Comparing the Calculators
. . . Why can't we all agree?
If you've tried a few of the Roth IRA calculators available on the Web, you've probably noticed a disquieting fact:
you can run the same numbers on five different calculators and get five different results!
Obviously, somebody has some explaining to do.
So here are some samples, comparing our calculator with some others, along with an explanation of the discrepancies.
Example I: Conversion
Assume you're converting a $25,000 deductible IRA into a Roth IRA, waiting 20 years, and withdrawing everything as a lump sum.
Investment rate of return will be 10%, and the tax bracket will be 31%, for all years.
The $7750 tax due on conversion will be paid from additional funds, not from the IRA.
(This example is shown in more detail in our case study.)
| Calculator |
Deductible IRA |
Roth IRA |
Notes |
| MoneyChimp |
$145,484 |
$168,187 |
We assume the $7750 gets invested in a non-sheltered account associated with the deductible IRA;
the deductible IRA number is the total of this non-sheltered account and the IRA itself.
|
| T. Rowe Price |
$145,484 |
$168,187 |
Perfect agreement!
|
| Strong Funds |
$116,049 |
$168,187 |
Strong doesn't invest the $7750.
|
| The Vanguard Group |
$143,447 |
$168,187 |
Vanguard invests $7214 rather than $7750 in the deductible IRA's non-sheltered account.
(They assume that if you convert in 1998, you will spread the tax burden over four years, rather than paying it all at once;
and $7214 invested in a money market account at 5% will yield the correct payment over those four years.)
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Example II: Future Contributions
Assume you contribute $1000 annually in actual post-tax dollars to your retirement.
You'll make contributions for 20 years, and then withdraw everything in a lump sum.
Again, the investment rate of return will be 10%, and the tax bracket will be 31%, for all years.
| Calculator |
Deductible IRA |
Roth IRA |
Notes |
| MoneyChimp |
$63,002 |
$63,002 |
We're entering $1000 in the "contributions" field, and specifying "post-tax dollars".
Behind the scenes, the calculator is actually putting $1449 into the deductible IRA, which gives a $449 deduction.
The Roth IRA gets $1000.
|
| T. Rowe Price |
$56,910 |
$63,002 |
We're entering $1000 in the "contributions" field, and saying Yes to the "tax savings" option.
This calculator puts $1000 into the Deductible IRA, which gives a $310 deduction that they invest in a non-sheltered account; so you aren't taking full advantage of the Deductible IRA, in this case.
(The Roth IRA still gets $1000.)
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By the way, if you set the contribution to $2000, then these two calculators will agree: they'll be "maxing out" the Deductible IRA before they put anything into the non-sheltered accounts.
(Which is of course what you want to do in real life, too.)
A couple of patterns are emerging here.
First, our calculator seems to be more conservative than the others in what it shows as the Roth advantage (something confirmed by this independent review).
Second, no matter who is doing the math, Roth really does offer a significant advantage in many circumstances.
This all goes to show that there is more to this comparison business than first meets the eye.
If you're really serious, you can try out the growing list of calculators at www.rothira.com, and try to figure out what assumptions are being made and what effect they have on the bottom line.
You're likely to discover some nuances that you haven't thought about yet.
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