Based on the information you provided, if maximizing the future value of your portfolio is your key goal, converting some or a portion of your assets to a Roth IRA may make sense for you. The estimated future value of your converted assets is more than if you left the assets in your Traditional IRA. This illustration is hypothetical in nature. Actual results will vary. See Calculator Assumptions for more information.
Your estimated future federal income tax rate is a key factor in this result. The ending portfolio value is only one of several strategic considerations for having a Roth IRA in your portfolio. Keep in mind that you can adjust various responses (like the amount you want to convert) because they can significantly impact the analysis you receive.
Your current federal income tax rate is (based on your estimated taxable income)
Your current federal income tax rate after conversion is (based on your estimated taxable income)
Based on the amount you wish to convert, you would owe approximately in federal income taxes. You can consider converting a smaller amount, which would reduce your potential taxes due. Simply adjust the amount you would like to convert (in the third question in the first section of this calculator) and click “Recalculate.”
This calculator assumes you will be paying the taxes due from funds outside of your IRA. Using your IRA funds to cover the taxes due will considerably diminish any benefits of conversion.
You chose not to include state tax in your calculations. Keep in mind that if you live in a state with state income taxes, those taxes could add a significant amount to the tax you would owe for conversion.
Based on the amount you indicated you wish to convert, your taxable income, and income from the conversion, the potential taxes due push you into a higher federal income tax bracket and the corresponding tax rate. Consult your tax advisor for additional information.
You believe that you will be taxed at the same rate or higher when you begin taking withdrawals. Therefore, converting some of your retirement assets to a Roth IRA could make sense, allowing for tax-free withdrawals in the future, when you expect your federal income tax to be higher.
This illustration is hypothetical in nature. Actual results will vary. See Calculator Assumptions for more information.
This calculator is intended to serve as an educational tool, not investment advice. It is designed to give you a point of reference when considering your own unique situation. The estimates presented are not based on the performance of any specific securities, and your results may differ. The results presented may vary with each use and over time based on the assumptions and information you provide. The tax and legal information offered here is based on a summary of information you have provided and an interpretation of the current income tax regulations, and is not exhaustive. The calculator does not consider the alternative minimum tax (AMT), which a conversion may subject you to. It's also important to note, however, that some states treat the IRA conversion amount differently so be sure to check with your tax advisor. Investors should consult with their tax advisor or legal counsel for advice and information concerning their particular situation.
Steps used to calculate these estimated conversion values:
Taxes Due: When you convert to a Roth IRA, the converted IRA balance is treated as if it were a distribution to you. This "income" must be included on your tax return in the year of conversion. You would not owe taxes on the after-tax contributions you have made to your existing IRA. The tax figure has been calculated based on a graduated marginal tax rate(s) determined from your taxable income and tax filing status, based on the information you input. The state taxes are calculated based on the current state tax input you provide.
Estimated Pre-Tax Value of IRA: First, the estimated pre-tax value of your IRA was calculated based on the existing IRA balance, number of years until withdrawal, and the hypothetical before-tax rate of return which you provided as inputs. The calculations assume no further contributions to your existing IRA.
Estimated After Tax Value: The value of each type of IRA in the future was then adjusted for taxes, assuming one lump sum withdrawal. In order to do a like comparison, the estimated future value of the Roth IRA has been reduced by the estimated future after-tax value of the money used to pay taxes that result from the conversion. The actual results you achieve may be different from those represented here. The calculation assumes that the conversion stays in the account for the 5-year holding period and the withdrawal is made when you are over 59 ½. Taxes and penalties occur otherwise. Taxes and penalties due in this situation are not factored into the estimate above.
Traditional IRA Tax Adjustment: If you leave the money in a traditional IRA, you will not pay any taxes now, but any withdrawals of earnings or deductible contributions from the IRA will be taxed when you make withdrawals from the IRA. For purposes of this calculation it is assumed that the investor is at least 59 ½ when the withdrawal takes place. Withdrawals taken before age 59 ½ may also be subject to federal and state tax penalties. The tax adjustment for the traditional IRA has been calculated using the estimated value of your IRA, the marginal tax rate at retirement, and the estimated future state rate which you provided.
Conversion to a Roth IRA Tax Adjustment: The calculation assumes that the taxes you would owe to convert to a Roth IRA are paid with funds outside the IRA. This adjustment reflects the lost earning potential of the funds used to pay the tax. The calculation assumes that these funds would have had the potential for long term growth and are taxed appropriately annually (interests and dividends) and at liquidation (capital gains). This opportunity cost grows at the same rate selected for the IRAs. Interest and dividends are assumed to be reinvested.
Estimated Tax Bracket (if applicable): In some cases, you may be warned that the conversion may cause an increase in your tax bracket for the tax year of the conversion. The conversion is considered a taxable distribution in the year of the conversion, and is added to your Taxable Income. Using the federal tax brackets, the calculation adds your conversion amount to your Taxable Income to see if your tax bracket will be increased for the tax year of the conversion.
The average rate of return figures represent the average annual total returns of six hypothetical investment plans for the period 1970 through 2019. These plans were developed as guides for investors with various time horizons and risk tolerances. These returns are weighted averages of the performance of the indices used to represent each asset class in the plans (including the reinvestment of dividends and interest) and are rebalanced annually.
The indices representing each asset class in the historical asset allocation plans are S&P 500 Index (large-cap stocks); Russell 2000 Index (small-cap stocks); MSCI EAFE Net of Taxes (international stocks); Barclays Capital US Aggregate Bond Index (fixed income); and Citigroup 3-Month US Treasury Bills (cash).
These returns are not based on the performance of specific securities during the period. The results you achieve may differ from those represented. The results shown by the tool may differ with each use and over time based on the assumptions and your selections.
Past performance is not an indication of future results. Indices are unmanaged and cannot be invested in directly.
Why this matters: To get a more accurate estimate of the conversion taxes you'd have to pay, you'll need to enter the total amount of your non-Roth IRA retirement accounts—not just the value you're considering converting. Here's why:
Let's say you have a total of $60,000 in IRA savings. $20,000 of that is in after-tax contributions (also known as nondeductible or post-tax contributions) and the remaining $40,000 is in pre-tax (or deductible) contributions and earnings.
If you're considering converting just a portion of your IRA savings, you might ask if you could convert only the $20,000 of after-tax contributions, since you've already paid income taxes on them, and therefore only have to pay taxes on the investment earnings within that $20,000 and not the contributions themselves.
The answer is that you can't choose which of your IRA funds get converted. Instead, you'll need to consider all of your non-Roth IRAs together and pay a proportional share—this is known as the IRS Aggregation Rule. Whether you convert the entire $60,000 or a portion of it, you'll pay taxes based on your overall percentage of taxable funds, or 66% in this example.
Additionally, keep in mind that accounts held by a partner/spouse are considered separately, even if you file jointly, so don't include those amounts in your answer.
For more information, you can review your IRS Form 8606—which includes a record of your after-tax contributions each year—or check with your tax advisor.
Why this matters: If you've made nondeductible IRA contributions, you've already paid income taxes on them and won't be required to pay taxes again if you convert to a Roth. If you're uncertain whether you've made nondeductible contributions to an IRA, check your income tax records for IRS Form 8606.
When investors can't qualify for tax-deductible contributions to a Traditional IRA because of income or contribution limits, they may decide to make an IRA contribution with after-tax funds. If you've made nondeductible contributions to an IRA, you should have filed IRS Form 8606. If you have this form on file, select "Yes" and enter the total amount of nondeductible contributions. If you haven't filed this form, select "No." For more information, refer to IRS Publication 590 or check with your tax advisor.
Why this matters: Your filing status is a key factor in determining the amount of conversion taxes that will be due.
The income ranges that are associated with your tax rate are different, depending on your filing status. As a result, your filing status will directly affect the amount of taxes that will be due, should you choose to convert.
Why this matters: A partial conversion may help you avoid a higher income tax bracket for the year you convert, lower your conversion costs, and help you manage your potential tax consequences as you plan for retirement.
Converting your Traditional IRA to a Roth IRA doesn't have to be an all-or-nothing decision, and you can phase your conversions over time. Here are three important reasons to consider a partial conversion:
Tax risk diversification can be a comprehensive strategy that incorporates more than IRA investments. Diversifying the tax consequences of your assets as part of your retirement strategy includes considering dividing your assets among three account types: taxable accounts (such as a brokerage account), tax-deferred accounts (such as a Traditional IRA or 401(k)), and tax-free accounts (such as a Roth IRA).
Why this matters: Your marginal federal tax rate is calculated using your taxable income that is subject to ordinary income tax—not your gross income—and your income tax rate is an important factor in determining whether a Roth IRA conversion is right for you.
Your taxable income is your gross income after taking out any allowable deductions (above-the-line adjustments for such things as alimony, student loan interest, deductible IRA contributions, etc., as well as the standard or itemized deductions and personal exemptions). Taxable income isn't limited to what you earn on the job—other types of income, including interest income and distributions from pension plans count, too.
You can find your taxable income as a line item on your most recent completed federal income tax return. However, this figure could include different kinds of income—the tax rate on which could vary. Depending on how much of your income is from qualified dividends and long-term gains, you can use the income tax return line item directly or adjust it. If you choose to adjust it, subtract your qualified dividend and long-term gain income from the taxable income line item to get the amount that is subject to ordinary income tax.
If you don't have your federal income tax return handy, enter your best estimate. For more information about taxable income, refer to IRS Publication 590 for tax assistance resources.
Why this matters: Your federal income tax bracket determines how much income tax you'll pay this year, which is a key consideration in deciding whether a Roth IRA conversion makes financial sense for you.
Your federal income tax rate is the starting marginal percentage at which conversion assets will be taxed. The calculator automatically calculates an estimated income tax rate based on the taxable income you entered, not including any potential conversion income which could move you into a higher tax bracket for the year you convert. For the most accurate result, make sure you've correctly entered your taxable income that is subject to ordinary income tax.
The calculator does not consider the alternative minimum tax (AMT). As converted funds are taxable, it is possible that the conversion amount could make you subject to the AMT. Be sure to consult your tax advisor.
|Single Filers||Married Filing Jointly & Surviving Spouses||Head of Household||Married Filing Separately||Federal Tax Rate|
|$0 - $9,700||$0 - $19,400||$0 - $13,850||$0 - $9,700||10%|
|$9,701 - $39,475||$19,401 - $78,950||$13,851 - $52,850||$9,701 - $39,475||12%|
|$39,476 - $84,200||$78,951 - $168,400||$52,851 - $84,200||$39,476 - $84,200||22%|
|$84,201 - $160,725||$168,401 - $321,450||$84,201 - $160,700||$84,201 - $160,725||24%|
|$160,726 - $204,100||$321,451 - $408,200||$160,701 - $204,100||$160,726 - $204,100||32%|
|$204,101 - $510,300||$408,201 - $612,350||$204,101 - $510,300||$204,101 - $306,175||35%|
|$510,301 or more||$612,351 or more||$510,301 or more||$306,176 or more||37%|
|Single Filers||Married Filing Jointly & Surviving Spouses||Head of Household||Married Filing Separately||Federal Tax Rate|
|$0 - $9,875||$0 - $19,750||$0 - $14,100||$0 - $9,875||10%|
|$9,876 - $40,125||$19,751 - $80,250||$14,101 - $53,700||$9,876 - $40,125||12%|
|$40,126 - $85,525||$80,251 - $171,050||$53,701 - $85,500||$40,126 - $85,525||22%|
|$85,526 - $163,300||$171,051 - $326,600||$85,501 - $163,300||$85,526 - $163,300||24%|
|$163,301 - $207,350||$326,601 - $414,700||$163,301 - $207,350||$163,301 - $207,350||32%|
|$207,351 - $518,400||$414,701 - $622,050||$207,351 - $518,400||$207,351 - $311,025||35%|
|$518,401 or more||$622,051 or more||$518,401 or more||$311,026 or more||37%|
Why this matters: A Traditional IRA can offer you tax benefits now, but a Roth IRA can give you more control over income taxes if you think you'll be taxed at a higher rate in retirement.
For this reason, your future income tax rate will have a significant effect on your calculator result. This calculator can help you estimate if the tax-free growth benefits of a Roth IRA will outweigh the effects of your tax rate in retirement being lower than your current tax rate.
Based on the information you provided, this calculator enters your current federal income tax rate for your future tax rate, but you may wish to adjust this figure. It's true that you can't know for sure what your federal income tax rate will be in the future, so estimating can be a bit of a challenge.
Your future income will determine your future tax bracket, which will determine the rate at which you will be taxed in the future. It's also important to consider that future tax laws may change over time, and they will be a critical factor in your future tax rate.
One approach to estimating your future tax rate is to base your future income tax rate on the amount you think you'll need to live on for your first year of retirement. Ask yourself how that amount compares to what you're making now—is it less, more, or about the same?
Here are some important additional considerations:
If you think your income at the time of retirement will be higher than your current income, then you would likely want to consider protecting yourself from tax consequences resulting from being in a higher income tax bracket (and, therefore, being taxed at a higher rate) than you are now. In this case, a Roth IRA could be a smart way to help gain more control over tax consequences when you need to begin taking withdrawals from your retirement account. If you have questions, refer to IRS Publication 590 for tax assistance resources.
Please note that if your primary reason for converting to a Roth IRA is estate planning, consider inputting your current tax rate for this question.
Why this matters: State tax rates may be as high as 11%, so inputting your state taxes in your calculation is an important factor in getting a more accurate result. It's important to note, however, that some states treat the IRA conversion amount differently—not all consider it as taxable income—so be sure to check with your tax advisor.
Current state individual income tax rates range from 0% - 11%. For additional information on current state income tax rates, you can:
As with federal income taxes, speculation is occurring regarding whether state income taxes are expected to change. Consider your current state income tax rate and enter your best estimate. Relocating to a different state in retirement can have a significant effect on your state tax rate. For additional information, you can:
Why this matters: It's important to remember that the amount you convert must be held in your Roth IRA for at least five years or until you turn the age of 59½, or you could incur a 10% early withdrawal penalty.
Additionally, the longer you leave your assets in your IRA without withdrawing them, the more time you have for potential tax-free growth.
If estate planning is a goal of your Roth IRA conversion, consider that, although you may not need to make withdrawals during your lifetime, withdrawals will be required when your heirs inherit the account.
This calculator does not take the early withdrawal penalty into consideration, so please make sure you enter the correct number, or contact your tax advisor.
Upon first review of the bar chart, conversion might not look like it makes sense but you may want to consider assessing a few more variables before making a decision:
If the hypothetical value of your unconverted IRA is greater than your hypothetical Roth IRA value, check the section labeled "Impact on Current Tax Rate":
Adjust the amount you would like to convert (using either a percentage or a dollar figure) until you find an amount that does not push you into a higher tax bracket and then review the bar chart to see which type of account has the greater proposed value. In many cases, a conversion can still make sense it just depends on the amount of funds selected:
A conversion probably does not make sense at this time.
Additionally, if the estimated conversion taxes are too high (shown in the section labeled "Managing Taxes Due"), you can adjust the Partial Conversion Amount until you find a conversion tax amount that you can afford.
If the total taxes you owe upon conversion are more than you can afford to pay from sources other than your IRA, consider partial conversions over multiple years. Roth conversions can be done every year regardless of income level or filing status, so if a conversion is right for you and the only barrier is the tax payment, investors can achieve an optimal conversion amount through multiple conversions over a several-year period. You can choose to convert any amount, so choose an amount that will generate a tax payment you can afford and tolerate.
Why this matters: Your comfort with risk and the subsequent rate of return from your investment decisions will influence how quickly your investment earnings can make up for any taxes you'll be required to pay if you convert.
Based on your risk tolerance, as well as your asset allocations and expectations for future market performance, select an estimated average rate of return for your investments from now until retirement. The options provided in the drop-down box include estimated average annual returns by risk profile. For details, see "Average Rate of Return" under Calculator Assumptions.