Individual retirement accounts (IRAs) and 401(k)s are both popular retirement savings vehicles that can help you secure a comfortable retirement.
Before you decide which account to open (or both), you need to know how much money you need to invest to reach your retirement goals. You can use an IRA calculator and 401(k) calculator to help you.
What you need to know about an IRA
To start, you don’t need to go through your employer to open an IRA, as you do with a 401(k).
You can open an IRA through your bank or a brokerage, which acts as the account custodian. Custodians will allow you to invest in a variety of assets, including stocks, bonds, certificates of deposit, and real estate.
You can deduct contributions from your taxable income, and you can contribute up to $6,000 per year. Individuals 50 or older can make an additional $1,000 “catch-up” contribution per year.
What you need to know about a 401(k)
To open a 401(k), you’ll need to talk to your employer. This retirement savings account allows you to invest part of your paychecks before income tax into mutual funds made up of stocks, bonds, and money market investments. Your employer may match part of your contributions.
With a 401(k), you can invest as much money as you want up to the IRS-imposed contribution limit, which is currently $19,000 per year. Individuals 50 or older can make an additional $6,000 catch-up contribution.
Pro tip! IRAs offer you more control over what you can invest in, and you don’t need to go through your employer to open one. On the other hand, you can invest more in a 401(k) each year, and your employer may match part of your contributions. If you don’t know whether you should invest in an IRA or 401(k), talk to a certified financial planner.
What’s the difference between an IRA calculator and a 401(k) calculator?
For this comparison, we’re using the AARP’s traditional IRA calculator and 401(k) savings and planning calculator.
On the whole, these calculators have an outstanding similarity: They both calculate total retirement savings achieved by a user-inputted retirement age from a summation of annual contributions, expected rates of return, and starting balances over a specified number of years. In addition, each calculator has required data inputs unique to itself.
The IRA calculator
To calculate estimated savings by retirement age, the IRA calculator requires the following data inputs:
- your starting IRA balance
- the amount you plan to contribute each year up to the contribution limit
- the age at which you open the account
- the age at which you plan to retire
- your adjusted gross income (the calculator uses this number to determine whether you can deduct contributions from your taxable income)
- your expected rate of return
- the tax rates you expect to pay on your investments currently and at retirement
The 401(k) calculator
To calculate estimated savings by retirement age, the 401(k) calculator requires the following data inputs:
- the percent of your annual salary you plan to contribute
- your annual salary
- the percent of your expected annual salary increase
- the age at which you open the account
- the age at which you plan to retire
- the current balance of your account
- your expected rate of return
- the percent of your annual contributions your employer will match
- the maximum percent of your salary your employer will match
The bottom line
Retirement savings calculators such as these are indispensable tools for those investing for retirement. If you want to know more about retirement calculators, head over to this comprehensive guide.
