A Roth IRA is an individual retirement account funded with after-tax dollars, meaning you pay taxes on contributions now but all qualified withdrawals in retirement are completely tax-free. This includes both your original contributions and all investment gains. The projected balance is calculated by compounding your current balance plus annual contributions at the expected rate of return over the years until retirement.

The primary advantage of a Roth IRA over a traditional IRA is tax-free growth. If you expect your tax rate to be higher in retirement than it is today, a Roth IRA can save you significant money. Additionally, Roth IRAs have no required minimum distributions (RMDs) during the owner's lifetime, making them excellent wealth transfer vehicles. There are income limits for direct Roth IRA contributions, but strategies like backdoor Roth conversions may be available for higher earners.

The estimated tax savings shown in this calculator represents the taxes you would have paid on investment growth if those gains were held in a taxable account instead. Over long time horizons, this tax advantage compounds significantly. For example, $7,000 contributed annually for 35 years at 7% growth produces approximately $1.1 million in tax-free assets, compared to roughly $860,000 after taxes in a taxable account at a 22% tax rate, a savings of over $240,000.