First Minnetonka Investment Center
 

Investment Center

Financial Calculators: Roth IRA Conversion

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 a 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 2006, the average compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 11.5% 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.


Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We can not and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.


Please Note: This information is being provided strictly as a courtesy. Upon linking to any of the above web sites, you will leave the FMIC web site. LaSalle St. Securities, LLC, and FMIC make no representation as to the completeness or accuracy of information provided at these sites. We are not liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third party technologies, sites, information and programs made available through this site. When you access one of these sites, you assume total responsibility and risk for your use of the sites you are linking to.

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First Minnetonka Investment Center is a registered branch of LaSalle St. Securities, LLC.
Securities are offered through LaSalle St. Securities, LLC., Advisory Services offered through LaSalle St. Investment Advisors, LLC.
 LaSalle St. Investment Advisors, LLC is affiliated with LaSalle St. Securities, LLC.- a registered broker/dealer.
Tam Hubert, CFP® and Kristi Remus are registered representatives of LaSalle St. Securities, LLC.
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