Ira to Roth Conversion Calculator

Use this calculator to estimate the potential long-term benefits of converting funds from a Traditional IRA to a Roth IRA, considering your current and future tax rates, and how you plan to pay the conversion taxes.

Traditional IRA Balance to Convert ($):

Current Marginal Tax Rate (%):

Expected Future Marginal Tax Rate in Retirement (%):

Years Until Retirement:

Expected Annual Growth Rate (%):

Tax on Conversion Paid From:

Converted Funds Outside Funds

Understanding the IRA to Roth Conversion

An IRA to Roth conversion involves moving pre-tax money from a Traditional IRA (or a pre-tax 401(k) that has been rolled into an IRA) into a Roth IRA. The primary consequence of this action is that the converted amount becomes taxable income in the year of the conversion. In return, all qualified withdrawals from the Roth IRA in retirement are completely tax-free, including both contributions and earnings.

Why Consider a Roth Conversion?

The decision to convert often hinges on your current tax situation versus your expected tax situation in retirement. Here are the main reasons individuals consider a Roth conversion:

Lower Current Tax Rates: If you anticipate your current marginal tax rate is lower than what it will be in retirement, paying taxes now on the conversion can be advantageous.
Tax-Free Growth and Withdrawals: Once converted, your Roth IRA grows tax-free, and qualified withdrawals in retirement are also tax-free. This is a significant benefit, especially for those who expect to be in higher tax brackets later in life.
No Required Minimum Distributions (RMDs): Unlike Traditional IRAs, Roth IRAs do not have RMDs for the original owner, providing more flexibility in managing your retirement income.
Estate Planning: Roth IRAs can be an excellent estate planning tool, as beneficiaries can inherit the account and continue to take tax-free withdrawals for a period.

Key Factors in the Calculator

Traditional IRA Balance to Convert: This is the amount of pre-tax money you are considering moving to a Roth IRA.
Current Marginal Tax Rate: This is the tax rate you expect to pay on the converted amount in the current year. The higher this rate, the more expensive the conversion.
Expected Future Marginal Tax Rate in Retirement: This is the tax rate you anticipate paying on withdrawals from a Traditional IRA in retirement. If this rate is higher than your current rate, a Roth conversion becomes more attractive.
Years Until Retirement: The longer your money has to grow tax-free in a Roth IRA, the more beneficial the conversion tends to be.
Expected Annual Growth Rate: This is the assumed rate of return on your investments. A higher growth rate amplifies the benefits of tax-free growth.
Tax on Conversion Paid From: This is a critical choice.
- Converted Funds: If you pay the conversion tax from the IRA funds themselves, the net amount invested in the Roth IRA is reduced, meaning less money grows tax-free.
- Outside Funds: If you pay the conversion tax from other savings (e.g., a taxable brokerage account or savings account), the full converted amount goes into the Roth IRA, allowing more money to grow tax-free. This is generally the more optimal strategy if you have the liquidity.

How the Calculator Works

The calculator compares two scenarios:

Roth Conversion Scenario: It calculates the tax due on the conversion based on your current marginal tax rate. Then, it determines the net amount invested in the Roth IRA (either the full amount if taxes are paid from outside funds, or the balance minus taxes if paid from converted funds). Finally, it projects the future value of this Roth IRA, which will be entirely tax-free upon withdrawal.
Traditional IRA (No Conversion) Scenario: It projects the future value of your Traditional IRA if you do not convert it. Then, it applies your expected future marginal tax rate to this future value to determine the net amount you would have after paying taxes in retirement.

By comparing the net future values of both scenarios, the calculator helps you understand which option might leave you with more money after taxes.

Example Scenario:

Let's say you have $100,000 in a Traditional IRA. Your current marginal tax rate is 24%, and you expect it to be 15% in retirement. You have 20 years until retirement and expect an annual growth rate of 7%.

If you convert and pay taxes from outside funds:
- Tax due on conversion: $100,000 * 0.24 = $24,000
- Amount invested in Roth: $100,000
- Future value of Roth (tax-free): ~$386,968
If you convert and pay taxes from converted funds:
- Tax due on conversion: $24,000
- Amount invested in Roth: $100,000 – $24,000 = $76,000
- Future value of Roth (tax-free): ~$294,100
If you do NOT convert (Traditional IRA):
- Future value of Traditional IRA (pre-tax): ~$386,968
- Future value after 15% retirement tax: $386,968 * (1 – 0.15) = ~$328,923

In this example, converting and paying taxes from outside funds yields the highest after-tax value. If you pay taxes from converted funds, it's less advantageous than not converting, highlighting the importance of having outside funds for the tax payment.