Calculate the estimated tax you would pay on a Roth IRA conversion.
Estimated Conversion Tax & Future Tax Savings
Understanding the Roth IRA Conversion
A Roth IRA conversion involves moving funds from a traditional IRA or a pre-tax retirement account (like a 401(k) or 403(b)) into a Roth IRA. Unlike traditional retirement accounts where contributions are often tax-deductible and growth is tax-deferred, Roth IRAs are funded with after-tax dollars. This means you pay taxes on the converted amount in the year of conversion, but qualified withdrawals in retirement are tax-free.
Deciding whether to convert involves a crucial tax calculation: you pay income tax now on the converted amount, but your money grows tax-free and can be withdrawn tax-free later. This calculator helps you estimate the immediate tax cost of a conversion and compare it to the potential tax savings you might realize in the future, especially if you expect to be in a higher tax bracket during retirement.
How the Calculator Works:
This calculator provides an estimate based on the information you provide. Here's a simplified breakdown of the calculations:
Estimated Immediate Tax: This is calculated by first projecting the future value of your traditional IRA balance using your estimated annual growth rate and the number of years until withdrawal. The estimated tax is then computed by multiplying this projected future balance by your current marginal tax rate. This represents the tax you'd pay if you converted the entire balance today, considering its future potential growth.
Formula (Simplified):
Future Value = `traditionalBalance * (1 + annualGrowthRate/100)^yearsUntilWithdrawal`
Estimated Immediate Tax = `Future Value * (currentTaxRate/100)`
Estimated Future Tax Savings: This compares the tax you'd pay on withdrawals from a traditional account versus a Roth IRA in retirement. It projects the future value of your balance (as calculated above) and then calculates the tax you'd owe on that amount if it remained in a traditional account (using your expected future marginal tax rate). The difference between this projected future tax and the estimated immediate tax gives you an idea of your potential net savings.
Tax Bracket Timing: The core decision hinges on whether your current tax rate is lower than your expected tax rate in retirement. If you anticipate being in a higher bracket later, converting now can be advantageous.
The "72(t)" Rule: Be aware of rules regarding early withdrawals from retirement accounts. Conversions to a Roth IRA can sometimes have implications if not managed correctly, especially concerning the 5-year rule for accessing converted principal without penalty.
Source of Funds for Tax: It's generally advisable to pay the conversion tax with funds from outside your retirement accounts. Using funds from the converted amount itself reduces the principal that can grow tax-free.
Tax Law Changes: Future tax laws are uncertain. This calculation is based on current rates and assumptions.
Professional Advice: This calculator is a tool for estimation and educational purposes. Always consult with a qualified financial advisor or tax professional before making any decisions about Roth IRA conversions.
Use this calculator to get a preliminary understanding of the financial implications of converting your traditional retirement savings to a Roth IRA.
function calculateRothConversion() {
var traditionalBalance = parseFloat(document.getElementById("traditionalBalance").value);
var currentTaxRate = parseFloat(document.getElementById("currentTaxRate").value);
var expectedFutureTaxRate = parseFloat(document.getElementById("expectedFutureTaxRate").value);
var yearsUntilWithdrawal = parseFloat(document.getElementById("yearsUntilWithdrawal").value);
var annualGrowthRate = parseFloat(document.getElementById("annualGrowthRate").value);
var resultDiv = document.getElementById("result");
var estimatedTaxElement = document.getElementById("estimatedTax");
var futureTaxSavingsElement = document.getElementById("futureTaxSavings");
// Clear previous results
resultDiv.style.display = 'none';
estimatedTaxElement.innerHTML = ";
futureTaxSavingsElement.innerHTML = ";
// Input validation
if (isNaN(traditionalBalance) || traditionalBalance < 0 ||
isNaN(currentTaxRate) || currentTaxRate 100 ||
isNaN(expectedFutureTaxRate) || expectedFutureTaxRate 100 ||
isNaN(yearsUntilWithdrawal) || yearsUntilWithdrawal < 0 ||
isNaN(annualGrowthRate) || annualGrowthRate < -100) { // Allow negative growth, but not excessively
alert("Please enter valid numbers for all fields. Tax rates should be between 0 and 100.");
return;
}
// Calculations
var futureValue = traditionalBalance * Math.pow((1 + annualGrowthRate / 100), yearsUntilWithdrawal);
// Ensure future value is not negative if growth rate is very low and years are long
if (futureValue < 0) {
futureValue = 0;
}
var estimatedTax = futureValue * (currentTaxRate / 100);
var projectedFutureTaxTraditional = futureValue * (expectedFutureTaxRate / 100);
var futureTaxSavings = projectedFutureTaxTraditional – estimatedTax;
// Display Results
estimatedTaxElement.innerHTML = "Estimated Tax on Conversion: $" + estimatedTax.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + "";
if (futureTaxSavings > 0) {
futureTaxSavingsElement.innerHTML = "Potential Future Tax Savings: $" + futureTaxSavings.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + "";
} else {
futureTaxSavingsElement.innerHTML = "Estimated Future Tax Savings: $" + futureTaxSavings.toFixed(2).replace(/\B(?=(\d{3})+(?!\d))/g, ",") + " (Consider converting if you expect lower future taxes)";
}
resultDiv.style.display = 'block';
}