401k to Roth 401k Conversion Calculator
Use this calculator to estimate the tax implications and potential future value of converting a portion or all of your traditional 401k balance to a Roth 401k through an in-plan Roth rollover.
Conversion Analysis:
"; resultHTML += "Estimated Tax Due on Conversion: " + formatter.format(taxOnConversion) + ""; resultHTML += "Net Amount Converted to Roth (after tax): " + formatter.format(netRothConversion) + ""; resultHTML += "Projected Future Value of Roth 401k (Tax-Free): " + formatter.format(futureRothValue) + ""; resultHTML += "Projected Future Value if Left in Traditional 401k (Pre-Tax): " + formatter.format(futureTraditionalPreTax) + ""; resultHTML += "Projected Net After-Tax Value if Left in Traditional 401k: " + formatter.format(futureTraditionalAfterTax) + ""; resultHTML += "Recommendation:
"; if (futureRothValue > futureTraditionalAfterTax) { resultHTML += "Based on these projections, converting to a Roth 401k appears to be the more advantageous option, potentially yielding " + formatter.format(futureRothValue – futureTraditionalAfterTax) + " more in after-tax dollars."; resultHTML += "This suggests that paying taxes now at your current rate may be better than paying taxes in retirement at your expected future rate."; } else if (futureTraditionalAfterTax > futureRothValue) { resultHTML += "Based on these projections, keeping your funds in a Traditional 401k appears to be the more advantageous option, potentially yielding " + formatter.format(futureTraditionalAfterTax – futureRothValue) + " more in after-tax dollars."; resultHTML += "This suggests that deferring taxes until retirement may be better than paying taxes now at your current rate."; } else { resultHTML += "Based on these projections, both options yield a similar after-tax value. Other factors may influence your decision."; } resultHTML += "Note: This is an estimation. Consult a financial advisor for personalized advice. Tax laws can change."; document.getElementById("conversionResult").innerHTML = resultHTML; } .calculator-container { background-color: #f9f9f9; border: 1px solid #ddd; padding: 20px; border-radius: 8px; max-width: 600px; margin: 20px auto; font-family: Arial, sans-serif; } .calculator-container h2 { color: #333; text-align: center; margin-bottom: 20px; } .calc-input-group { margin-bottom: 15px; } .calc-input-group label { display: block; margin-bottom: 5px; font-weight: bold; color: #555; } .calc-input-group input[type="number"] { width: calc(100% – 22px); padding: 10px; border: 1px solid #ccc; border-radius: 4px; box-sizing: border-box; } button { background-color: #007bff; color: white; padding: 12px 20px; border: none; border-radius: 4px; cursor: pointer; font-size: 16px; width: 100%; margin-top: 10px; } button:hover { background-color: #0056b3; } .calc-result { margin-top: 20px; padding: 15px; border: 1px solid #e0e0e0; border-radius: 4px; background-color: #eaf6ff; color: #333; } .calc-result h3, .calc-result h4 { color: #007bff; margin-top: 0; } .calc-result p { margin-bottom: 8px; line-height: 1.5; } .calc-result strong { color: #333; } .disclaimer { font-size: 0.9em; color: #777; margin-top: 15px; }Understanding the 401k to Roth 401k Conversion
Deciding whether to convert funds from a traditional 401k to a Roth 401k is a significant financial planning decision that can have long-term tax implications. This calculator helps you analyze the potential outcomes based on your current financial situation and future expectations.
What is a Traditional 401k?
A traditional 401k is an employer-sponsored retirement plan where contributions are typically made on a pre-tax basis. This means your contributions reduce your taxable income in the year they are made. Your investments grow tax-deferred, and you don't pay taxes on the earnings until you withdraw the money in retirement. At that point, both your contributions and earnings are taxed as ordinary income.
What is a Roth 401k?
A Roth 401k is also an employer-sponsored retirement plan, but it operates on an "after-tax" basis. Contributions are made with money you've already paid taxes on, meaning they do not reduce your current taxable income. The significant advantage of a Roth 401k is that your qualified withdrawals in retirement—including all earnings—are completely tax-free. This can be incredibly valuable if you expect to be in a higher tax bracket during retirement than you are today.
The Conversion (In-Plan Roth Rollover)
An "in-plan Roth rollover" or conversion allows you to move funds from your traditional 401k to a Roth 401k within the same employer plan, provided your plan offers this feature. The critical aspect of this conversion is that the amount you convert from your traditional 401k becomes taxable income in the year of the conversion. You will pay ordinary income tax on the entire converted amount (contributions and earnings) at your current income tax rate.
Why Consider a Conversion?
The primary reason to consider converting to a Roth 401k is if you believe your income tax rate will be higher in retirement than it is today. By paying taxes now at a potentially lower rate, you lock in tax-free withdrawals in the future. This can be particularly appealing for:
- Individuals currently in a lower tax bracket than they anticipate being in retirement.
- Those who want to diversify their retirement income streams (some taxable, some tax-free).
- People who want to leave a tax-free inheritance to their beneficiaries.
Factors to Consider Before Converting:
- Current vs. Future Tax Rates: This is the most crucial factor. If your current tax rate is significantly lower than your expected retirement tax rate, a Roth conversion might be beneficial.
- Time Horizon: The longer your money has to grow tax-free in the Roth account, the more beneficial the conversion can be.
- Ability to Pay Taxes: You must have sufficient funds outside your 401k to pay the taxes due on the conversion. Using funds from the 401k itself to pay taxes reduces the amount that can grow tax-free.
- Impact on Current Income: A large conversion can push you into a higher tax bracket for the conversion year, increasing your overall tax liability.
- Employer Plan Rules: Not all 401k plans offer in-plan Roth rollovers. Check with your plan administrator.
How to Use the Calculator:
Enter your current traditional 401k balance, your current and expected future federal and state income tax brackets, the number of years until you plan to retire, and your expected annual investment growth rate. The calculator will then estimate:
- The immediate tax cost of the conversion.
- The projected after-tax value of your funds if converted to a Roth 401k.
- The projected after-tax value if your funds remain in a traditional 401k.
This comparison will help you understand which option might provide a greater after-tax retirement nest egg.
Example Scenario:
Let's say you have a $100,000 traditional 401k balance. You are currently in the 24% federal tax bracket and have no state income tax. You expect to be in the 15% federal tax bracket in retirement. You have 20 years until retirement and anticipate an annual growth rate of 7%.
- Tax on Conversion: $100,000 * 24% = $24,000.
- Net Roth Conversion: $100,000 – $24,000 = $76,000.
- Projected Future Roth Value (Tax-Free): $76,000 * (1 + 0.07)^20 ≈ $294,190.
- Projected Future Traditional Value (Pre-Tax): $100,000 * (1 + 0.07)^20 ≈ $386,968.
- Projected Future Traditional Value (After-Tax): $386,968 * (1 – 0.15) ≈ $328,923.
In this example, keeping the funds in the traditional 401k and paying taxes in retirement (at a lower rate) results in a higher after-tax value. However, if your expected retirement tax rate was higher than your current rate, the Roth conversion would likely be more beneficial.
Always remember that tax laws are complex and can change. This calculator provides an estimate for educational purposes and should not replace professional financial or tax advice.