Why Consider a Roth Conversion?

Moving money from a traditional individual retirement account into a Roth IRA is called a Roth conversion. Traditional IRAs are funded with pre‑tax dollars, so withdrawals in retirement are taxed as ordinary income. Roth IRAs operate in the opposite manner: contributions are made with after‑tax dollars, yet qualified withdrawals are completely tax‑free. People pursue conversions when they expect their future tax rate to be higher than it is today, when they want to avoid required minimum distributions, or when they hope to leave tax‑free assets to heirs. A conversion shifts the tax burden to the year of the transaction, and it can dramatically change the long‑term growth of a portfolio.

The trade‑off is the immediate tax bill. Converting adds the converted amount to your taxable income for the year. For example, moving $60,000 from a traditional IRA to a Roth when you are in the 22 percent bracket creates a tax liability of $13,200. That cost may be justified if the funds can grow without future taxation, but it requires careful planning and often a multiyear strategy to avoid jumping into a higher bracket.

What This Calculator Does

This tool estimates the up‑front taxes due and compares the after‑tax value of two scenarios: converting the balance now or leaving the funds in the traditional account and paying taxes later. The core tax equation is:

$T=BR$, where $B$ is the amount converted and $R$ is the marginal tax rate expressed as a decimal.

To project growth, the calculator compounds the account for the chosen number of years using

$$F=P{(}^{1}y$$, where $P$ is the starting principal, $g$ is the annual growth rate, and $y$ represents the number of years the money remains invested. The tool then compares the future values after accounting for taxes in each case.

Breaking Down the Inputs

Traditional IRA Balance: The dollars you plan to convert. Partial conversions are common; you may enter any portion of your account. Marginal Tax Rate: Your current top tax rate. Conversions are taxed as ordinary income, so knowing your bracket is essential. Expected Annual Growth: An estimate of how fast you expect the investments to grow each year. Historical stock returns range around seven percent after inflation, but you may choose a conservative number if your portfolio is bond‑heavy. Years Until Retirement: The number of years the funds will compound before you start withdrawals.

The checkbox labelled “Pay taxes from IRA balance” determines whether the tax owed is subtracted from the converted amount or paid with outside funds. Paying taxes from other savings allows the full balance to enter the Roth, but it assumes you have liquid assets available. Paying from the IRA reduces the amount converted but may be necessary if cash is tight.

Paying Taxes Now or Later

If you keep the funds in the traditional IRA, they continue to grow tax‑deferred. When you eventually withdraw them, the entire balance is taxed at the future rate. The calculator assumes the tax rate at retirement is the same as your current rate and computes the after‑tax value as $F{(}^{1}y\times (1-R)$. For the conversion scenario, the account grows after paying the tax today, and future withdrawals are tax‑free.

This after‑tax comparison is crucial. Many simple calculators look only at pre‑tax balances, which can misleadingly favor keeping money in a traditional IRA. By subtracting the projected taxes on the traditional account, this tool offers a clearer picture of what you might actually spend in retirement.

Worked Example

Imagine you have $100,000 in a traditional IRA, you expect a seven percent annual return, and you plan to retire in twenty years. Your marginal tax rate today and at retirement is 24 percent. Converting the entire balance today produces a tax bill of $24,000. If you pay the tax from other savings, the full $100,000 grows inside the Roth to about $386,000, all tax‑free. If you leave the money in the traditional IRA, it also grows to $386,000, but withdrawing it requires paying roughly $92,640 in tax, leaving you with about $293,000 after tax. The conversion in this case increases your after‑tax retirement funds by approximately $93,000, though you had to pay $24,000 upfront.

If instead you paid the tax from the IRA itself, only $76,000 would move into the Roth. Compounded for twenty years, that balance would reach about $293,000, equal to the after‑tax amount from keeping the traditional account. This example shows why the source of the tax payment matters: using outside funds can amplify the benefit of a conversion.

Time Horizon and Break‑Even Analysis

The longer the money remains invested, the more a conversion has time to work in your favor. Short horizons, such as fewer than five years, rarely justify paying the upfront tax. In the example above, if the investment horizon were only five years, the Roth would grow to about $140,000 while the after‑tax value of the traditional IRA would be roughly $106,000. The advantage shrinks considerably, and if markets underperform, the conversion could even result in less money.

Some investors perform partial conversions over several years to stay within a desired tax bracket. This so‑called “filling up the bracket” strategy smooths out taxes and takes advantage of annual standard deductions. The calculator can model each year’s conversion separately by adjusting the balance and years until retirement.

Additional Considerations

Required Minimum Distributions (RMDs): Traditional IRAs mandate withdrawals starting at age 73 under current law. Converting to a Roth before that age can reduce or eliminate future RMDs, allowing your investments to continue compounding undisturbed. Estate Planning: Roth IRAs can be bequeathed to heirs, who then enjoy tax‑free withdrawals subject to their own distribution rules. Five‑Year Rule: Each conversion amount must sit in the Roth for five tax years before its earnings can be withdrawn tax‑free, even if you are over 59½. Plan conversions early enough to meet this requirement.

Also consider the impact on Social Security taxation, Medicare premiums, and other means‑tested benefits. A large conversion can temporarily raise your income, potentially increasing costs or reducing eligibility for certain programs. Spreading conversions over multiple years may mitigate these side effects.

Limitations of the Model

The calculator assumes a constant rate of return and a constant tax rate, yet real life rarely follows a steady path. Investment returns fluctuate, and future tax laws may change. The tool also ignores state income taxes, which can significantly alter outcomes, especially in states with high tax rates. When paying taxes from outside funds, the calculator does not account for the lost opportunity cost of those dollars. If the money used to pay taxes could have been invested elsewhere, the true benefit of the conversion narrows.

Nonetheless, by providing an after‑tax comparison and a clear statement of the upfront cost, this calculator offers a grounded starting point for your decision. Use it to experiment with different growth rates, tax rates, and time horizons. Record several scenarios and discuss them with a financial or tax adviser who understands your broader goals.

How to Use the Results

The output summarizes the conversion tax, the projected value of a Roth after conversion, the projected after‑tax value of keeping the traditional account, and the difference between the two. A positive difference suggests that converting yields more spendable money at retirement under the assumptions provided. A negative difference indicates the conversion might not be worthwhile. Copy the results with the provided button to keep notes for future planning or to share with a financial professional.

Step-by-Step Guide to Running Scenarios

1. Collect recent statements: Note your current IRA balance and your marginal federal and state tax rates. Having a recent pay stub or tax return handy ensures you enter accurate figures.
2. Estimate growth and timeline: Decide how aggressively the funds might grow and how many years remain until you expect to start withdrawals. You can run the calculator multiple times with different growth rates to test optimistic and conservative outlooks.
3. Choose tax payment source: Decide whether taxes will be paid from the IRA itself or from other savings. Checking the “Pay taxes from IRA balance” box shows the effect of surrendering part of the account to cover the bill.
4. Review the summary: After pressing the calculate button, read the comparison carefully. If the Roth future value exceeds the after‑tax traditional amount by a comfortable margin and you can afford the upfront tax, a conversion may be attractive.
5. Adjust and iterate: Change one input at a time—perhaps the tax rate or the years until retirement—to see how sensitive the outcome is. This iterative approach reveals which factors matter most for your situation.

Timing and Strategy Ideas

Many investors wonder when the “right” moment is to convert. One common approach is to target years with unusually low income, such as a sabbatical, a gap between jobs, or the early years of retirement before Social Security or pension payments begin. Lower income can place you in a reduced tax bracket, making the conversion more affordable. Another strategy is to convert during market downturns, when account balances have temporarily fallen. Paying tax on a depressed balance means more shares can rebound tax‑free inside the Roth when markets recover. Finally, consider spreading conversions over several years to avoid bracket creep. Doing smaller conversions annually can prevent pushing yourself into a higher marginal rate and allows you to take advantage of yearly tax deductions and credits.

Frequently Asked Questions

Does a conversion still make sense if I plan to retire soon? It depends on your expected withdrawals. If retirement is only a few years away, the investment has little time to compound, reducing the benefit of paying tax upfront. However, even late conversions can be useful for eliminating required distributions or for estate planning purposes, especially if heirs are in higher tax brackets.

Can I undo a Roth conversion? Reversing a conversion—called a recharacterization—was once allowed but is no longer permitted for conversions performed after 2017. Once you convert and pay the tax, the transaction is permanent, so run several scenarios before committing.

What about state income taxes? This calculator focuses on federal taxes. If you live in a state with income tax, you should include that rate in your analysis. Converting while residing in a no‑tax state or after moving to one can enhance the benefit of the strategy.

Disclaimer

This calculator is an educational tool and not personalized financial or tax advice. The model simplifies many aspects of the tax code and ignores certain variables, such as potential state taxes, future legislative changes, and the opportunity cost of paying taxes with outside funds. Always consult a qualified financial planner or tax professional before executing a conversion, especially for large balances or when complex factors like Social Security taxation, Medicare premiums, or estate goals are involved.

Roth conversions can be powerful tools for managing lifetime taxes and building flexible retirement income. By carefully modeling the costs and benefits—and by revisiting the analysis as tax laws and personal circumstances evolve—you can make informed choices that align with your financial priorities.