Estimate the immediate tax impact of converting traditional IRA or 401(k) funds to a Roth IRA.
Estimated Immediate Tax Due on Conversion:
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Understanding the Roth Conversion Tax Calculator
A Roth conversion involves moving funds from a traditional retirement account (like a Traditional IRA or a 401(k)) to a Roth IRA. The primary difference lies in taxation:
Traditional Accounts: Contributions may be tax-deductible, and earnings grow tax-deferred. Withdrawals in retirement are taxed as ordinary income.
Roth Accounts: Contributions are made with after-tax money. Earnings grow tax-free, and qualified withdrawals in retirement are also tax-free.
The crucial aspect of a Roth conversion is that you must pay income tax now on the amount you convert. This calculator helps you estimate that immediate tax liability and provides context for your decision.
How the Calculator Works:
This calculator focuses on the immediate tax impact of a Roth conversion. It uses the following logic:
Taxable Amount: For simplicity in this calculator, we assume the entire "Current Traditional IRA/401(k) Balance" is converted. In reality, you can convert portions over time.
This formula calculates the tax you'll owe in the current tax year based on the amount you convert and your current marginal income tax bracket.
Future Value of Untaxed Traditional Funds:
Future Value (Traditional) = Traditional Balance * (1 + Expected Annual Growth / 100) ^ Years to Retirement
This estimates how much the converted amount might have grown if left untaxed in the traditional account until retirement.
Future Value of Post-Tax Roth Funds:
Future Value (Roth) = (Traditional Balance - Immediate Tax) * (1 + Expected Annual Growth / 100) ^ Years to Retirement
This estimates how much the converted amount would be worth in retirement *after* paying the conversion tax and assuming the remaining balance grows.
Potential Tax Savings in Retirement:
Potential Retirement Tax Savings = (Future Value (Traditional) - Future Value (Roth)) * (Estimated Future Tax Rate / 100)
This estimates the potential tax savings you could achieve in retirement by having the funds grow tax-free in a Roth account, considering your estimated future tax rate.
When to Consider a Roth Conversion:
You expect your tax rate to be higher in retirement than it is now. Paying taxes at a lower current rate is advantageous.
You are in a lower income/tax bracket currently due to a temporary situation (e.g., unemployment, reduced work hours).
You want tax diversification in retirement. Having both taxable and tax-free income sources provides flexibility.
You want to avoid Required Minimum Distributions (RMDs) from traditional accounts in retirement. Roth IRAs do not have RMDs for the original owner.
You anticipate higher future income or tax rates due to potential tax law changes or career progression.
Important Considerations:
The 5-Year Rule: Funds converted to a Roth IRA must remain in the Roth account for at least five years (from the date of conversion) to be eligible for tax-free withdrawal of earnings. There are separate 5-year rules for qualified distributions.
Paying the Tax: It's crucial to pay the conversion tax with funds from outside your retirement accounts. If you use retirement funds to pay the tax, you'll owe tax on that amount as well, reducing the benefit.
No Recharacterization: Unlike in the past, Roth conversions generally cannot be undone (recharacterized).
Impact on Income: The converted amount increases your taxable income for the year, potentially affecting eligibility for certain tax credits or deductions, and increasing Medicare premiums (IRMAA).
Disclaimer: This calculator provides an estimate for educational purposes only. It does not constitute financial or tax advice. Consult with a qualified financial advisor or tax professional before making any decisions about Roth conversions.
function calculateRothConversionTax() {
var traditionalBalance = parseFloat(document.getElementById("traditionalBalance").value);
var currentTaxRate = parseFloat(document.getElementById("currentTaxRate").value);
var futureTaxRate = parseFloat(document.getElementById("futureTaxRate").value);
var yearsToRetirement = parseInt(document.getElementById("yearsToRetirement").value);
var expectedAnnualGrowth = parseFloat(document.getElementById("expectedAnnualGrowth").value);
var resultValueElement = document.getElementById("result-value");
var resultComparisonElement = document.getElementById("result-comparison");
resultValueElement.textContent = "–";
resultComparisonElement.textContent = "";
if (isNaN(traditionalBalance) || traditionalBalance < 0 ||
isNaN(currentTaxRate) || currentTaxRate 100 ||
isNaN(futureTaxRate) || futureTaxRate 100 ||
isNaN(yearsToRetirement) || yearsToRetirement <= 0 ||
isNaN(expectedAnnualGrowth) || expectedAnnualGrowth 0) {
comparisonText = `If your future tax rate is higher, converting could save you approximately ${formattedPotentialSavings} in taxes during retirement compared to leaving the funds in a traditional account.`;
resultComparisonElement.style.color = "#28a745";
} else if (potentialRetirementTaxSavings < 0) {
comparisonText = `Based on these estimates, converting might result in approximately ${formattedPotentialSavings} more in taxes during retirement. Consider if your current tax rate is lower than your expected future rate.`;
resultComparisonElement.style.color = "#dc3545";
} else {
comparisonText = `Under these assumptions, there's no projected tax savings difference in retirement between converting and not converting.`;
resultComparisonElement.style.color = "#6c757d";
}
resultComparisonElement.textContent = comparisonText;
}