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 dependent 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 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 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 additional sales charges and fees that funds may charge.