Roth IRA Conversion Calculator
Don't let a surprise tax bill derail your retirement. Calculate the true cost and potential savings of a Roth IRA conversion instantly.
Should You Convert to a Roth IRA?
- Estimate your upfront tax liability.
- Find your break-even point.
- Compare Roth vs. Traditional net worth.
What Is a Roth Conversion?
A Roth IRA conversion is the process of moving funds from a pre-tax retirement account—like a Traditional IRA—into a post-tax Roth IRA. This requires you to pay income taxes on the converted amount in the year of the conversion. In exchange, the funds grow tax-free, and qualified withdrawals in retirement are entirely tax-free.
The Trade-Off: Taxes Now vs. Taxes Later
The primary strategic value of a Roth conversion is locking in current tax rates to avoid potentially higher rates in the future. It also eliminates Required Minimum Distributions (RMDs) during your lifetime and allows for tax-free inheritance for your heirs. The risk, however, lies in paying taxes now; if your tax rate drops significantly in retirement or your time horizon is short, you may end up paying more upfront than you save later.
- Pros: Tax-free growth and withdrawals; No RMDs; Tax-free inheritance.
- Cons: Upfront tax bill; No immediate deduction; Irreversible (no recharacterization).
Key Factors in Your Conversion
To accurately estimate the benefit, you must understand the inputs required for the calculator.
Current vs. Future Tax Rates
The Marginal Tax Rate determines your immediate conversion cost. Because the U.S. uses a progressive tax system, a large conversion can "bump" income into higher brackets. The calculator compares this against your assumed Future Tax Rate (effective rate in retirement) to determine if you save money over time.
The Power of Time
Your investment horizon acts as a multiplier. The longer your money has to compound within the Roth tax-free, the faster you overcome the initial tax cost. A longer time horizon generally favors conversion, while a short horizon increases risk.
How We Calculate Your Roth Conversion Benefit
We ensure transparency by comparing two hypothetical portfolios side-by-side over 20+ years: one paying taxes upfront (Roth) and one paying taxes later (Traditional).
The Break-Even Formula
Years to Break-Even ≈ ln(TaxFuture / TaxCurrent) / ln(1 + r)
Where:
- TaxFuture: Estimated effective tax rate in retirement.
- TaxCurrent: Marginal tax rate paid on the conversion.
- r: Annual investment return rate.
Projecting Net Worth
The calculator assumes you pay the tax bill from cash savings (outside the IRA). This maximizes the investment principal and allows for a true "apples-to-apples" comparison of after-tax wealth accumulation.
How to Use This Calculator
Finding Your Marginal Rate
Follow these steps to ensure accurate data entry:
- Check your latest tax return (IRS Form 1040) for "Taxable Income" to find your current bracket.
- Estimate your retirement income to guess your future effective tax rate.
- Input your expected annual portfolio return (7% is a standard conservative estimate).
Tip: Use the "Presets" to see common scenarios (e.g., "Pre-Retirement").
Interpreting Your Results
Actionable advice based on your calculated break-even period.
Immediate - 5 Years (Excellent)
You recover tax costs very quickly. This is a strong candidate if you have the cash on hand to pay the tax bill.
5 - 10 Years (Good)
A standard recovery period for moderate growth. Proceed if you expect tax rates to stay stable or rise.
10 - 15 Years (Moderate)
You are betting on a long time horizon. Only recommended if you are young or very bullish on market performance.
15+ Years (Poor / High Risk)
It takes decades to break even. Market volatility or changes to tax law could easily wipe out the projected benefit.
Understanding Net Benefit
If your Current Rate is higher than your Future Rate, you are paying a premium now. In this case, only convert for non-financial benefits like avoiding RMDs or for inheritance planning.
Roth vs. Traditional IRA: A Comparison
| Feature | Roth IRA | Traditional IRA |
|---|---|---|
| Contributions | After-tax (No deduction) | Pre-tax (Tax deductible) |
| Withdrawals | Tax-Free | Taxable as Income |
| RMDs | None | Yes (Starting at 73/75) |
Use the calculator to see how these rules translate to dollars.
Hidden Variables That Impact Your Decision
The "Bump" Effect
A large conversion increases your Adjusted Gross Income (AGI). This "proportional bump" can push ordinary income into higher tax brackets (e.g., jumping from 22% to 24%). Always check the marginal impact before converting a large sum.
Medicare Surcharges
Higher AGI can trigger the Income Related Monthly Adjustment Amount (IRMAA), significantly increasing your Medicare Part B and D premiums. Additionally, added income from a conversion may cause up to 85% of your Social Security benefits to become taxable.
Some states do not conform to federal Roth rules and may tax conversions differently (e.g., NJ, PA). Check your state tax laws before converting.
When to Use This Calculator
Scenario A: The "Low Income" Year
You work part-time or have large deductions. Convert just enough to fill up the lowest tax brackets (e.g., 12% or 22%) without paying the top marginal rates.
Scenario B: Early Retirement Gap Years
Between retirement (age 60) and RMDs (age 73), your income drops significantly. Use these "gap years" to convert funds at low rates before RMDs force you into higher brackets.
Scenario C: Inheritance Planning
You intend to leave assets to heirs in high tax brackets. Converting now allows the funds to grow tax-free for them, removing the future tax burden.
Calculator Limitations & Disclaimer
Common Mistakes to Avoid
Remember that recharacterization (undoing a conversion) is banned since 2018. Once converted, the transaction is final. Also, converted funds must stay in the Roth for 5 years (or until age 59½) to avoid penalties.
Accuracy Note: This tool assumes constant tax rates and market returns. Real-world volatility and legislative changes may impact actual results.
Frequently Asked Questions About Roth Conversions
Sources & Further Reading
- IRS Publication 590-A: Contributions to IRAs
- IRS Publication 590-B: Distributions from IRAs
- FINRA Investor Alert: "Roth IRAs and Conversions"