Taxes on roth conversion

Roth IRA Conversion Calculator

to Calculate Retirement Comparisons

This online Roth IRA Conversion Calculator will help you to calculate an estimation of the net consequences of converting your traditional IRA to a Roth IRA.

Note that if you're not sure what a Traditional IRA is, or what a Roth IRA is, or what their respective advantages, disadvantages, and purposes are, please visit the Traditional Vs Roth IRA Calculator.

While researching the information needed to build this calculator, one thing became perfectly clear -- no two Roth IRA calculators contain the same entry fields -- much less generate the same results. The reasons for this phenomenon probably stem from the fact that they are all making crystal ball assumptions and predications.

In order to forecast the exact comparative consequences of converting your traditional IRA to a Roth IRA, you would need to be able to make precise predictions about the following details the calculators depend on for the calculations:

  • Precisely when you will retire and how long you will live.

  • Your exact state and federal tax bracket during each remaining year of your life.

  • All changes to tax laws between now and when you die.

  • How much you will need to withdraw from your retirement account each year of your retirement.

    Well, since few of us even know for certain what tomorrow will bring, making predictions about the state of our health, wealth and tax laws years into the future is probably not a good investment of your time. However, what is a good investment of your time, is taking the time to learn what an Individual Retirement Account (IRA) is, what a Roth IRA is, their advantages and disadvantages, and how they compare to other retirement investment options.

    While contemplating contributing to an IRA or converting to a Roth IRA, be sure to keep in mind that investing and saving for retirement is only half the equation. After all, if you have a mountain of debt on the day you retire, the proceeds from your retirement investment funds will have to go toward paying bills instead of paying for airfare to distant, tropical beaches. Therefore your retirement might be better served by using extra money for paying off high interest debt (Invest in Your Debt Calculator).

    While I'm by no means an expert in retirement investment options, I do have one important quality that should make what I have to say worth listening to: I'm not trying to sell you an IRA -- traditional, Roth or otherwise. So for what it's worth, in the Glossary of Terms located beneath the calculator, I will do my best to highlight what I've gleaned from researching the information needed to build this calculator.

    With that, let's use the Roth IRA Conversion Calculator to calculate retirement comparisons for converting your traditional IRA to a Roth IRA.

    Taxes on roth conversion

    Online Roth IRA Conversion Calculator Glossary of TermsTaxes on roth conversion

    Taxes on roth conversion

    Traditional IRA: Basically, a traditional Individual Retirement Account (IRA) is an investment (stocks, bonds, mutual funds, cds, etc.) wherein your contributions serve to reduce your taxable income for the year contributions are recorded. The earnings from an IRA grow on a tax-deferred basis until you begin to take qualified distributions (after age 59-1/2). Contributions and earnings are added to your ordinary income at the time they are distributed (withdrawn) and are therefore fully taxable based on your tax bracket at the time of the withdrawals. Minimum distributions are required at age 70-1/2. Distributions taken prior to your qualifying age will incur taxes and early withdrawal penalties. Please consult a tax professional for up-to-date IRA information, such as contribution limits, etc. (if you notice any out-of-date material in the Roth IRA Conversion Calculator, please let me know).

    Roth IRA: Basically, a Roth IRA is an individual retirement account wherein your contributions do not serve to reduce your taxable income in the year they are recorded. In other words, you will have already paid income taxes on your contributions based on your tax bracket at the time of each contribution. The earnings from a Roth IRA grow tax-free so qualified distributions (withdrawals) are not taxed. The main advantage to a Roth IRA is that once you have kept a contribution for the "seasoning period" (currently 5-years), you can withdraw the contribution without tax (you already paid the taxes) or penalties. The main disadvantage of a Roth is that your contributions will not lower your tax liability for the year they are recorded. Please consult a tax professional for up-to-date Roth information, such as Roth IRA income limits, etc. (if you notice any out-of-date material in the Roth IRA Conversion Calculator, please let me know).

    Purpose of Roth IRA: The main purpose of a Roth IRA is to enable you to withdraw funds from your retirement account during your retirement without having to pay any tax on the withdrawals -- including the earnings. A second purpose of a Roth is to enable you to leave your retirement funds for your heirs. This is because a Roth doesn't have the minimum distribution requirements imposed by a Traditional IRA. A third potential purpose of a Roth IRA is if you believe you will be in a higher tax bracket after retirement, paying taxes on your contributions now might make more sense.

    IRA to Roth Conversion Taxes: Since you have not paid taxes on the amount in your Traditional IRA, any contributions to Roth IRAs are not deductible from your income, the amount you convert will increase your taxable income for that year. The danger here, is if that increase results in pushing you into a higher tax bracket, the increased taxes may offset any advantage you hope to gain from converting.

    Deductible Contribution: A deductible contribution is one that is within the maximum allowable annual contribution (as of this writing it was $5,500 for up to age 49, and $6,500 age 50 and older). In other words, if your maximum annual allowable contribution is $5,500, any contributions adding up to less than that amount are considered "deductible," meaning your contributions are subtracted from your taxable income for that year.

    Non-Deductible Contribution: A non-deductible contribution is one that extends beyond the maximum allowable contribution. So if your maximum annual allowable contribution is $5,500, but your total annual contributions add up to $8,000, then $2,500 of your contributions will be considered "non-deductible," meaning that portion will not be subtracted from your taxable income for that year.

    Federal Tax Bracket: These were the latest federal tax brackets as of the last edit of this page (02/28/2014). You can use this table as a guide for deciding which tax bracket percentage to enter into the Roth IRA Conversion Calculator.


    What’s the Best Way to Pay for Taxes on a Roth Conversion?

    Mark Riepe offers helpful insights that could help you avoid penalties and protect your retirement savings.

    Taxes on roth conversion

    CFA, Senior Vice President

    Schwab Center for Financial Research

    Taxes on roth conversion

    Will Conversion Lead to Higher Taxes?

    Learn how to avoid moving into a higher tax bracket upon conversion.

    Taxes on roth conversion

    What Is a Partial Roth Conversion?

    A Roth conversion doesn’t have to be an all-or-nothing proposition. Learn why.

    Talk to a Schwab investment professional about your specific situation. Call 888-298-6558 .

    Find out more about Roth IRAs at Schwab.

    This information is for general informational purposes only and is not intended as an individualized recommendation or a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult a qualified tax advisor, CPA, financial planner, or investment manager.

    All expressions of opinion are subject to change without notice in reaction to shifting markets, as well as tax and estate planning rules. Examples provided are for informational purposes only and are not intended to be reflective of results you can expect to achieve.

    The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


    Reporting the ROTH IRA Conversion on your Tax Return

    Retirement by Scott Wills

    It might have seemed like a simply marvelous idea at the time, but lots of people who did the ROTH IRA conversion are having a bear of a time getting it all sorted out on their income tax returns. If you’re one of those people, hopefully this will help.

    I’m going to tell you where the numbers should show up on the form. If you know where things are supposed to go, then you’ll know if it’s right or not. Quite frankly, the most difficult part for me has been using the computer software to get the numbers to go in the right place.

    Let’s run a few different scenarios, all using a rollover of $15,000. In all of the scenarios, you’re going to use form 8606 to let the IRS know that you did a ROTH conversion instead of just taking the money out and spending it. This will keep you from being charged the 10% penalty for early withdrawal.

    In our first example, you’re rolling over $15,000 from a traditional IRA and you have no basis (meaning you didn’t pay taxes on any of the $15,000.) Down near the bottom of the first page of the 8606 is Part II, the section about ROTH IRA conversions. Question 16 wants to know the amount that you converted: that’s $15,000. Line 17 will be blank, line 18 will be the taxable amount of $15,000. Lines 19 and 20 are based upon if you’re paying the tax in 2010 or if you’re splitting it between 2011 and 2012. If you’re paying the tax this year, then you’ll have the number 15,000 on line 15b of your 1040 form. If you’re putting off paying until next year, then that line will be blank.

    One of the questions I’ve been asked is, “If I don’t pay the tax this year, how does the IRS know that I’m supposed to pay it next year?” Line 20. Rest assured, anyone with numbers in lines 20a and 20b will have their returns looked at during the next two years to see if they remembered to pay the tax. I guarantee it.

    Our second example still has you rolling over $15,000 and that’s all the money you have in your IRA. What’s different is that you paid taxes on $5000 of that money. Just like before you put 15,000 on line 16, but now you put $5000 basis on line 17. That makes the taxable amount only $10,000. You decide about whether to pay now or later.

    Our third scenario is a little trickier. You’re still rolling over $15,000 and your basis is $5,000—the difference this time is that you have a total of $60,000 total in your IRA. Unlike the above example, you can’t just deduct the $5,000 of basis from what you rollover, it has to be proportional to your total IRA amount. 5000/60,000 equals 8.33%. That percentage of 5000 is $417. You’ll put $15,000 on line 16 for the rollover, $417 on line 17 for the basis. That means that the taxable amount on line 18 will be $14,583. (I know, it doesn’t sound as good as the other scenarios does it?) Don’t forget that you still have $4,583 in basis to use if you do any conversions in the future.

    And our last scenario, you have $5,000 in basis from before and you made a $5000 non-deductible IRA contribution this year. The $15,000 is your entire IRA. This time, you also have to fill out Part 1 of form 8606. On line 1 you will put $5,000—the contribution you made this year. On line 2 you will put $5,000 the basis you had before. One line 3 your add them together for $10,000. Then you’re going to skip down to Part 2 (unless you had SEP and SIMPLE IRAs) and put $15,000 on line 16. Your total basis will be $10,000 on line 17, and your taxable conversion will be $5,000.

    Knowing what form you need and where the numbers go is only half the battle. Getting the numbers to go where they’re supposed to go using computer software can be more challenging than doing it by hand. If you’re using brand name software like Turbo Tax, you can call their expert hotline for help.

    Note: We try to answer all the questions that come to us but please be patient. It’s our busy season right now. We may not get to your post until the weekend. When you make a post and use the capcha code, it won’t immediately show up. You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of. (We try to keep this a G rated website.) We have to edit those out. If you need an answer right away, here are some links that might help:

    If you want to hire us, please call (314) 275-9160 or email us. We do prepare returns for people all over the country (and a few foreign countries as well.) We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.


    Roth IRA Rules: Smart Ways to Avoid Taxes on a Conversion

    Roth IRA rules can appear limiting on first glance— but you may be able to fund a Roth by rolling over funds from another account.

    Even if you are not able to contribute directly to a Roth IRA because your income is too high, you may be able to rollover funds from a 401(k) or traditional IRA.

    Plan ahead to use the times in life where you have a lower income to do the conversion—and minimize your tax bill.

    Taxes on roth conversionYou want to fund a Roth IRA to take advantage of those tax-free withdrawals in retirement. But your income is too high (over $129,000 if you’re single or $191,000 if you’re married filing jointly for 2014).

    Good news: Roth IRA rules allow you to get around this restriction if you roll over funds from a 401(k) or traditional IRA to a Roth. There are no income limits for rolling over to a Roth, and no limit on the amount you can roll over. And Betterment is engineered to make any IRA or 401(k) rollover as seamless as possible.

    Not-so-good news: In most cases, when you roll over funds from a tax-deferred account to a Roth, it’s considered a Roth conversion, and you will owe taxes on that money. How do you minimize the tax hit?

    One strategy that would enable you to take advantage of a Roth, but not get hit with a super-high tax bill, is to do what’s known as a backdoor Roth conversion (details below), or plan ahead and take advantage of upcoming life or career changes that could nudge you into a lower tax bracket. Here’s how to make that Roth rollover happen.

    Betterment is not a tax advisor, nor should any information in this article be considered tax advice. If you need tax advice, please consult a tax professional.

    If a Roth conversion sounds appealing, you’re in good company. Roths are appealing to many high-income earners because they want a way to minimize taxes in retirement—and unlike distributions from a traditional IRA, Roth funds are withdrawn tax-free.

    Indeed, when the IRS removed the income limit on Roth conversions in 2010, the number “increased over 800%, to $64.8 billion,” a new report from the IRS found in January. It was the first time conversions exceeded contributions. And the bulk of the conversions (57%) was from people with six-figure incomes.

    With the income barrier removed, the big question now is the taxes: What’s the best way to minimize the amount you have to pay when you convert?

    The so-called backdoor Roth is one way to avoid a big tax bill when you’re over the income limit for a Roth.

    In that case, if you’re also covered by an employer retirement plan like a 401(k), you likely wouldn’t be able to fund a deductible IRA, because of IRS rules. But you could contribute to a nondeductible IRA, and then convert to a Roth.

    When you contribute to a nondeductible IRA, you’re in effect depositing after-tax dollars, so you’d only owe tax on the earnings. If you do the Roth conversion soon after, any taxes are likely to be minimal and you won’t pay any taxes if you don’t have any earnings.

    This method is most beneficial, tax-wise, if you don’t have other, deductible IRAs. If you do, then the portion that you convert to the Roth has to be prorated over the total amount you have in all your IRAs.

    As you can see in in this Roth conversion example, if you have $15,000 in traditional IRAs for which you’ve received a deduction, and want to deposit $5,000 into a nondeductible IRA and convert it to a Roth, you would divide $5,000 by $20,000 (the total value of all IRAs) to get the amount you can convert tax-free, which is 25%. So you’d owe tax on the other $3,750, based on your current tax bracket.

    Another way to minimize taxes is to plan ahead, if you can, when you know that a career or life change is coming that will push you into a lower tax bracket. Then, when you convert from a 401(k) or traditional IRA to a Roth, the tax you’d owe would be based on that lower bracket.

    • Going to graduate school
    • Making a career change that lands you in a lower-paying (but perhaps more rewarding) line of work
    • A planned or unplanned period of unemployment
    • Starting your own business

    In each case, you can and should continue to save in tax-deferred accounts prior to making the conversion. Then, when the life transition is underway, you can strategize about the amounts you plan to convert and when, depending on your new tax bracket.

    For example, if you’re planning to attend graduate school, your income could drop from the 28% tax bracket to the 15% tax bracket.

    In that case, imagine that you’d like to seize the moment and convert a $100,000 IRA to a Roth. If you did the conversion while you were in the 28% tax bracket, you could owe about $17,250 in federal and state tax (using New York as the state).

    But if you waited until you were enrolled in school, living on a teaching stipend and squarely in the 15% tax bracket, you could convert the IRA to a Roth and pay $9,750—about $7,500 less.

    Bear in mind that the amount you convert is considered income, so you want to make sure that amount doesn’t bump you back up to a higher tax bracket. Again, this example is only an illustration; individual specifics could change the numbers.

    The greater point is that converting to a Roth may be highly desirable from a tax perspective down the road—so understand the Roth IRA rules and don’t let the tax bill today stand in your way.

    [onboarding experiment=”roth_conversion_onboarding” variation=”roth_conversion_onboarding_treatment” /]

    401(k) plan administration services provided by Betterment for Business LLC. Investment advice to plans and plan participants provided by Betterment LLC, an SEC registered investment adviser. Brokerage services provided to clients of Betterment LLC by Betterment Securities, an SEC registered broker-dealer and member FINRA/SIPC. Betterment LLC and Betterment Securities are affiliates of Betterment for Business LLC.

    Betterment for Business is an award-winning turnkey 401(k) service that includes plan administration for employers, and personalized, unconflicted investment advice for all plan participants. Powered by Betterment’s smart investment technology, Betterment for Business is one of the most efficient and cost-effective providers in the space, and offers a globally diversified portfolio of ETFs, tax-efficient portfolio management, smart rebalancing, automated investing, fee analysis on synced external accounts, and our retirement planning advice tool, RetireGuide. Learn more at www.BettermentforBusiness.com.

    This article was last updated on April 8, 2016

    Taxes on roth conversion

    MP Dunleavey is a personal finance expert, and the co-founder and former editor-in-chief of DailyWorth.com. She's a former columnist for The New York Times and MSN Money, and the author of "Money Can Buy Happiness." She lives in Manhattan with her family. Contact MP at Google+

    You can contact MP via email or follow on Twitter.

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    2010 Roth IRA Conversion Rules: What’s the Big Deal About 2010?

    Roth IRA conversions in 2010 are of special significance due to some unique tax circumstances and rule changes. If you’ve considered making a Roth IRA conversion from a traditional IRA and have worried about the tax implications, or haven’t been able to contribute to a Roth in year’s past due to high income levels, you’ll want to pay close attention.

    There is one big tax rule related to conversions that only takes place in 2010 and others that are new this year that make it a special year for a conversion. Before getting into why 2010 is so significant, let’s first cover what a Roth IRA conversion is and why you might want to consider it in the first place.

    A Roth IRA conversion is actually a rollover from a Traditional IRA to a post-tax Roth IRA. Roth IRA’s are an attractive investment vehicle because all earnings are tax-free upon withdrawal in retirement. Many big proponents of Roth IRA’s advocate for them because they think tax rates will increase in future years and if you expect your tax bracket in retirement will be higher than it is now it might also make good sense to convert, because you don’t have to pay future taxes in retirement on Roth IRA’s.

    The Drawback: Tax Liability Now

    The drawback to converting from a Traditional IRA to a Roth IRA is that you must pay taxes on the conversion amount, when you make the conversion. You’re taxed at whatever your tax rate is for that year. Because you didn’t pay taxes up front with the Traditional IRA, you pay taxes on the amount going to your Roth (which you would have done in the first place had you originally contributed to your Roth).

    If you don’t have significant savings on hand immediately, this can be a huge impeding factor that might cause you to shy away from a conversion altogether. It’s usually wise to save ahead of time so that you have enough cash on hand to pay for the conversion taxes. Now, let’s get in to why 2010 is a big year for Roth conversions.

    The Three Big Roth IRA Conversion Changes in 2010

    1. Roth IRA Conversion Income Limit Restrictions Removed

    Prior to 2010, you could not convert from a traditional IRA to a Roth IRA if your modified gross adjusted income (magi) exceeded $100,000. In 2010 (and beyond), that rule has been eliminated.

    2. High Income Earners Can Now Avoid the Roth IRA Income Limits

    Roth IRA contributions have income phaseout limits. This prevents high wage earners from being able to contribute to Roth IRA’s. However, those same high earners with traditional IRA’s can now get into Roth IRA’s through the backdoor via the aforementioned $100,000 conversion income limit restriction being removed.

    These converters, however, will not be able to contribute new funds directly to a Roth IRA. They’ll have to move funds over via a conversion in any year that they want to put funds into a Roth IRA.

    3. Spread Out your Tax Liability Over 2011 and 2012

    Unique only to 2010 conversions, you are able to choose between paying taxes on your converted dollars on your 2010 tax return, or spread out the payment in 2011 and 2012 (50% on each year’s tax return). This way, if you don’t have the savings immediately at hand or don’t want to deplete your emergency savings, you can spread out the tax liability to 2011 and 2012. In other years (including starting again in 2011), you have to claim the conversion amount as ordinary income for that tax year.

    Note that it is recommended that you pay the tax liability with saved non-retirement dollars versus pulling funds from your IRA, which kind of defeats the point of the conversion in the first place.