Estimate your potential tax savings and understand the impact of converting traditional retirement funds to a Roth IRA.
Roth Conversion Estimator
Enter the total amount you plan to convert from your traditional IRA or 401(k).
Your current income tax rate on the converted amount.
Your estimated income tax rate when you withdraw from retirement.
Number of years until you plan to start withdrawing from your retirement accounts.
The average annual return you expect on your investments.
Estimated Results
Immediate Tax Paid on Conversion:$0.00
Potential Future Tax Savings:$0.00
Tax-Advantaged Growth Potential (Roth):$0.00
Taxable Withdrawal Amount (Traditional):$0.00
$0.00
Net Benefit of Roth Conversion (Estimated)
Formula Explanation:
Immediate Tax Paid = Conversion Amount * Current Tax Rate.
Taxable Withdrawal (Traditional) = Conversion Amount * (1 + Growth Rate)^Years.
Roth Growth Potential = Conversion Amount * (1 + Growth Rate)^Years.
Future Tax Savings = Taxable Withdrawal (Traditional) * Future Tax Rate.
Net Benefit = (Roth Growth Potential – Immediate Tax Paid) – Traditional Withdrawal.
(Note: This is a simplified model. Actual results may vary.)
Key Assumptions & Intermediate Values
Assumption/Value
Input/Result
Unit
Amount to Convert
$
Current Tax Rate
%
Future Tax Rate
%
Years to Withdrawal
Years
Investment Growth Rate
%
Immediate Tax Paid
$
Estimated Traditional Withdrawal Value
$
Estimated Roth Withdrawal Value (Post-Tax)
$
Estimated Tax Savings
$
Summary of inputs and calculated values for your Roth conversion estimate.
Projected Account Growth Comparison
Comparison of projected growth between a Traditional account (taxable withdrawals) and a Roth account (tax-free withdrawals).
Understanding the Charles Schwab Roth Conversion Calculator
What is a Roth Conversion?
A Roth conversion involves moving funds from a traditional retirement account, such as a traditional IRA or a 401(k), into a Roth IRA. The key difference lies in taxation. With traditional accounts, contributions may be tax-deductible, and growth is tax-deferred, but withdrawals in retirement are taxed as ordinary income. With a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. A Roth conversion triggers an immediate tax liability on the converted amount in the year of conversion, based on your current marginal tax rate. This calculator helps you estimate the financial implications, particularly focusing on potential tax savings over time, and is often used in conjunction with planning with institutions like Charles Schwab.
Who should consider a Roth conversion? Individuals who anticipate being in a higher tax bracket in retirement than they are currently, those seeking tax diversification, or those who want to leave a tax-free inheritance to beneficiaries. It's also beneficial for those who believe tax rates will generally increase in the future.
Common misconceptions: A frequent misunderstanding is that a Roth conversion is always beneficial. It's crucial to consider the immediate tax hit and whether your future tax rate will indeed be higher. Another misconception is that all retirement funds can be converted without consequence; specific rules apply, and the tax implications must be carefully weighed.
Roth Conversion Formula and Mathematical Explanation
The core of a Roth conversion calculation involves comparing the tax implications of keeping funds in a traditional account versus converting them to a Roth IRA. This calculator simplifies the process by focusing on key variables:
Conversion Amount (C): The principal sum being moved from a traditional account to a Roth IRA.
Current Marginal Tax Rate (T_curr): The tax rate applied to the income in the year of conversion.
Expected Future Marginal Tax Rate (T_fut): The anticipated tax rate on withdrawals in retirement.
Years Until First Withdrawal (Y): The time horizon until retirement withdrawals begin.
Assumed Annual Investment Growth Rate (r): The average annual percentage return expected on investments.
Step-by-Step Derivation:
Immediate Tax Paid (IT): This is the upfront cost of the conversion.
IT = C * T_curr
Future Value of Converted Amount (FV_conv): This represents the total value of the converted amount at retirement, assuming it grows tax-free in the Roth IRA.
FV_conv = C * (1 + r)^Y
Future Value of Traditional Account (FV_trad): This represents the total value of the amount if it had remained in the traditional account, assuming the same growth rate. Withdrawals from this account will be taxed.
FV_trad = C * (1 + r)^Y
(Note: For simplicity in this model, we assume the same growth rate applies to both scenarios. In reality, the tax impact on withdrawals from the traditional account could affect the net amount available for reinvestment, but this calculator focuses on the tax difference at withdrawal.)
Taxable Withdrawal from Traditional Account (TW_trad): The amount withdrawn from the traditional account that is subject to income tax.
TW_trad = FV_trad
Taxes Due on Traditional Withdrawal (Taxes_trad): The total taxes paid upon withdrawal from the traditional account.
Taxes_trad = TW_trad * T_fut
Net Withdrawal from Traditional Account (Net_trad): The amount remaining after taxes.
Net_trad = TW_trad - Taxes_trad
Net Withdrawal from Roth Account (Net_roth): The amount remaining after conversion taxes (which were paid upfront).
Net_roth = FV_conv - IT
Potential Future Tax Savings (FS): The difference in taxes paid between the two scenarios.
FS = Taxes_trad (This is the tax you *avoid* by having the money in Roth)
Net Benefit of Conversion (NB): The overall financial advantage of converting.
NB = Net_roth - Net_trad NB = (FV_conv - IT) - (TW_trad - Taxes_trad) NB = FV_conv - IT - FV_trad + Taxes_trad
Since FV_conv = FV_trad in this model:
NB = Taxes_trad - IT
This means the net benefit is the future tax savings minus the immediate tax cost. If this value is positive, the conversion is estimated to be financially advantageous.
Variable Table:
Variable
Meaning
Unit
Typical Range
C (Conversion Amount)
Principal amount converted
$
$1,000 – $1,000,000+
T_curr (Current Tax Rate)
Marginal income tax rate now
%
10% – 37%
T_fut (Future Tax Rate)
Expected marginal income tax rate in retirement
%
10% – 37%+
Y (Years to Withdrawal)
Time horizon until retirement
Years
1 – 40+
r (Growth Rate)
Assumed annual investment return
%
5% – 10%
IT (Immediate Tax)
Tax paid upfront on conversion
$
Calculated
FV_conv (Roth Future Value)
Projected value in Roth IRA at retirement
$
Calculated
FV_trad (Traditional Future Value)
Projected value in Traditional IRA at retirement (pre-tax)
$
Calculated
Taxes_trad (Taxes on Trad Withdrawal)
Estimated taxes due on traditional withdrawals
$
Calculated
NB (Net Benefit)
Overall estimated financial advantage of conversion
$
Calculated
Explanation of variables used in the Roth conversion estimation.
Practical Examples (Real-World Use Cases)
Example 1: The Young Professional Expecting Higher Income
Scenario: Sarah is 35 years old and currently in the 22% federal tax bracket. She has $100,000 in a traditional IRA. She anticipates her income and tax bracket will increase significantly by the time she retires at age 65 (in 30 years), projecting a 32% marginal tax rate. She assumes her investments will grow at an average of 7% annually.
Inputs:
Amount to Convert: $100,000
Current Tax Rate: 22%
Future Tax Rate: 32%
Years to Withdrawal: 30
Investment Growth Rate: 7%
Calculations:
Immediate Tax Paid: $100,000 * 0.22 = $22,000
Future Value (Roth): $100,000 * (1 + 0.07)^30 ≈ $761,226
Future Value (Traditional): $100,000 * (1 + 0.07)^30 ≈ $761,226
Taxes on Traditional Withdrawal: $761,226 * 0.32 ≈ $243,592
Interpretation: In this scenario, the calculator suggests that converting the $100,000 to a Roth IRA could result in a net benefit of approximately $221,592 over 30 years. This is because Sarah expects to pay significantly more in taxes in retirement than she does now. The upfront tax cost is outweighed by the substantial future tax savings.
Example 2: The Near-Retiree in a Lower Tax Bracket
Scenario: John is 60 years old and expects to retire in 5 years. He is currently in a lower tax bracket (12%) due to a temporary reduction in income. He has $200,000 in a traditional 401(k) that he plans to roll over. He believes his tax rate in retirement might be similar or even lower (15%) due to lower living expenses and potential deductions. He assumes a 6% annual growth rate.
Inputs:
Amount to Convert: $200,000
Current Tax Rate: 12%
Future Tax Rate: 15%
Years to Withdrawal: 5
Investment Growth Rate: 6%
Calculations:
Immediate Tax Paid: $200,000 * 0.12 = $24,000
Future Value (Roth): $200,000 * (1 + 0.06)^5 ≈ $268,948
Future Value (Traditional): $200,000 * (1 + 0.06)^5 ≈ $268,948
Taxes on Traditional Withdrawal: $268,948 * 0.15 ≈ $40,342
Interpretation: For John, the calculator shows a positive net benefit of approximately $16,342. While the immediate tax cost is significant, the projected future tax savings are higher. However, the benefit is less dramatic than in Sarah's case. John might also consider converting only a portion of his funds to manage the immediate tax impact and achieve tax diversification.
How to Use This Charles Schwab Roth Conversion Calculator
Using this calculator is straightforward and designed to provide quick insights into the potential financial impact of a Roth conversion. Follow these steps:
Enter Conversion Amount: Input the total dollar amount you are considering converting from your traditional IRA or 401(k) to a Roth IRA.
Input Current Tax Rate: Enter your current marginal federal (and state, if applicable) income tax rate. This is the rate applied to your last dollar earned.
Estimate Future Tax Rate: Provide your best estimate of your marginal income tax rate in retirement. Consider factors like expected income sources, potential tax law changes, and your planned retirement lifestyle.
Specify Years to Withdrawal: Enter the number of years between the conversion date and when you anticipate making your first withdrawal from your retirement accounts. A longer time horizon allows for more tax-advantaged growth.
Set Investment Growth Rate: Input the average annual rate of return you expect your investments to achieve. Be realistic; historical averages can be a guide, but future returns are not guaranteed.
Click 'Calculate': Once all fields are populated, click the 'Calculate' button.
Reading the Results:
Immediate Tax Paid: This shows the estimated tax bill you'll receive in the year of the conversion.
Potential Future Tax Savings: This estimates the total taxes you could save in retirement by having the converted funds in a Roth IRA instead of a traditional account.
Tax-Advantaged Growth Potential (Roth): The projected value of your converted amount at retirement, assuming tax-free growth and withdrawals.
Taxable Withdrawal Amount (Traditional): The projected value of the amount if left in a traditional account, which would be subject to income tax upon withdrawal.
Net Benefit: This is the primary highlighted result. A positive number indicates that, based on your inputs, the conversion is estimated to be financially advantageous over the long term, primarily due to future tax savings outweighing the immediate tax cost. A negative number suggests the opposite.
Decision-Making Guidance: Use these results as a guide, not a definitive answer. A positive net benefit suggests a conversion might be wise, especially if you are confident about your future tax rate projections. Consider the immediate tax impact on your current cash flow. If the immediate tax liability is too high, you might consider converting smaller amounts over several years. If the net benefit is negative or marginal, leaving the funds in a traditional account might be more prudent, especially if you expect your tax rate to decrease in retirement.
Key Factors That Affect Roth Conversion Results
Several critical factors influence the outcome of a Roth conversion. Understanding these can help you refine your inputs and make a more informed decision:
Tax Rate Differential (Current vs. Future): This is the most significant driver. If your future tax rate is expected to be higher than your current rate, a Roth conversion is generally more attractive. Conversely, if you expect your tax rate to decrease in retirement, converting may not be beneficial.
Time Horizon (Years to Withdrawal): The longer the time until you need the money, the more opportunity your converted funds have to grow tax-free in the Roth IRA. This extended growth period amplifies the benefits of tax-free withdrawals, making conversions more compelling for younger individuals.
Investment Growth Rate: A higher assumed growth rate increases the future value of both traditional and Roth accounts. However, it magnifies the benefit of tax-free growth in a Roth IRA, as the larger the final amount, the greater the tax savings from avoiding future taxes.
Amount Converted: The larger the amount converted, the higher the immediate tax bill. This requires careful cash flow planning. Converting smaller amounts over time can mitigate the immediate tax impact but may result in less overall tax-free growth compared to a single large conversion if future tax rates are significantly higher.
State Income Taxes: Many states tax retirement income. If your state has high income taxes and you expect them to remain high, this adds another layer to the tax calculation, potentially increasing the benefit of a Roth conversion if state taxes are also expected to rise.
Inflation: While not directly calculated here, inflation erodes the purchasing power of money. Tax-free withdrawals from a Roth IRA help preserve purchasing power, as the growth and withdrawals are not diminished by future income taxes, which themselves could rise with inflation.
Withdrawal Strategy in Retirement: How you plan to draw down your retirement assets matters. If you anticipate needing significant taxable income in retirement (from pensions, Social Security, or traditional accounts), converting some traditional assets to Roth can provide tax diversification, allowing you to manage your taxable income more effectively year-to-year.
Market Volatility and Investment Risk: The assumed growth rate is an estimate. Actual market performance can vary significantly. If you convert and the market performs poorly, the immediate tax cost might outweigh the benefits. Conversely, strong market performance enhances the Roth conversion advantage.
Frequently Asked Questions (FAQ)
Q1: Is a Roth conversion right for me if I expect my tax rate to be lower in retirement?
A: Generally, no. The primary benefit of a Roth conversion comes from paying taxes now at a lower rate to avoid paying taxes later at a higher rate. If you expect your tax rate to decrease, keeping funds in a traditional account where withdrawals are taxed at that lower future rate is usually more advantageous.
Q2: Can I convert just a portion of my traditional IRA or 401(k)?
A: Yes. You can convert any amount you choose. Many people opt to convert only a portion, especially if they want to manage the immediate tax impact or if they have funds in both traditional and Roth accounts and want to balance their tax treatment in retirement.
Q3: What happens if I convert and then need the money before retirement?
A: Roth IRAs have specific rules regarding early withdrawals. While contributions can typically be withdrawn tax-free and penalty-free at any time, converted amounts (the principal that was taxed) may be subject to taxes and penalties if withdrawn before age 59½ and before the Roth IRA has been open for five years. Traditional IRA withdrawals before 59½ are generally subject to income tax and a 10% penalty.
Q4: Does Charles Schwab offer advice on Roth conversions?
A: Charles Schwab, like many financial institutions, offers resources and financial advisors who can provide guidance on Roth conversions. It's recommended to consult with a financial professional to discuss your specific situation and ensure a conversion aligns with your overall financial plan.
Q5: Are there income limits for Roth conversions?
A: No, there are no income limitations for performing a Roth conversion from a traditional IRA or 401(k). This differs from direct Roth IRA contributions, which do have income restrictions.
Q6: How long does it take for the conversion to process?
A: The processing time can vary depending on the financial institutions involved (where the traditional account is held and where the Roth IRA is established). It can take anywhere from a few days to a couple of weeks. It's important to initiate the conversion well before tax deadlines.
Q7: What is the five-year rule for Roth IRAs?
A: The five-year rule applies to qualified distributions of earnings from a Roth IRA. Your first Roth IRA must have been established (funded) at least five tax years prior to the withdrawal of earnings to be tax-free. Conversions have their own five-year clock for the converted principal, but qualified distributions of earnings are the primary focus of this rule.
Q8: Should I consider the "Backdoor Roth IRA" strategy alongside conversions?
A: The Backdoor Roth IRA is a strategy used by high-income earners to contribute to a Roth IRA when they exceed income limits for direct contributions. It typically involves contributing to a non-deductible traditional IRA and then converting it to a Roth IRA. This is different from converting existing pre-tax traditional IRA/401(k) funds. Both strategies have different implications and should be evaluated separately.