Understanding Roth Conversions and This Calculator
A Roth conversion involves moving funds from a pre-tax retirement account, such as a Traditional IRA or a pre-tax 401(k), into a Roth IRA. The key difference lies in when you pay taxes. With pre-tax accounts, you receive a tax deduction now, but withdrawals in retirement are taxed as ordinary income. With a Roth IRA, you pay taxes on the contributions now, but qualified withdrawals in retirement are tax-free.
Why Consider a Roth Conversion?
Tax Diversification: Having both pre-tax and Roth accounts provides flexibility in managing your tax liability in retirement.
Tax Rate Expectations: If you anticipate being in a higher tax bracket in retirement than you are now, converting to Roth can be advantageous.
Estate Planning: Roth IRAs offer more favorable tax treatment for beneficiaries compared to traditional IRAs.
No Required Minimum Distributions (RMDs): Roth IRAs do not have RMDs for the original owner, allowing assets to grow tax-free for longer.
How This Calculator Works
This calculator provides an estimate of the potential tax cost of a Roth conversion and its long-term implications. It simplifies complex financial planning by focusing on the immediate tax impact and a projected future benefit.
The primary calculation involves estimating the tax liability incurred in the current year due to the conversion.
Current Year Tax Liability = Taxable Conversion Amount * (Current Marginal Tax Rate / 100)
While this calculator focuses on the immediate tax cost, a comprehensive Roth conversion strategy also considers:
Future Tax Savings: The long-term benefit comes from tax-free growth and withdrawals in retirement. If your future tax rate is higher than your current rate, the tax-free withdrawals become more valuable.
Opportunity Cost: The money used to pay the taxes on the conversion cannot be invested.
Impact on Existing Balances: Large conversions can significantly reduce your Traditional IRA balance.
Example Scenario
Let's say you have a Traditional IRA balance of $150,000. You plan to contribute $8,000 annually to your pre-tax accounts. You decide to convert $7,000 per year to a Roth IRA for the next 10 years. Your current marginal tax rate is 24%, and you project your future marginal tax rate to be 28%.
Total Tax Paid Over 10 Years: $1,680/year * 10 years = $16,800
This $16,800 is the estimated tax you'll pay upfront. The "benefit" is that the converted amount and all its future earnings will be tax-free in retirement, especially valuable if your tax rate rises to 28% or higher.
Disclaimer
This calculator is for informational purposes only and does not constitute financial or tax advice. Tax laws are complex and subject to change. Consult with a qualified financial advisor and tax professional before making any Roth conversion decisions. Fidelity is a registered broker dealer and investment adviser.
function calculateRothConversion() {
var currentTraditionalIRA = parseFloat(document.getElementById("currentTraditionalIRA").value);
var annualPreTaxContributions = parseFloat(document.getElementById("annualPreTaxContributions").value);
var conversionAmountPerYear = parseFloat(document.getElementById("conversionAmountPerYear").value);
var currentTaxBracketRate = parseFloat(document.getElementById("currentTaxBracketRate").value);
var projectedFutureTaxRate = parseFloat(document.getElementById("projectedFutureTaxRate").value);
var yearsToConvert = parseInt(document.getElementById("yearsToConvert").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = "; // Clear previous results
// Input validation
if (isNaN(currentTraditionalIRA) || isNaN(annualPreTaxContributions) || isNaN(conversionAmountPerYear) ||
isNaN(currentTaxBracketRate) || isNaN(projectedFutureTaxRate) || isNaN(yearsToConvert)) {
resultDiv.innerHTML = 'Please enter valid numbers for all fields.';
return;
}
if (currentTaxBracketRate < 0 || projectedFutureTaxRate < 0 || yearsToConvert <= 0 ||
annualPreTaxContributions < 0 || conversionAmountPerYear < 0 || currentTraditionalIRA < 0) {
resultDiv.innerHTML = 'Please enter non-negative values for amounts and rates, and a positive number of years.';
return;
}
// — Calculations —
// 1. Immediate Tax Cost Calculation
var currentYearTaxLiability = conversionAmountPerYear * (currentTaxBracketRate / 100);
var totalTaxPaidOverConversionPeriod = currentYearTaxLiability * yearsToConvert;
// 2. Estimated Tax-Free Growth Potential (Simplified – assumes conversion amount grows at an assumed rate)
// This is a very simplified projection. Real growth varies.
// For simplicity, we'll just state the amount converted to Roth.
var totalAmountConvertedToRoth = conversionAmountPerYear * yearsToConvert;
// 3. Comparison of Tax Paid vs. Potential Future Savings (Illustrative)
// Illustrates the benefit of tax-free growth IF future tax rate is higher.
// We'll show the tax paid and the amount that will grow tax-free.
var illustrativeFutureTaxSavingIfConverted = totalAmountConvertedToRoth * (projectedFutureTaxRate / 100);
// Display Results
var resultHTML = '
Estimated Roth Conversion Impact
';
resultHTML += 'Immediate Tax Cost (Annual): $' + currentYearTaxLiability.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ";
resultHTML += 'Total Tax Paid (Over ' + yearsToConvert + ' Years): $' + totalTaxPaidOverConversionPeriod.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ";
resultHTML += 'Total Amount Converted to Roth: $' + totalAmountConvertedToRoth.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ";
if (projectedFutureTaxRate > currentTaxBracketRate) {
resultHTML += ";
resultHTML += 'Illustrative Future Tax Savings (on converted amount): Up to $' + illustrativeFutureTaxSavingIfConverted.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ";
resultHTML += '(This assumes the converted amount grows and is withdrawn at your projected future tax rate)';
} else if (projectedFutureTaxRate < currentTaxBracketRate) {
resultHTML += '';
resultHTML += 'Note: Your projected future tax rate is lower than your current rate. Assess carefully if conversion is beneficial.';
resultHTML += '';
} else {
resultHTML += '';
resultHTML += 'Your current and projected future tax rates are the same. Consider other benefits of Roth.';
resultHTML += '';
}
resultHTML += 'Disclaimer: This is an estimate. Consult a financial professional for personalized advice.';
resultDiv.innerHTML = resultHTML;
}