IRA to Roth Conversion Calculator
When planning for retirement, there are a number of key decisions to make. One big decision is whether or not you should convert your traditional IRA into a Roth IRA. This calculator can show you the consequences of such a decision.
First enter your current age, the age at which you wish to retire, and the number of years you will need to draw an income following retirement. Then include a rate of return on your investments for the time before retirement and after retirement. Next input your current federal tax rate and the rate you will be paying during retirement. Then provide the current balance of your IRA and the nondeductible portion of it. From the pull-down menu, indicate whether you plan to pay the IRA conversion tax from non-IRA assets or from the IRA itself.
Click on CALCULATE and you’ll see a breakdown of differences between your traditional IRA and a potential Roth IRA.
Assumptions: This tool assumes you will keep your Roth IRA for at least 5-years and you won't withdraw any funds until at least age 59-1/2. It also assumes your return on investment remains constant and that you will remain in the same federal tax bracket for each period (conversion may or may not push you into a higher tax bracket for the year of conversion). Finally, it does not account for any state taxes or AMT (Alternative Minimum Tax). All results are hypothetical, so be sure to consult a qualified tax professional before making any decisions regarding your existing IRA.
Converting an IRA to a Roth IRA
Whether you're just beginning to plan your retirement or have been contributing to an IRA already, it may be a good time to consider converting to a Roth IRA. As income tax rates continue to climb, Roth IRAs, with their potential for tax-free growth, are proving to be valuable to many investors.
If you're interested in converting your IRA to a Roth IRA, the process can be fairly simple and extremely beneficial if handled correctly. However, a Roth IRA is not the best choice for everyone. Read on to find out who can benefit most from a Roth IRA and how to make the switch.
IMPORTANT NOTICE: The 2017 Tax Cuts and Jobs Act did away with the ability to reverse Roth IRAs back into traditional IRAs.
What Is an IRA?
A traditional individual retirement account (IRA) lets you make contributions to a retirement fund using money you can deduct on your tax return, with your earnings remaining tax-deferred until you withdraw them. After that, they are subject to income tax. IRAs make great supplements to employer-sponsored retirement packages since, very often, things like 401(k)s don't give us enough of a nest egg with which to live out the rest of our lives.
What Is a Roth IRA?
You use money you've already paid taxes on to make contributions to your Roth IRA. You also don't have to pay income taxes on your investment earnings, meaning your money can grow tax-free, provided you meet a few conditions. Finally, Roth IRAs don't force you to start taking minimum required distributions (MRDs) after a certain age, unlike virtually every other retirement plan. As a result, you can continue to accumulate money to avoid outliving your finances.
More Benefits of a Roth IRA
In addition to tax flexibility in retirement and no MRDs, a Roth IRA offers a few other interesting perks.
Often, Roth IRA plans offer legacy and estate planning benefits. This particular benefit can work for or against your beneficiaries, so it's important to implement it wisely. For example, if your MRDs from a traditional IRA have been accumulating taxable income, it will be passed on to your heirs, potentially pushing them into a higher tax bracket. Still, your estate has the potential to grow larger over the years while being subject to fewer taxes, so it's something to look into. Just be sure to consult with an attorney before making any decisions.
Additionally, you can use your contributions anytime you need them without incurring penalties, you can contribute as long as you work, and you can be protected from future tax increases.
Is a Roth IRA Right for You?
While anyone can convert an existing IRA to a Roth IRA, regardless of income, you still have to meet some requirements to avoid penalties. First, you must be at least 59-and-a-half years of age when you begin taking withdrawals, and you have to have been participating in the plan for five years.
If you meet those qualifications, you're on your way to successfully converting to a Roth IRA. However, note that this plan is not ideal for everyone, so it's important to take a step back and evaluate your situation before making any decisions.
For example, if your tax rate isn't going to get any higher, converting to a Roth IRA isn't very beneficial. Tax-free growth and tax-free withdrawals after retirement are the driving forces beyond Roth IRA appeal, but you lose the opportunity for potential deductions from contributing to a traditional IRA. If you're in the maximum tax bracket already, those deductions might be important to you later on.
There are several ways to complete your IRA to Roth IRA conversion.
- By using a same trustee transfer, your money stays in the same financial institution. Set up a Roth IRA account with your current IRA holder and ask them to move your funds to the new Roth account. This is the easiest conversion option.
- A trustee-to-trustee transfer allows you to move your funds from one institution to the other, eliminating the possibility that your traditional IRA funds will become taxable. Tell your IRA trustee to direct your funds to your new Roth account.
- A 60-day rollover conversion involves receiving a check for the complete amount of your IRA funds and then rolling them over to your new Roth IRA account. If you fail to complete the transfer within 60 days of the distribution, the conversion will not be completed, the amount distributed will be taxable and, you'll incur an IRS 10 percent early distribution tax penalty.
Taxes on Conversion
No matter how you choose to carry out the transfer, however, bear in mind that you will still be required to pay taxes on the funds you remove from your IRA no matter what, except for non-deductible contributions since they were never deferred.
You can't even bypass income tax liability by rolling over a portion of your non-deductible contributions thanks to the IRS pro-rata rule. While you can't entirely avoid the tax, there is a way to control it. By gradually transferring funds to your Roth IRA, you can prevent having to pay one large tax on the entire sum without worrying about a timetable for making a full conversion.
If you ever wish to revert back to a traditional IRA account, you may be eligible to do so. This process is known as recharacterization and it must be completed before October 15 of the federal income year. Should you decide to recharacterize your funds, consult with a tax adviser to find out if you're eligible.
While Roth IRAs aren't the best course of action for every investor, they are still extremely valuable to certain people. By converting your existing traditional IRA to a Roth IRA, you'll enjoy the benefits later down the road when you begin withdrawing from your plan and aren't subject to income tax liability.
If you decide to move forward with an IRA conversion, seriously consider enlisting the help of a tax professional. While it's possible to convert to a Roth IRA on your own, you stand a greater chance of missing a detail or two that can result in penalties or tax liability.