How Will Climate Change Impact Your Retirement?
- The Best Retirement Income Funds Of 2022
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
