Thrivent Financial Bank

What is the advantage of converting to a Roth IRA?

In 1997, the Roth IRA was introduced. Since then, many people have converted all or a portion of their existing Traditional IRAs to Roth IRAs, where interest earned may be completely tax-free. Is this a good option for you? A conversion has both advantages and disadvantages that should be carefully considered before you make a decision. This calculator estimates the change in total net-worth, at retirement, if you convert your Traditional IRA into a Roth IRA.

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Definitions

Amount to convert

Amount to convert from a Traditional IRA account to a Roth IRA. It is important to note that some high income households do not qualify for a Roth IRA conversion. Currently, anyone with an adjusted gross income over $100,000 cannot make a Roth IRA conversion. For the purposes of this calculator, we assume that your income does not limit your ability to convert to a Roth IRA.

We also assume that you are paying any taxes owed with funds that you have available outside of the IRA you are converting. The IRS treats any money not directly transferred to the new Roth IRA as an early withdrawal - even if that money is used to pay the tax bill caused by the conversion. If you do not have adequate funds outside of your IRA to pay the tax liability on a conversion, you probably should not consider converting your Traditional IRA to a Roth IRA.

Non-deductible contributions

Amount contributed to the Traditional IRA you are converting that was not tax deductible.

Current tax rate

Current marginal income tax rate that will apply to conversion amount. Please note that the marginal tax rate for your conversion may be higher than your current marginal tax rate if the conversion moves your AGI into a higher income tax bracket.

Tax rate at retirement

Expected marginal income tax rate at retirement.

Investment tax rate

Expected marginal tax rate (base this on expected capital gains rate) for investments.

Current age

Current age.

Age at retirement

Desired age at retirement.

Rate of return

The annual rate of return for your IRA. This calculator assumes that your return is compounded annually. The actual rate of return is largely dependant on the type of investments you select. From January 1970 to December 2007, the average compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 11.4% per year (source: www.standardandpoors.com). During this period, the highest 12-month return was 61%, and the lowest was -39%. Savings accounts at a bank can pay as little as 1% or less.

It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

These interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide specific financial advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical, are for illustrative purposes only, are not guaranteed, and may differ from a more in depth analysis. You are encouraged to seek personalized analysis and/or advice from a qualified professional regarding all personal finance issues.