1. What is a Roth IRA?

A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Contributions are made with after-tax dollars, meaning you've already paid taxes on the money you put into it.

2. How Does the Calculator Work?

The calculator uses the future value of an annuity formula:

Where:

• \( FV \) — Future value of the investment
• \( Contribution \) — Annual contribution amount
• \( r \) — Annual rate of return (as decimal)
• \( n \) — Number of years invested

Explanation: This formula calculates the future value of a series of equal annual payments (contributions) that earn compound interest.

3. Importance of Roth IRA Planning

Details: Proper retirement planning with Roth IRAs can lead to significant tax-free savings. The power of compound interest makes starting early particularly valuable.

4. Using the Calculator

Tips: Enter your planned annual contribution, expected annual return rate (as decimal, e.g., 0.07 for 7%), and number of years you plan to contribute. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the maximum Roth IRA contribution?
A: For 2023, $6,500 ($7,500 if age 50 or older). Limits are subject to income restrictions and may change annually.

Q2: How does Roth IRA differ from traditional IRA?
A: Traditional IRAs offer tax-deductible contributions but taxable withdrawals, while Roth IRAs use after-tax contributions with tax-free withdrawals.

Q3: What's a realistic rate of return assumption?
A: Historically, stock market returns average about 7-10% annually, but conservative estimates often use 5-7% for long-term planning.

Q4: Can I withdraw contributions penalty-free?
A: Yes, Roth IRA contributions (but not earnings) can be withdrawn at any time without penalty since they were already taxed.

Q5: When should I start a Roth IRA?
A: The earlier the better due to compounding. Even small contributions in your 20s can grow significantly by retirement.