Use this calculator to estimate the tax implications and potential long-term benefits of converting a portion or all of your traditional 401k balance to a Roth IRA. This can help you decide if paying taxes now is better than paying them in retirement.
Conversion Results:
Understanding the 401k to Roth Conversion
A 401k to Roth conversion, often referred to as a "Roth conversion" or "backdoor Roth," involves moving funds from a traditional pre-tax 401k account into a Roth IRA. The primary benefit of a Roth IRA is that qualified withdrawals in retirement are completely tax-free. However, the catch is that you must pay income taxes on the converted amount in the year the conversion takes place.
Why Consider a Roth Conversion?
Anticipated Higher Future Tax Rates: If you believe your income tax bracket will be higher in retirement than it is today, converting now allows you to pay taxes at a lower rate.
Tax-Free Growth and Withdrawals: Once funds are in a Roth IRA, they grow tax-free, and all qualified withdrawals in retirement are also tax-free. This provides predictable, tax-free income in your golden years.
No Required Minimum Distributions (RMDs): Unlike traditional IRAs and 401ks, Roth IRAs do not have RMDs for the original owner. This offers greater flexibility in managing your retirement income and estate planning.
Estate Planning Benefits: Roth IRAs can be a powerful tool for leaving a tax-free inheritance to your beneficiaries.
Key Factors to Consider:
Your Current Tax Bracket: The higher your current tax bracket, the more expensive the conversion will be upfront.
Your Estimated Future Tax Bracket: If you expect to be in a significantly lower tax bracket in retirement, a conversion might not be as beneficial. Conversely, if you expect higher future tax rates, it's more attractive.
Years Until Retirement: The longer your money has to grow tax-free in the Roth account, the greater the potential benefit.
Source of Tax Payment: Ideally, you should pay the conversion taxes from funds outside your retirement accounts. Paying taxes from the converted amount reduces the amount that can grow tax-free.
Investment Growth Rate: A higher growth rate amplifies the benefit of tax-free growth.
How This Calculator Works:
This calculator helps you compare two scenarios:
Scenario 1: Roth Conversion. It calculates the immediate tax hit on the converted amount, the net amount that goes into the Roth, and its projected tax-free value at retirement.
Scenario 2: No Conversion. It estimates the future value of your traditional 401k if you leave the funds there, and then calculates its net value after an estimated future tax withdrawal.
By comparing the projected tax-free Roth value with the projected after-tax traditional 401k value, the calculator provides an estimate of the potential benefit (or cost) of performing the Roth conversion.
Example Calculation:
Let's say you want to convert $50,000 from your 401k. Your current tax bracket is 24%, and you estimate your retirement tax bracket will be 12%. You have 20 years until retirement, and you expect an average annual growth rate of 7%.
Tax on Conversion: $50,000 * 24% = $12,000
Initial Roth Balance: $50,000 – $12,000 = $38,000
Projected Roth Value at Retirement (tax-free): $38,000 * (1 + 0.07)^20 ≈ $147,000
Projected Traditional 401k Value (if not converted, pre-tax): $50,000 * (1 + 0.07)^20 ≈ $192,000
Projected Traditional 401k Value (if not converted, after 12% tax): $192,000 * (1 – 0.12) ≈ $169,000
Benefit of Roth Conversion: $147,000 (Roth) – $169,000 (Traditional after tax) = -$22,000. In this specific example, if your future tax bracket is significantly lower, not converting might be better.
This example highlights that the decision is highly dependent on your individual tax situation and future expectations. Use the calculator with your own numbers to get a personalized estimate.
Disclaimer: This calculator provides estimates for informational purposes only and should not be considered financial or tax advice. Tax laws are complex and can change. Consult with a qualified financial advisor or tax professional before making any decisions regarding your retirement accounts.
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function calculateRothConversion() {
var current401kBalance = parseFloat(document.getElementById("current401kBalance").value);
var currentTaxBracket = parseFloat(document.getElementById("currentTaxBracket").value) / 100;
var futureTaxBracket = parseFloat(document.getElementById("futureTaxBracket").value) / 100;
var yearsToRetirement = parseInt(document.getElementById("yearsToRetirement").value);
var annualGrowthRate = parseFloat(document.getElementById("annualGrowthRate").value) / 100;
// Input validation
if (isNaN(current401kBalance) || current401kBalance < 0) {
alert("Please enter a valid amount to convert from 401k.");
return;
}
if (isNaN(currentTaxBracket) || currentTaxBracket 1) {
alert("Please enter a valid current income tax bracket (0-100%).");
return;
}
if (isNaN(futureTaxBracket) || futureTaxBracket 1) {
alert("Please enter a valid estimated future retirement tax bracket (0-100%).");
return;
}
if (isNaN(yearsToRetirement) || yearsToRetirement < 1) {
alert("Please enter a valid number of years until retirement (at least 1).");
return;
}
if (isNaN(annualGrowthRate) || annualGrowthRate < 0) {
alert("Please enter a valid annual investment growth rate.");
return;
}
// Scenario 1: Roth Conversion
var conversionTax = current401kBalance * currentTaxBracket;
var initialRothBalance = current401kBalance – conversionTax;
var projectedRothValue = initialRothBalance * Math.pow((1 + annualGrowthRate), yearsToRetirement);
// Scenario 2: No Conversion (Traditional 401k)
var projectedTraditionalValuePreTax = current401kBalance * Math.pow((1 + annualGrowthRate), yearsToRetirement);
var projectedTraditionalValueAfterTax = projectedTraditionalValuePreTax * (1 – futureTaxBracket);
// Comparison
var rothBenefit = projectedRothValue – projectedTraditionalValueAfterTax;
// Display Results
document.getElementById("conversionTax").innerHTML = "Estimated Tax Paid on Conversion: $" + conversionTax.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 });
document.getElementById("initialRothBalance").innerHTML = "Net Amount Converted to Roth IRA: $" + initialRothBalance.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 });
document.getElementById("projectedRothValue").innerHTML = "Projected Roth IRA Value at Retirement (Tax-Free): $" + projectedRothValue.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 });
document.getElementById("projectedTraditionalValuePreTax").innerHTML = "Projected Traditional 401k Value at Retirement (Pre-Tax, if not converted): $" + projectedTraditionalValuePreTax.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 });
document.getElementById("projectedTraditionalValueAfterTax").innerHTML = "Projected Traditional 401k Value at Retirement (After Estimated Future Tax, if not converted): $" + projectedTraditionalValueAfterTax.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 });
var benefitText = "";
if (rothBenefit >= 0) {
benefitText = "Potential Benefit of Roth Conversion: $" + rothBenefit.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + " (More money in your pocket)";
} else {
benefitText = "Potential Cost of Roth Conversion: $" + Math.abs(rothBenefit).toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + " (Less money in your pocket)";
}
document.getElementById("rothBenefit").innerHTML = benefitText;
}