Roth IRA Conversion

In 1997, the Roth IRA was introduced. Since then, many people have converted all or a portion of their existing Traditional IRAs to Roth IRAs, where interest earned may be completely tax-free. Is this a good option for you? A conversion has both advantages and disadvantages that should be carefully considered before you make a decision. This calculator estimates the change in total net-worth, at retirement, if you convert your Traditional IRA into a Roth IRA.

   
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Definitions

Amount to convert
Amount to convert from a Traditional IRA account to a Roth IRA. It is important to note that some high income households do not qualify for a Roth IRA conversion. Currently, anyone with an adjusted gross income over $100,000 cannot make a Roth IRA conversion. For the purposes of this calculator, we assume that your income does not limit your ability to convert to a Roth IRA.

We also assume that you are paying any taxes owed with funds that you have available outside of the IRA you are converting. If you are under 59 1/2, the IRS treats any money not directly transferred to the new Roth IRA as an early withdrawal - even if that money is used to pay the tax bill caused by the conversion. If you do not have adequate funds outside of your IRA to pay the tax liability on a conversion, you probably should not consider converting your Traditional IRA to a Roth IRA.

 

Non-deductible contributions
The amount contributed to the Traditional IRA you are converting that was an after tax contribution (and for which you received no tax deduction on your tax return for the year it was made).

 

Current tax rate
Current marginal income tax rate that will apply to conversion amount. Please note that the marginal tax rate for your conversion may be higher than your current marginal tax rate if the conversion moves your AGI into a higher income tax bracket.

 

Tax rate at retirement
Expected marginal income tax rate at retirement.

 

Investment tax rate
Expected marginal tax rate (base this on expected capital gains rate) for investments.

 

Current age
Current age.

 

Age at retirement
Desired age at retirement.

 

Rate of return
The annual rate of return for your IRA. This calculator assumes that your return is compounded annually. The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com). During this period, the highest 12-month return was 61%, from June 1982 through June 1983. The lowest 12-month return was -39%, which happened twice, once from September 1973 to September 1974 and again from November 2007 to November 2008. Savings accounts at a bank may pay as little as 1% or less but carry significantly lower risk of loss of principal balances.

It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

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