Many investors choose a Roth IRA for its deferred tax payments until retirement, which enables their investment to reach its highest potential during its exponential years.
And then, once you retire, you will be taxed on the distributions according to your current income level.
Hence, it leaves you trying to accumulate the interest payments for the biggest return that can withstand the hit of your deferred tax payments while still enabling you to enjoy a comfortable lifestyle in your golden years.
However, what is the easiest way to calculate your interest payments to ensure so? Read on.
Understanding How Your Interest Accumulates With Your Roth IRA
Each time you make a deposit into your IRA account, it accumulates interest. However, when you make each deposit ultimately determines just how much interest it will earn for the year.
For instance, say you made a deposit of $100 during month one and then another $100 deposit during month two.
The month one deposit of $100 will earn more during that year because it was deposited first, so it had time to grow more while your month two $100 deposit, and so on, would only earn interest for the fewer months it had to grow for the year.
This means the timing of your deposits determines the maximum interest your Roth earns overall.
The investments your Roth is comprised of will also affect your return because stocks, bonds, mutual funds, CDs, and other common IRA assets pay different interest rates.
Calculating the Overall Return for Your Roth IRA
First, determine the return and then the anticipated 12-month returns for each of your deposits.
Next, to get the overall return for your portfolio, take the total anticipated future value and then divide it by your investment.
So if you deposited $300 in month one, with a different percentage of it going into different assets, then you would add all the future values of each portion of your investment and then divide it by the total deposit amount.
Hence, in a nutshell, if you came up with a total future value of $3,600 from your 12 monthly deposits, then the overall return for your portfolio would be 0.2%.
In this case, the $3,000 would be the amount of your accumulated deposits, which, in turn, earned you 0.2% on your investment.
Use a Roth IRA Calculator
According to the experts at SoFi, their Roth IRA calculator “will also take you through what you need to know to make an informed decision. “This way, you’ll know how much you need to contribute to your Roth IRA annually to meet your retirement goals.
So, ultimately, these are at least two ways to easily calculate your Roth IRA returns to determine if your incremental investments are enough to meet your final goals.
Just keep in mind that timing is everything to maximize your overall return, so be sure to contribute to your IRA soon and often to get the most out of your retirement account.
You can also hire a professional to do the math for you, and they can also work with you to set a yearly deposit amount for the retirement of your dreams.