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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. 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.
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Definitions
- Amount to convert
- Amount to convert from a Traditional IRA account to a Roth IRA. It is important to note that in 2009, some high income households do not qualify for a Roth IRA conversion. In 2009 anyone with an adjusted gross income over $100,000 cannot make a Roth IRA conversion. In 2010 and beyond there is no inome limit for a ROTH Conversion. For the purposes of this calculator, we assume that your income does not limit your ability to convert to a Roth IRA.
We also assume that you are paying any taxes owed with funds that you have available outside of the IRA you are converting. If you are under 59 1/2, the IRS treats any money not directly transferred to the new Roth IRA as an early withdrawal - even if that money is used to pay the tax bill caused by the conversion. If you do not have adequate funds outside of your IRA to pay the tax liability on a conversion, you probably should not consider converting your Traditional IRA to a Roth IRA.
- Non-deductible contributions
- The amount contributed to your Traditional IRAs, SEP IRAs and rollover IRAs 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 if 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.
- 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. Below are the resulting tax rates and income ranges for 2009:
| 10% |
$0 - 16,700 |
$0 - 8,350 |
$0 - $11,950 |
$0 - 8,350 |
| 15% |
$16,701- 67,900 |
$8,351- 33,950 |
$11,951- 45,500 |
$8,351- 33,950 |
| 25% |
$67,901- 137,050 |
$33,951- 82,250 |
$45,501- 117,450 |
$33,951- 68,525 |
| 28% |
$137,051- 208,850 |
$82,251- 171,550 |
$117,451- 190,200 |
$68,526- 104,425 |
| 33% |
$208,851- 372,950 |
$171,551- 372,950 |
$190,200- 372,950 |
$104,425- 186,475 |
| 35% |
over $372,950 |
over $372,950 |
over $372,950 |
over $186,475 |
Source: http://www.irs.gov/pub/irs-drop/rp-08-66.pdf
- Use 2010 Option to delay tax payments
- Check this box to use the 2010 option to delay your Roth Conversion tax payments to 2011 and 2012. This option is only available for conversions that take place in 2010, this is not available for conversions that take place in 2009. When this box is checked, no taxes are due for the conversion in 2010. In both 2011 and 2012, one half of your converted amount will be added to your income and subject to income tax.
- 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 divdends.
- Current age
- Current age.
- 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 type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com). During this period, the highest 12-month return was 61%, from June 1982 through June 1983. The lowest 12-month return was -39%, which happened twice, once from September 1973 to September 1974 and again from November 2007 to November 2008. 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.
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