Convert 401k to Roth Calculator

401(k) to Roth Conversion Calculator

Conversion Analysis:

Current Tax Impact of Conversion:

$' + taxPaidOnConversion.toFixed(2) + '

$' + netAmountIntoRoth.toFixed(2) + '

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Projected Future Value (in ' + yearsUntilRetirement + ' years):

$' + futureValueRoth.toFixed(2) + '

$' + futureValueTraditionalAfterTax.toFixed(2) + '

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Potential Benefit of Roth Conversion:

$' + potentialBenefit.toFixed(2) + '

Understanding the 401(k) to Roth Conversion

A 401(k) to Roth conversion, often referred to as a "Roth conversion" or "backdoor Roth," is a strategy where you move funds from a traditional, pre-tax 401(k) account into a Roth IRA. The primary benefit of a Roth IRA is that qualified withdrawals in retirement are completely tax-free, unlike traditional 401(k) withdrawals which are taxed as ordinary income.

How Does It Work?

When you contribute to a traditional 401(k), your contributions are typically made with pre-tax dollars, meaning you don't pay income tax on them in the year they are contributed. The money grows tax-deferred, and you pay taxes when you withdraw it in retirement.

With a Roth conversion, you are essentially reversing this process for a portion or all of your 401(k) balance. You pay income tax on the converted amount in the year the conversion takes place. Once the money is in the Roth IRA, it grows tax-free, and all qualified withdrawals in retirement are also tax-free.

Why Consider a Roth Conversion?

The decision to convert hinges on your current tax situation versus your expected tax situation in retirement. Here are the main reasons people consider a Roth conversion:

• Expect Higher Future Tax Rates: If you believe your income tax bracket will be higher in retirement than it is today, paying taxes now at a lower rate could save you money in the long run.
• Tax-Free Growth and Withdrawals: All earnings and withdrawals from a Roth IRA are tax-free in retirement, provided you meet certain conditions (account open for 5 years and age 59½ or older).
• No Required Minimum Distributions (RMDs): Unlike traditional IRAs and 401(k)s, Roth IRAs do not have RMDs for the original owner, offering greater flexibility in managing your retirement income.
• Estate Planning Benefits: Roth IRAs can be a powerful estate planning tool, as beneficiaries can inherit the account and continue to take tax-free withdrawals.

When Might a Roth Conversion NOT Be Ideal?

• Expect Lower Future Tax Rates: If you anticipate being in a lower tax bracket in retirement, it might be better to defer taxes and pay them later at a reduced rate.
• Need for Current Funds: The tax bill from a conversion can be substantial. If paying this tax would strain your current finances or require you to withdraw funds from the converted amount (which incurs penalties), it might not be the right time.
• Large Conversion Amount: A very large conversion could push you into a higher tax bracket for the year of conversion, negating some of the benefits.

How to Use the Calculator

Our 401(k) to Roth Conversion Calculator helps you estimate the tax impact of a conversion today and project the potential future value of your converted funds versus leaving them in a traditional 401(k).

• 401(k) Balance to Convert: Enter the specific amount you are considering converting from your traditional 401(k) to a Roth IRA.
• Current Federal/State Income Tax Rate: Input your current marginal federal and state income tax rates. This is crucial for calculating the immediate tax cost of the conversion.
• Estimated Future Federal/State Income Tax Rate in Retirement: Provide your best estimate for what your marginal federal and state income tax rates will be when you retire. This helps determine the tax savings in retirement.
• Estimated Annual Investment Growth Rate: Enter the average annual rate you expect your investments to grow. A common assumption is 5-7%.
• Number of Years Until Retirement: This helps project the long-term growth of your funds.

Example Scenario:

Let's say you have $100,000 in your traditional 401(k) that you're considering converting. You are 45 years old and plan to retire in 20 years. Your current federal tax bracket is 24% and state is 5%. You anticipate your federal tax bracket in retirement will be 15% and state 0% (perhaps you'll move to a state with no income tax). You expect an average annual growth rate of 7%.

• Conversion Amount: $100,000
• Current Federal Tax Rate: 24%
• Current State Tax Rate: 5%
• Future Federal Tax Rate: 15%
• Future State Tax Rate: 0%
• Annual Growth Rate: 7%
• Years Until Retirement: 20

Based on these inputs, the calculator would show:

• Estimated Tax Paid on Conversion: $29,000 ($100,000 * (0.24 + 0.05))
• Net Amount Converted to Roth: $71,000
• Future Value of Converted Roth (Tax-Free): Approximately $275,000 (after 20 years at 7% growth)
• Future Value if Left in Traditional 401(k) (After Future Taxes): Approximately $290,000 (pre-tax value) – $43,500 (future taxes) = $246,500
• Potential Benefit of Roth Conversion: Approximately $28,500 ($275,000 – $246,500) more in your pocket in retirement.

This example illustrates how paying taxes now at a higher current rate can still lead to a greater after-tax sum in retirement if your future tax rates are significantly lower. Always consult with a qualified financial advisor and tax professional before making significant financial decisions.