Roth IRAs offer many benefits. But moving assets to Roth IRAs from traditional, SEP or SIMPLE IRAs could cost you. Our calculator helps you estimate if making a Roth conversion is beneficial to you.
Consider this important information before converting assets to a Roth IRA:
- You'll generally be subject to ordinary income tax on the amount converted (specifically, on pre-tax contributions and investment gains).
- If you pay taxes with money distributed from your IRA, you'll lose the benefits of potential tax-free growth on that amount within the Roth IRA.
- If you're under age 59½, you may be subject to a 10% federal tax penalty for money withdrawn from an IRA to pay tax on a conversion. You may also have to pay state tax penalties.
- For investors in lower tax brackets that meet certain modified adjusted gross income (MAGI) requirements, IRA contributions may be tax deductible. Roth IRA contributions aren't tax deductible (although qualified distributions of Roth earnings are tax-free and penalty-free).
- After conversion, a Roth IRA must be opened for five tax years before earnings can be withdrawn tax-free if certain other requirements are also met. These include those taken after age 59½, for death or disability, or for a first time home purchase.
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Definitions
- Please note the following important information regarding any Roth conversion
- You must pay ordinary income tax on the amount converted (specifically, on pre-tax contributions and investment gains).
- If you pay the taxes using money from the traditional IRA, you will lose the potential benefits of tax-free growth on that amount.
- If you are under age 59½, you may be subject to a 10% federal tax penalty if you withdraw money from your traditional IRA to pay the tax on the conversion. You may also have to pay state tax penalties.
- For an investor in a lower tax bracket, traditional IRA contributions may be tax deductible while Roth IRA contributions are not.
- After conversion, in order to take any distributions that include earnings that are tax-free, the Roth IRA must be opened for 5 tax years. Eligible tax-free distributions include those taken for death or disability, after age 59½, or for a first-time home purchase.
- Amount to convert
- Amount to convert from a traditional IRA account to a Roth IRA. We assume that you are paying any taxes owed with funds that you have available outside of the account you are converting. If you are under 59½, the IRS treats any money not directly rolled over to the Roth IRA as an early withdrawal – even if that money is used to pay the tax bill caused by the conversion and, except in the case of a rollover from a governmental 457(b) plan, the funds will be subject to a federal tax penalty unless an exception applies.
- Non-deductible contributions
- The amounts, if any, contributed to your traditional IRAs or employer-sponsored accounts made with after-tax contributions. It is important to note that you may not "cherry pick" funds that are either after-tax or pre-tax to convert. If you are not converting all of your IRAs or the entire amount in your employer-sponsored plan, you must convert a prorated amount of the pre-tax (deductible) and after-tax (nondeductible) balance. All of your IRAs are added together and treated as one for this purpose.
- Current age
- Current age. This age must be less than 70. Since this calculator does not take Required Minimum Distributions (RMD) into account, which begin at age 70½, it is not designed for individuals that are currently required to begin making these distributions.
- Age at retirement
- Desired age at retirement.
- Rate of return
- The annual rate of return for your IRA. This calculator assumes that your return is compounded annually. The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor's 500® (S&P 500®) for the 10 years ending December 31st 2017, had an annual compounded rate of return of 8.3%, including reinvestment of dividends. From January 1, 1970 to December 31st 2017, the average annual compounded rate of return for the S&P 500®, including reinvestment of dividends, was approximately 10.6% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a financial institution may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.
It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that investment funds and/or investment companies may charge.
- Current tax rate
- Current marginal income tax rate that will apply to conversion amount. Please note that the marginal tax rate for your conversion may be higher than your current marginal tax rate if the conversion moves your AGI into a higher income tax bracket. It is also possible, especially on very large conversions, that part of your conversion be subject to more than one tax rate. Use the ‘Filing Status and Income Tax Rates Table’ to assist you in estimating your federal tax rate.
Filing Status and Income Tax Rates 2018* Tax Rate Married Filing Jointly or Qualified Widow(er) Single Head of Household Married Filing Separately 10% $0 - $19,050 $0 - $9,525 $0 - $13,600 $0 - $9,525 12% $19,050 - $77,400 $9,525 - $38,700 $13,600 - $51,800 $9,525 - $38,700 22% $77,400 - $165,000 $38,700 - $82,500 $51,800 - $82,500 $38,700 - $82,500 24% $165,000 - $315,000 $82,500 - $157,500 $82,500 - $157,500 $82,500 - $157,500 32% $315,000 - $400,000 $157,500 - $200,000 $157,500 - $200,000 $157,500 - $200,000 35% $400,000 - $600,000 $200,000 - $500,0000 $200,000 - $500,000 $200,000 - $300,000 37% Over $600,000 Over $500,000 Over $500,000 Over $300,000 *Caution: Do not use these tax rate schedules to figure 2017 taxes. Use only to figure 2018 estimates. Source: 2017 Tax Cuts and Jobs Act - Tax rate at retirement
- Expected marginal income tax rate at retirement.
- Investment tax rate
- Expected marginal tax rate (base this on expected capital gains rate) for investments. This calculator assumes that you invest the amount that you would have had to pay in taxes in a taxable investment account. The investment tax rate is used for calculating the annual return on these taxable investments. For many, this will be the same as their income tax rate. If you expect your non-IRA investments to be primarily from long-term capital gains or dividends, enter your expected capital gains rate here.
The Roth Conversion Results at Retirement chart is based on inputs that are hypothetical. Information and interactive calculators are available to you as self-help tools for your independent use and aren't intended to provide legal, tax or investment advice. We can't and don't guarantee their applicability or accuracy to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals, such as your legal or tax adviser, for all personal finance issues and your specific situation.
There may be a delay between Roth Conversion Results at Retirement updates and the effective date of changes to the tax code or other rule changes.