How to Calculate the Value of a Roth IRA Account
A Roth IRA is a retirement savings plan where contributions to the plan are not tax free, but earnings and distributions from the plan are tax free. A Roth IRA works similar to an annuity, so to find the value of a Roth IRA, the user must calculate the future value of it. To do this, the user needs to know the amount of each contribution per year, the average interest rate and the number of months until retirement. For example, a 25-year-old plans to contribute $4,000 a year and retire at age 65. He expects annual interest of six percent per year.
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Instructions
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1
Do the math to determine the number of years until retirement. In the example, 65 years (retirement age) minus 25 years (current age) equals 40 years until retirement.
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2
Add one plus the interest rate, then raise the sum to the power of the years until retirement. In the example, one plus 0.06 equals 1.06. Then, 1.06 raised to the power of 40 equals 10.28572.
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3
Subtract one from the number calculated in Step 2. In the example, 10.28572 minus one equals 9.28572.
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4
Divide the number calculated in Step 3 by the interest rate. In the example, 9.28572 divided by 0.06 equals 154.762.
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5
Multiply the annual contribution by the number calculated in Step 4 to determine the future value of the Roth IRA. In the example, $4,000 times 154.762 equals $619,047.90, which will be the value of the 25-year-old's Roth IRA when he retires at age 65.
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Tips & Warnings
Online calculators provide a quicker method to calculate the value of a Roth IRA and allow for more complex assumptions.
References
Resources
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