Which will provide the most retirement income?

Your annual contributions

Amount to contribute

Option 1: The above figure is the amount contributed before taxes. The actual amount saved after taxes may be less.

Option 2: The above figure is the net amount saved, after taxes.

Option 3: The above figure is the amount contributed. No taxes are calculated at the time of contribution.

Your plans and assumptions

Federal + state tax rate - before retirement

Federal + state tax rate - after retirement

Your current age

Age to begin withdrawing

Age at death

Funds you wish to leave at death

Estimated rate of return on IRA

Estimated return on other assets

"Which will provide the most retirement income?" compares four alternatives to save for your retirement: a deductible IRA, nondeductible IRA, Roth IRA and depositing into a taxable account. Deductible IRAs are also known as traditional IRAs.

A nondeductible IRA is an IRA whose contributions cannot be deducted from your taxable income. A nondeductible IRA is sometimes called a taxable IRA. The amount of contributions that you are allowed to make to a deductible or Roth IRA phases out at higher incomes.

You have three options for calculating contributions to these accounts:

Option 1. The amount contributed is before taxes. This option favors the traditional IRA. Since a contribution into a traditional IRA is not taxable at the time of contribution, the results page (monthly retirement income) is likely to show that the traditional IRA provides the most advantageous option. In this comparative scenario, both the Roth IRA and the nondeductible IRA contributions are calculated by deducting taxes from the gross amount entered and then putting those amounts into the Roth and nondeductible IRAs.
Option 2. The amount contributed is the net amount saved, after taxes. This option favors the Roth IRA. The results page (monthly retirement income) is likely to show that the Roth IRA provides the most advantageous option. In this comparative scenario, the traditional IRA contribution is calculated by depositing the net amount saved into a traditional IRA. The remaining amount (taxes paid to allow for the net contribution entered) goes into a taxable savings account.
Option 3. The amount entered is the amount contributed. This option disregards taxes at contribution and contribution restrictions of an IRA.

In options 1 and 2, if the amount contributed exceeds the maximum allowed, the contribution is first maximized into the IRAs. The remaining amount is assumed to be deposited in a taxable savings account. Option 3 does not have a savings account.

For IRAs, deductible contributions are based on the amount of your modified adjusted gross income (MAGI), tax-filing status and whether you or a spouse participates in a qualified employer-sponsored retirement plan.

This calculator also considers your age, expected length of retirement and how much you wish to leave for heirs. You enter your estimated rate of return on your investments, as well as your current and expected future income tax bracket.

The Economic Growth and Tax Relief Reconciliation Act of 2001 expanded future contribution limits to regular and Roth IRAs. In 2011, you can contribute up to $5,000 to a regular or Roth IRA in a year. A catch-up provision in the law allows workers age 50 to make even larger contributions.

For 2011, the yearly limit is $6,000. Beginning in 2009, regular contribution limits increase based on the rate of inflation.

You can contribute to an IRA before the traditional tax-filing deadline of April 15.

Nondeductible IRA:A nondeductible IRA is an individual retirement account whose contributions are either partially or fully funded with contributions that are not tax-deductible. You can contribute up to either $5,000 or $6,000 (depending on age, income limits and participation in an employer-sponsored retirement plan) in 2011. A nondeductible IRA benefits from tax-deferred compounded growth.

Roth IRA:A Roth IRA is a tax-advantaged retirement account that allows you to make an after-tax contribution of $5,000 for 2011. For persons who are age 50 or older, a special catch-up provision allows you to contribute an additional $1,000, or a total of $6,000. If you keep a Roth IRA for at least five years and are at least age 59-1/2 when you begin to withdraw from the account, the entire account may be distributed tax- and penalty-free. Your entire balance may also be distributed tax- and penalty-free if you have held the account for at least five years and are disabled, are taking out up to $10,000 to buy a first home, or payments are being made to a beneficiary of your estate after your death.

Monthly retirement income (IRAs):The amount of monthly income, after taxes, that you can expect from your individual retirement accounts. The amount you wish to leave behind when you die is subtracted from your retirement savings lump sum.

Modified adjusted gross income (MAGI):Modified adjusted gross income (MAGI) is a measure of income used to determine how much of a tax-deductible contribution you may make to a regular IRA or nondeductible contribution to a Roth IRA. MAGI is also used to determine how much you can contribute to certain Coverdell education savings accounts, formerly called education IRAs. MAGI is smaller than gross income and may be larger than adjusted gross income (AGI is shown on line 37 of the 2010 IRS Form 1040.) The IRS says that MAGI and AGI are equal for most taxpayers. To calculate MAGI, add any foreign-earned income and housing exclusions (or income earned in American Samoa or Puerto Rico) to your AGI.

Deductible IRA:A deductible IRA is an individual retirement account that is funded with tax-deductible contributions. You can contribute up to either $5,000 or $6,000 (depending on age, income, and participation in an employer-sponsored retirement plan) in 2011.

Catch-up provision for contributions to individual retirement accounts:The Economic Growth and Tax Relief Reconciliation Act of 2001 authorized higher yearly contribution limits to IRAs, 401(k) plans and other defined-contribution retirement plans. A catch-up provision of the new law authorized even higher limits for workers who are age 50 or older. For regular and Roth IRAs, this additional contribution amount is $1,000 for 2011. As a result, combined yearly contribution limits for persons aged 50 or older increase to $6,000 for 2011.

Taxable account:A taxable account is an account that does not receive the tax breaks that either a tax-exempt account or tax-deferred account are eligible to receive. (Both of these accounts are called tax-advantaged accounts. Tax-advantaged accounts are authorized by the IRS as investment vehicles to save for your retirement or the retirements of investors.)

Lump sum before taxes:The cumulative value of your individual retirement accounts (IRAs) and any taxable investments before income taxes. Investments held in other retirement accounts, such as a 401(k) plan, are ignored.