Roth IRA Conversion Calculator

Determine if converting Traditional IRA funds to a Roth IRA makes financial sense for your situation. This calculator compares paying taxes now for tax-free growth versus keeping funds in a Traditional IRA, helping you optimize conversion amounts and timing.

Roth IRA Conversion: A Complete Strategic Guide

A Roth IRA conversion involves moving money from a Traditional IRA (or other pre-tax retirement accounts) to a Roth IRA. You pay income taxes on the converted amount now, but gain tax-free growth and tax-free withdrawals in retirement. This guide explores when conversions make sense, how to optimize them, and potential pitfalls to avoid.

How Roth Conversions Work

When you convert Traditional IRA funds to a Roth IRA:

1. Tax Event: The converted amount is added to your taxable income for the year
2. No 10% Penalty: Conversion is not an early withdrawal (but withdrawing converted funds within 5 years may trigger penalties)
3. Future Tax-Free: Converted funds grow tax-free; qualified withdrawals are tax-free
4. No RMDs: Roth IRAs have no Required Minimum Distributions during your lifetime

The Core Trade-Off

The fundamental question is: Is it better to pay taxes now at your current rate, or later at your retirement rate?

The Break-Even Analysis

To properly compare, you must account for the tax payment. The comparison is:

Where r is annual return, n is years until withdrawal, and t_ret is retirement tax rate.

Critical Factor: Where Do You Pay Taxes From?

This is often overlooked but dramatically affects the analysis:

Scenario A: Pay Taxes from Non-Retirement Funds

This is the ideal approach. You preserve the full conversion amount in tax-free growth.

• $50,000 converts to Roth (full amount)
• $12,000 tax paid from savings/brokerage
• Full $50,000 grows tax-free

Scenario B: Pay Taxes from Converted Amount

This reduces the Roth benefit significantly:

• $50,000 comes from Traditional IRA
• $12,000 (24%) goes to taxes
• Only $38,000 ends up in Roth

Scenario B is essentially withdrawing funds early, which is rarely optimal.

When Roth Conversions Make the Most Sense

1. Low-Income Years

Periods with unusually low income create "tax arbitrage" opportunities:

• Early retirement before Social Security starts
• Gap years between jobs
• Sabbaticals or reduced work years
• Business losses offsetting income

2. Large Traditional IRA Balances

Big Traditional balances create problems:

• Large RMDs push you into higher brackets
• Can cause Social Security taxation
• May trigger IRMAA Medicare surcharges

3. Expectation of Higher Future Taxes

If you believe tax rates will rise (personally or nationally), converting now locks in current rates.

4. Long Time Horizon

More years of tax-free growth = greater benefit. Younger converters or those planning for heirs benefit most.

5. Estate Planning Goals

Roth IRAs are powerful estate planning tools:

• No RMDs during your lifetime = more to pass on
• Heirs inherit tax-free (though SECURE Act requires 10-year withdrawal)
• You pay the taxes, not your heirs

When to Avoid Conversions

• Peak earning years: You're already in your highest tax bracket
• Need the money soon: 5-year rule on converted funds
• Will be in lower bracket in retirement: Classic scenario where Traditional wins
• Would push into higher bracket: Conversion bumps you from 22% to 32%
• No outside funds for taxes: Paying from conversion itself is usually suboptimal

The "Fill the Bracket" Strategy

One of the most effective conversion approaches is filling lower tax brackets each year:

Example: Your income is $60,000. You could convert up to $40,525 and stay in the 22% bracket, rather than converting $100,000 and pushing into the 32% bracket.

Multi-Year Conversion Planning

Rather than one large conversion, spreading over multiple years can:

• Keep you in lower brackets each year
• Avoid ACA subsidy cliffs (if on marketplace insurance)
• Prevent Medicare IRMAA surcharges
• Manage state tax exposure

Impact on Other Tax Situations

Social Security Taxation

Roth conversions count as income and can cause more Social Security benefits to become taxable. However, reducing future RMDs can decrease future SS taxation.

Medicare IRMAA

High-income years trigger Medicare Part B and D premium surcharges. 2024 thresholds:

• Single: IRMAA kicks in at $103,000 MAGI
• MFJ: IRMAA kicks in at $206,000 MAGI

ACA Premium Subsidies

If you're on marketplace insurance, conversion income can reduce or eliminate subsidies—potentially costing thousands.

The 5-Year Rules (Yes, There Are Two)

5-Year Rule #1: Converted Funds

Each conversion has its own 5-year clock. Withdrawing converted amounts before 5 years (and before age 59½) triggers a 10% penalty on the converted amount.

5-Year Rule #2: Earnings

To withdraw earnings tax-free, your first Roth contribution or conversion must have been at least 5 years ago AND you must be 59½+.

Roth Conversion Ladder Strategy

Early retirees use this to access retirement funds before 59½:

1. Convert Traditional IRA funds each year
2. Wait 5 years per conversion
3. Withdraw that year's conversion tax and penalty-free
4. Repeat to create ongoing income stream

Tax Planning Around Conversions

Strategies to Reduce Conversion Tax Cost

• Bunch deductions: Itemize in conversion year, standard deduction other years
• Charitable giving: Bunch donations in conversion year or use DAF
• Harvest losses: Use capital losses to offset conversion income
• Time business income: Defer income to next year if possible

Worked Example

Situation: Mark, age 55, has $500,000 in a Traditional IRA. He's in the 24% bracket now and expects 22% in retirement at 65.

Single Large Conversion:

• $500,000 conversion pushes him into 37% bracket
• Average tax rate on conversion: ~30%
• Tax cost: $150,000

10-Year Conversion Ladder:

• $50,000/year conversions
• Stays in 24% bracket
• Tax cost: $12,000/year × 10 = $120,000 total
• Savings: $30,000 vs. single conversion

State Tax Considerations

State taxes add complexity:

• No income tax states: AK, FL, NV, NH (limited), SD, TN (limited), TX, WA, WY
• Moving strategy: Convert in a no-tax state year, retire elsewhere
• High-tax states: CA (13.3%), NJ (10.75%), NY (10.9%) make conversions more expensive

Pro Rata Rule Warning

If you have pre-tax AND after-tax contributions in Traditional IRAs, the pro-rata rule applies. You cannot convert only the after-tax portion—each conversion is proportionally taxable.

Workaround: Roll pre-tax funds into a 401(k) first, then convert after-tax funds to Roth.

Frequently Asked Questions

Can I undo a Roth conversion?

No. "Recharacterization" of conversions was eliminated by the Tax Cuts and Jobs Act of 2017. Conversions are permanent.

Is there a limit on how much I can convert?

No limit on conversions (unlike annual Roth IRA contributions, which have income limits).

Can I convert a 401(k) directly to Roth?

Only if you've left that employer. Otherwise, roll to Traditional IRA first, then convert. Some 401(k)s allow in-plan Roth conversions.

Do conversions count toward my Roth contribution limit?

No. Conversions and contributions are separate. You can contribute and convert in the same year.

What if I'm over the Roth IRA income limit?

Conversions have no income limits. This enables the "Backdoor Roth"—contribute to Traditional IRA, then immediately convert to Roth.

Key Takeaways

1. Compare current vs. future tax rates—convert when rates are lower
2. Pay conversion taxes from non-retirement funds if possible
3. "Fill the bracket" rather than one large conversion
4. Consider multi-year conversion strategies
5. Watch out for ACA, IRMAA, and Social Security tax impacts
6. Understand both 5-year rules
7. Conversions are permanent—plan carefully

A Roth conversion can be one of the most impactful retirement planning moves available, but it requires careful analysis of your complete tax picture. Use this calculator as a starting point, and consider consulting a tax professional for complex situations.