This online Roth IRA Conversion Calculator will help you to calculate an estimation of the net consequences of converting your traditional IRA to a Roth IRA.
Note that if you're not sure what a Traditional IRA is, or what a Roth IRA is, or what their respective advantages, disadvantages, and purposes are, please visit the Traditional Vs Roth IRA Calculator.
While researching the information needed to build this calculator, one thing became perfectly clear -- no two Roth IRA calculators contain the same entry fields -- much less generate the same results. The reasons for this phenomenon probably stem from the fact that they are all making crystal ball assumptions and predications.
In order to forecast the exact comparative consequences of converting your traditional IRA to a Roth IRA, you would need to be able to make precise predictions about the following details the calculators depend on for the calculations:
Well, since few of us even know for certain what tomorrow will bring, making predictions about the state of our health, wealth and tax laws years into the future is probably not a good investment of your time. However, what is a good investment of your time, is taking the time to learn what an Individual Retirement Account (IRA) is, what a Roth IRA is, their advantages and disadvantages, and how they compare to other retirement investment options.
While contemplating contributing to an IRA or converting to a Roth IRA, be sure to keep in mind that investing and saving for retirement is only half the equation. After all, if you have a mountain of debt on the day you retire, the proceeds from your retirement investment funds will have to go toward paying bills instead of paying for airfare to distant, tropical beaches. Therefore your retirement might be better served by using extra money for paying off high interest debt (Invest in Your Debt Calculator).
While I'm by no means an expert in retirement investment options, I do have one important quality that should make what I have to say worth listening to: I'm not trying to sell you an IRA -- traditional, Roth or otherwise. So for what it's worth, in the Glossary of Terms located beneath the calculator, I will do my best to highlight what I've gleaned from researching the information needed to build this calculator.
With that, let's use the Roth IRA Conversion Calculator to calculate retirement comparisons for converting your traditional IRA to a Roth IRA.
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Traditional IRA: Basically, a traditional Individual Retirement Account (IRA) is an investment (stocks, bonds, mutual funds, cds, etc.) wherein your contributions serve to reduce your taxable income for the year contributions are recorded. The earnings from an IRA grow on a tax-deferred basis until you begin to take qualified distributions (after age 59-1/2). Contributions and earnings are added to your ordinary income at the time they are distributed (withdrawn) and are therefore fully taxable based on your tax bracket at the time of the withdrawals. Minimum distributions are required at age 70-1/2. Distributions taken prior to your qualifying age will incur taxes and early withdrawal penalties. Please consult a tax professional for up-to-date IRA information, such as contribution limits, etc. (if you notice any out-of-date material in the Roth IRA Conversion Calculator, please let me know).
Roth IRA: Basically, a Roth IRA is an individual retirement account wherein your contributions do not serve to reduce your taxable income in the year they are recorded. In other words, you will have already paid income taxes on your contributions based on your tax bracket at the time of each contribution. The earnings from a Roth IRA grow tax-free so qualified distributions (withdrawals) are not taxed. The main advantage to a Roth IRA is that once you have kept a contribution for the "seasoning period" (currently 5-years), you can withdraw the contribution without tax (you already paid the taxes) or penalties. The main disadvantage of a Roth is that your contributions will not lower your tax liability for the year they are recorded. Please consult a tax professional for up-to-date Roth information, such as Roth IRA income limits, etc. (if you notice any out-of-date material in the Roth IRA Conversion Calculator, please let me know).
Purpose of Roth IRA: The main purpose of a Roth IRA is to enable you to withdraw funds from your retirement account during your retirement without having to pay any tax on the withdrawals -- including the earnings. A second purpose of a Roth is to enable you to leave your retirement funds for your heirs. This is because a Roth doesn't have the minimum distribution requirements imposed by a Traditional IRA. A third potential purpose of a Roth IRA is if you believe you will be in a higher tax bracket after retirement, paying taxes on your contributions now might make more sense.
IRA to Roth Conversion Taxes: Since you have not paid taxes on the amount in your Traditional IRA, any contributions to Roth IRAs are not deductible from your income, the amount you convert will increase your taxable income for that year. The danger here, is if that increase results in pushing you into a higher tax bracket, the increased taxes may offset any advantage you hope to gain from converting.
Deductible Contribution: A deductible contribution is one that is within the maximum allowable annual contribution (as of this writing it was $5,500 for up to age 49, and $6,500 age 50 and older). In other words, if your maximum annual allowable contribution is $5,500, any contributions adding up to less than that amount are considered "deductible," meaning your contributions are subtracted from your taxable income for that year.
Non-Deductible Contribution: A non-deductible contribution is one that extends beyond the maximum allowable contribution. So if your maximum annual allowable contribution is $5,500, but your total annual contributions add up to $8,000, then $2,500 of your contributions will be considered "non-deductible," meaning that portion will not be subtracted from your taxable income for that year.
Federal Tax Bracket: These were the latest federal tax brackets as of the last edit of this page (02/28/2014). You can use this table as a guide for deciding which tax bracket percentage to enter into the Roth IRA Conversion Calculator.
|Federal Tax Brackets||Single||Married Filing Jointly|
|10% Tax Bracket||$2,250 - $11,325||$8,450 - $26,600|
|15% Tax Bracket||$11,325 - $39,150||$26,600 - $82,250|
|25% Tax Bracket||$39,150 - $91,600||$82,250 - $157,300|
|28% Tax Bracket||$91,600 - $188,600||$157,300 - $235,300|
|33% Tax Bracket||$188,600 - $407,350||$235,300 - $413,550|
|35% Tax Bracket||$407,350 - $409,000||$413,550 - $466,050|
|39.6% Tax Bracket||Over $409,000||Over $466,050|