Roth IRA Conversion Calculator
Use this calculator to estimate the tax implications and potential long-term benefits or costs of converting a traditional IRA to a Roth IRA. A Roth conversion involves paying taxes on your pre-tax traditional IRA balance now, in exchange for tax-free growth and tax-free withdrawals in retirement.
This is the portion of your traditional IRA that you've already paid taxes on. It reduces the taxable amount of your conversion.
The tax bracket you expect to be in for the year of conversion.
Enter 0 if you live in a state with no income tax.
Your estimated tax bracket when you plan to withdraw funds in retirement.
The average annual return you expect on your investments.
Conversion Summary
Taxable Conversion Amount:
Estimated Federal Tax on Conversion:
Estimated State Tax on Conversion:
Total Estimated Tax on Conversion:
Projected Future Wealth Comparison (After-Tax)
Projected After-Tax Wealth with Roth Conversion:
Projected After-Tax Wealth without Conversion (Traditional IRA):
Net Benefit/Cost of Conversion:
Understanding Roth IRA Conversions
A Roth IRA conversion is the process of moving funds from a traditional IRA (or other pre-tax retirement accounts like a 401(k) or 403(b) that have been rolled into an IRA) into a Roth IRA. The primary reason individuals consider this move is to pay taxes on their retirement savings now, rather than later, in exchange for tax-free growth and tax-free withdrawals in retirement.
Why Convert to a Roth IRA?
- Tax-Free Withdrawals in Retirement: Qualified withdrawals from a Roth IRA are completely tax-free, unlike traditional IRA withdrawals which are taxed as ordinary income.
- Tax Rate Expectations: If you believe your tax rate will be higher in retirement than it is today, converting now can save you money in the long run.
- No Required Minimum Distributions (RMDs): Roth IRAs do not have RMDs for the original owner, providing greater flexibility in managing your retirement income.
- Estate Planning: Roth IRAs can be a powerful estate planning tool, as beneficiaries can often take tax-free withdrawals.
Key Considerations Before Converting
- Paying the Taxes: The amount you convert from a pre-tax traditional IRA is generally taxable in the year of conversion. It's usually recommended to pay these taxes from funds outside your IRA to maximize the amount that grows tax-free within the Roth. If you pay taxes from the converted amount, that portion is subject to a 10% early withdrawal penalty if you are under age 59½.
- Current vs. Future Tax Rates: The core decision hinges on whether your current marginal tax rate is lower or higher than your expected marginal tax rate in retirement. If your current rate is lower, a conversion might be beneficial.
- Time Horizon: The longer your money has to grow in the Roth IRA, the more valuable the tax-free growth becomes. Conversions are generally more beneficial for those with a longer time until retirement.
- Impact on Current Income: A large conversion can push you into a higher tax bracket for the year of conversion, increasing your overall tax bill.
- State Taxes: Don't forget to account for state income taxes, which can add significantly to the conversion cost.
- Five-Year Rule: For converted amounts, a separate five-year rule applies before withdrawals are tax-free and penalty-free.
How the Calculator Works
This calculator helps you compare two scenarios: converting your traditional IRA to a Roth IRA versus keeping it as a traditional IRA. It projects the after-tax value of your retirement savings in both cases, considering the taxes paid now (for Roth) versus taxes paid in retirement (for Traditional).
- Traditional IRA Balance: Your total balance in your traditional IRA.
- Non-Deductible Contributions (Basis): Any contributions you made to your traditional IRA that you did not deduct on your taxes. This portion is not taxed again upon conversion.
- Current Federal/State Marginal Tax Rate: The tax rate applied to the taxable portion of your conversion.
- Expected Future Federal Marginal Tax Rate: The tax rate you anticipate paying on withdrawals from a traditional IRA in retirement.
- Annual Investment Growth Rate: The assumed rate at which your investments will grow.
- Years Until Retirement: The period over which your investments will grow.
The "Net Benefit/Cost of Conversion" output shows the difference in your projected after-tax wealth. A positive number indicates a benefit from converting, while a negative number suggests it might be more advantageous to keep your funds in a traditional IRA.
Example Scenario:
Let's say you have a $100,000 Traditional IRA with $10,000 in non-deductible contributions. Your current federal tax rate is 24% and state tax is 5%. You expect your future federal tax rate to be 15% and your investments to grow at 7% annually for 20 years until retirement.
- Taxable Conversion Amount: $100,000 – $10,000 = $90,000
- Total Estimated Tax: ($90,000 * 0.24) + ($90,000 * 0.05) = $21,600 + $4,500 = $26,100
- Projected After-Tax Wealth with Roth Conversion: ($100,000 – $26,100) * (1 + 0.07)^20 = $73,900 * 3.86968 = $286,012.35
- Projected After-Tax Wealth without Conversion: ($100,000 * (1 + 0.07)^20) * (1 – 0.15) = $386,968 * 0.85 = $328,922.80
- Net Benefit/Cost: $286,012.35 – $328,922.80 = -$42,910.45 (A cost in this scenario, as current taxes are higher than future expected taxes, and the opportunity cost of paying taxes now is significant).
This calculator provides estimates and should be used as a guide. Always consult with a qualified financial advisor and tax professional before making significant financial decisions like a Roth IRA conversion.