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In 1997, the Roth IRA was introduced. This new IRA allowed for all gains (or growth) to be distributed completely tax-free provided certain requirements are met. Since then, people with incomes under $100,000 have had the option to convert all or a portion of their existing traditional IRAs to Roth IRAs. Starting in 2010, all IRA owners, regardless of income level, will be eligible to convert their traditional IRA to a Roth. Is this a good option for you? A conversion has both advantages and disadvantages that should be carefully considered before you make a decision. This calculator estimates the change in total net-worth, at retirement, if you convert your traditional IRA into a Roth IRA. It also allows you to compare the impact of future Required Minimum Distributions between these accounts for both the owner and their future beneficiaries.
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Definitions
- IRA owner name
- Please enter the IRA owner's name.
- IRA owner birthdate
- Please enter the IRA owner's birthdate.
- IRA owner's age at retirement
- This is the age that the account owner expects to retire. This does not automatically start any distributions, but we begin using the rate of return during retirement when computing investment returns.
- IRA owner's age at death
- Age account owner expects to pass their IRA to beneficiaries, or age you wish future projections to end if beneficiaries are not being projected.
- Amount to convert
- Total amount to convert to a Roth IRA. This amount must be less then or equal to the total of all traditional IRA balances.
- Total of all traditional IRA balances
- Total of all pre-tax IRA balances. This includes SIMPLE, SEP and traditional IRAs. This entry is used to calculate the tax basis of the Roth IRA conversion. If there have not been any non-deductible contributions to any of the IRA balances held by the account owner, this amount can be the same as the amount to convert.
- Non-deductible contributions made to Traditional IRA
- The amount contributed to your traditional IRAs, SEP IRAs and rollover IRAs that was made with an after tax contribution (and for which you received no tax deduction on your tax return for the year it was made). It is important to note that you are not able to "cherry pick" an account with a larger portion of non-deductible contributions. If you are not converting all of your IRAs, including SEP IRAs and rollover IRAs from employer sponsored plans such as a 401(k), your are only able to use a pro-rated amount of the non-deductible balance.
We determine the pro-rated amount by computing the percent of the total current IRA balances (not including any Roth IRAs) that the non-deductible contributions represent. This percentage is then used to determine the portion of the amount to convert that will not be subject to additional income taxes. For details on this computation you may wish to view IRS Form "8606: Nondeductible IRAs" which discusses both non-deductible contributions to traditional IRAs and the tax basis for converting a traditional IRA with non-deductible contributions to a Roth IRA.
- Rate of return before retirement
- This is the expected rate of return on your account before you retire. This is used to project your future account balances (which of course will impact your Roth IRA Conversion with Distributions) before your expected retirement. The actual rate of return is largely dependent on the type of investments you select. For example, from December 1999 to December 2009, the average annual compounded rate of return for the S&P 500 was -0.6%, including reinvestment of dividends. From January 1970 to December 2009, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.1% (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 bank may pay as little as 1% 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 funds and/or investment companies may charge.
- Rate of return after retirement
- This is the expected rate of return on your account after you retire. This is used to project your future account balances (which of course will impact your Roth IRA Conversion with Distributions) after your expected retirement. The actual rate of return is largely dependent on the type of investments you select. For example, from December 1999 to December 2009, the average annual compounded rate of return for the S&P 500 was -0.6%, including reinvestment of dividends. From January 1970 to December 2009, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.1% (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 bank may pay as little as 1% 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 funds and/or investment companies may charge.
- Beneficiary (non-spouse) future rate of return
- Use this field if you expect the rate of return for a non-spouse beneficiary to be different than the rate of return expected in retirement by the account owner.
- Include beneficiary in projections?
This allows you to project balances and RMDs for your potential beneficiaries. Projecting distributions for beneficiaries uses the following assumptions:
With Spouse as First Beneficiary
- The IRA owner names his/her spouse as sole primary beneficiary of the IRA. While alive, for the traditional IRA, the owner begins taking RMD payments at age 70 ˝. For the Roth IRA there is no RMD.
- Upon the death of the IRA owner, the surviving spouse rolls over the funds to his/her own IRA. Any RMD amount from the decreased spouse's traditional IRA cannot be rolled over and must be distributed. The surviving spouse names a new IRA beneficiary, such as children. While alive, for the traditional IRA, the spouse begins taking RMD at age 70 ˝. For the Roth IRA there is no RMD for the spouse.
- Upon the surviving spouse's death, beneficiaries are required to take distributions for both traditional and Roth IRAs. The beneficiaries generally take distributions from the IRA based on the life expectancy of the oldest beneficiary.
With Non-spousal First Beneficiary
- The IRA owner names a beneficiary or beneficiaries of the IRA. While alive, the IRA owner begins taking RMD payments at age 70 ˝, and for the Roth IRA there is no RMD.
- Upon the death of the IRA owner, the beneficiaries are required to take distributions for both traditional and Roth IRAs. The beneficiaries generally take distributions from the IRA based on the life expectancy of the oldest beneficiary.
Projecting future beneficiary distributions is only applicable for individuals who will not need the funds in the IRA for their own retirement needs. The figures created in these projections are hypothetical and based on current and variable assumptions you selected to help illustrate the concept of stretching distributions over as long a period as possible. Many factors could impact actual outcome, such as possible changes to tax laws in the future, the impact of inflation and other risks.
- Is beneficiary a spouse?
- Check this box if your only beneficiary is your spouse. The IRS distribution rules use a uniform lifetime table to calculate all life expectancies for determining a minimum distribution. The only exception to this rule is if the only beneficiary is a spouse and he or she is more than 10 years younger than the account owner. In this situation, the joint life expectancy table is used. The joint life expectancy table normally produces lower required minimum distributions.
We also use this entry to calculate for a spouse's beneficiary life expectancy.
- Beneficiary birthdate
- This is only required if your beneficiary is your spouse or if you are including beneficiaries in your future RMD projections
- Beneficiary name
- Beneficiary's name to appear on the printable report.
- Beneficiary's age at death
- When calculating for the beneficiary RMDs, this is only used when the beneficiary is a spouse to determine when the spouse's beneficiary will receive the IRA.
- Spouse's beneficiary birthdate
- When calculating for the future RMDs and the original beneficiary of the account is a spouse, we use this birthdate to determine the life expectancy of the spouse's beneficiary.
- Pay your conversion tax bill from your IRA?
- Check this box to use your IRA to pay your conversion tax bill. This assumes that when you convert your traditional IRA you keep enough of the proceeds, and pay any taxes or penalty on the amount, to pay any additional income taxes due to the Roth conversion. For the purposes of this analysis, we assume that you do not receive any interest on the withheld amount, even if you delay your tax payments to 2011 and 2012.
- Calculate possible distribution penalty?
- Check this box to calculate a possible penalty if you are paying your conversion tax bill from your IRA. There is a 10% penalty on distributions from a traditional IRA before you are 59 1/2. The penalty would apply to any amount you withhold to pay for income taxes on the conversion. There would also be a 10% penalty on any amounts that you withhold to pay the penalty. There is no penalty if you are over 59 1/2.
- Filing status
- Choose your filing status. Your filing status determines the income levels for your Federal tax bracket. It is also important for calculating your standard deduction, personal exemptions, and deduction phase out incomes. The table below summarizes the five possible filing status choices. It is important to understand that your marital status as of the last day of the year determines your filing status.
| Filing Status for 2010 |
| Married filing jointly | If you are married, you are able to file a joint return with your spouse. If your spouse died during the tax year, you are still able to file a joint return for that year. You may also choose to file separately under the status "Married filing separately". |
| Qualified Widow(er) | Generally, you qualify for this status if your spouse died during the previous tax year (not the current tax year) and you and your spouse filed a joint tax return in the year immediately prior to their death. You are also required to have at least one dependent child or step child whom which you are the primary provider. |
| Single | If you are divorced, legally separated or unmarried as of the last day of the year you should use this status. |
| Head of household | This is the status for unmarried individuals that pay for more than half of the cost to keep up a home. This home needs to be the main home for the income tax filer and at least one qualifying relative. You can also choose this status if you are married, but didn't live with your spouse at anytime during the last six months of the year. You also need to provide more than half of the cost to keep up your home and have at least one dependent child living with you. |
| Married filing separately | If you are married, you have the choice to file separate returns. The filing status for this option is "married filing separately". |
For 2010, the standard deductions are $11,400 for married couples filing jointly (and qualified widow(er)), $5,700 for married couples filing separately and singles, and $8,400 for heads of household. For this calculator, we assume that you use the standard deduction.
- Use 2010 Option to pay conversion taxes in 2011 & 2012
- Check this box to calculate with conversion taxes paid in 2011 and 2012, instead of 2010. This option is only available in 2010, and allows you to add the 1/2 of the conversion amount to your 2011 AGI and 1/2 of the conversion amount to your 2012 AGI. This will delay your tax bill for the conversion, and may provide you with lower a lower marginal tax rate on the conversion. It is important to note, that for high incomes, the top marginal tax rate increases from 35% in 2010 to 39.6% for 2011 and 2012. There may also be the possibility of new and even retroactive income tax increases for 2010, negating this advantage.
- Estimated adjusted gross income (AGI)
- Your adjusted gross income comes from your income tax form (for example, in 2009 this can be found on your 1040 tax from line 37) and is generally your total income minus any adjustments. Adjustments would include items such as IRA deductions, HSA deductions, self-employment tax deductions, alimony paid, etc. This total is before any standard deductions, itemized deductions or any income tax credits.
- Marginal tax rate
- This is the tax rate you would pay if your Adjusted Gross Income increased. This can be different than your current tax bracket. For example, if you are currently in the 28% tax bracket, but your conversion increases your AGI enough so that your income goes into the 33% tax bracket, part of your conversion would be taxed at 28% and part of your conversion would be taxed at 33%. We calculate your marginal tax rate as the effective tax rate for the additional income added to your AGI from your Roth conversions. This takes into account any changes to your income that span multiple tax brackets. We also take into account phase outs of certain tax credits such as the "Make Work Pay" tax credit and the phase-out of standard deductions. You can see the current 2010 tax rates below.
| 10% |
$0 - 16,750 |
$0 - 8,375 |
$0 - $11,950 |
$0 - 8,375 |
| 15% |
$16,751- 68,000 |
$8,376- 34,000 |
$11,951- 45,550 |
$8,376- 34,000 |
| 25% |
$68,001- 137,300 |
$34,001- 82,400 |
$45,551- 117,650 |
$34,001- 68,650 |
| 28% |
$137,301- 209,250 |
$82,401- 171,850 |
$117,651- 190,550 |
$68,651- 104,625 |
| 33% |
$209,251- 373,650 |
$171,851- 373,650 |
$190,551- 373,650 |
$104,626- 186,825 |
| 35% |
over $373,650 |
over $373,650 |
over $373,650 |
over $186,825 |
Source: http://www.irs.gov/pub/irs-drop/rp-09-50.pdf
- Tax rate at retirement
- Expected marginal income tax rate at retirement.
- Investment tax rate
- Expected marginal tax 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.
- Beneficiary (non-spouse) future tax rate
- Expected marginal tax rate for a non-spouse beneficiary. Changing this value will allow you to use different tax rates for beneficiaries. For example, if account owner in retirement has a very low tax rate but prospective beneficiary has a higher tax rate, enter the beneficiary's tax rate in this field.
- Planned annual IRA withdrawal
- Annual after tax amount to withdraw from IRA. For Roth IRA the after tax amount is the same as the actual withdrawal. For the traditional IRA the after tax amount will be calculated using the entered retirement tax rate. If the gross traditional IRA withdrawal (before tax) amount is less than any RMD for the year, the RMD will be used.
The planned annual withdrawals last through the owner's and the spouse's lifetime. We assume no planned withdrawals, other than the RMD, for any non-spouse beneficiary.
- Age to begin withdrawals
- Age to begin the withdrawals. Default age will be the age of retirement, but any age greater than retirement age is acceptable. This allows for time to pass before any funds are withdrawn if other resources are available that can be drawn down first. If an age entered is less than 59 ˝, we assume a 10% penalty on the withdrawal.
- Annual Increase of withdrawal amount
- Allows you to automatically increase the amount taken out each year, once withdrawals begin. This can help plan for potential cost of living increases.
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