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Explore Your IRA Options With Amplify’s Roth IRA Conversion Calculator

Considering converting your retirement funds to a Roth IRA account? Amplify's Roth IRA Conversion Calculator can help.

A few factors influence what our retirement investments look like, including taxes. For many, the name of the game when it comes to retirement investments is minimizing taxes. Some people achieve this by moving their money from a traditional IRA to a Roth IRA. This is sometimes known as a “backdoor Roth IRA.”

This Roth IRA conversion calculator shows you whether it is worth converting your traditional IRA to a Roth IRA. The calculator considers if you pay your conversion taxes out of IRA proceeds or if you pull them from other sources. The results are shown as a traditional deductible IRA, conversion to a Roth IRA paying taxes out of the IRA distributions, and conversion to a Roth IRA paying taxes out of funds outside of the IRA distributions.

Important Terms to Know for the Roth IRA Conversion Calculator

Here’s how to use the Roth IRA conversion calculator.

Deductible IRA (Traditional IRA)

A deductible IRA, also known as a traditional IRA, is a retirement plan that has immediate tax advantages. It is a tax-deferred investment, meaning that you don’t have to pay taxes on it upfront. Instead, you’ll pay them when you withdraw money from the account in retirement. The taxes you pay will be based upon your marginal tax rate at the time of withdrawal.

What makes this type of retirement plan even more lucrative is that you can also deduct your contributions from your taxable income in the year that you contribute. This means that if you make $50,000 and place $5,000 this year in a traditional IRA, you’ll only have to pay taxes on $45,000.

Traditional IRAs don’t have income limits. However, there are income limits for tax-deductible contributions. If you earn more than the threshold amount, you’re investing in a non-deductible IRA.

Roth IRA

Roth IRAs are another type of retirement plan with tax advantages. This type of plan is known as a tax-exempt investment. Roth IRAs are funded with after-tax earnings, meaning you won’t realize any immediate tax benefits.

However, when you withdraw from your account in retirement, both the amount you contributed and your investment gains will be tax-free. This is especially beneficial if you expect a higher tax bracket in retirement than when you initially invested the money.

Roth IRAs have income limits. You can contribute to a Roth IRA only if your income is below a certain amount.

Roth IRA Conversion

With a conversion, you change the account classification from a traditional IRA to a Roth. This can be done regardless of the amount of income that you earn.

The benefit of converting to a Roth IRA is that your contributions and earnings will grow tax-free. The downside is that you’ll owe taxes on the amount you convert, which can add up.

IRA Conversion Amount

Here, enter the one-time lump sum that you wish to convert.

Annual Rate of Return

Retirement plans are not merely savings accounts; they are also a type of investment. Your IRA is a vehicle that holds investments such as stocks, mutual funds, bonds, and cash that is earmarked explicitly for when you’re no longer working. This means that you can expect to see growth beyond the money you put in it every year.

To effectively plan your retirement, you need to account for the rate of return on these investments. Some folks are cautious and estimate a 4% return, while others are optimistic and hope for a 12% return. This can give you two dramatically different numbers. Even small changes to your annual rate of return estimation can provide different results.

The key to estimating your annual return rate is to look at the data and consider your unique investment portfolio. Much of your account performance depends on asset allocation and how long you’ve been investing.

According to experts, a moderately aggressive portfolio will see an average return between 5% and 8%. Financial planners often use 7% as the magic number with portfolios that are heavily invested in stocks. This is based on the historical performance of the stock market.

Current Tax Rate

For this category, input your marginal tax rate. Your marginal tax rate is the amount of tax paid for every additional dollar earned. As income rises, the marginal tax rate increases thanks to progressive taxation.

To see which tax bracket you fall under, check out the Tax Foundation’s tax bracket breakdown. Make sure that you are viewing the current year’s rates.

Tax Rate in Retirement

Estimate what your tax rate will be once you retire. To do this, consider how much income you’ll still be bringing in from not only your retirement investments but from other sources as well. Other common sources to consider include stocks, rent from other properties owned, royalties, and annuities.

Like you did for your current tax rate, take a look at a tax bracket breakdown to estimate where you will fall.

Years Until Retirement

How long will your investment grow before you begin withdrawing money? For many, this number will depend on your anticipated retirement age. Subtract your current age from your expected retirement age to determine how many years you have until you start needing the funds.

Retirement age is an essential factor to consider when determining whether or not to convert your IRA. Keep in mind that you must wait at least five years to take tax-free withdrawals from a converted Roth IRA, even if you’re already 59 ½ years old.

If you are far out and don’t have a date in mind yet, consider the statistics. On average, people in the United States retire at 62. 64% of people leave the workforce somewhere between the ages of 55 and 65. Keep in mind that most people can’t start collecting Social Security benefits until they reach 66 (or 67, if you’re born after 1970).

And, according to the Transamerica Center for Retirement Studies, only a third of retirees end up retiring when they think they will. For various reasons, many folks end up retiring sooner than anticipated.

More Financial Resources

If you’re looking for more resources like this one, be sure to visit Amplify Credit Union’s calculator toolbox page. We’ve got the tools to help you with all the big (and small) financial decisions in your life.

* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer Member FINRA/SIPC and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Before deciding whether to retain assets in an employer-sponsored plan or rollover to an IRA an investor should consider various factors including but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Before you elect to open an IRA account and engage your investment representative, please review all account statements and disclosure documents related to the IRA and services to be provided under a new relationship and consult with a qualified tax advisor as needed. If transferring an existing retirement plan into an IRA, you should be aware that (i) Those assets will no longer be subject to the protections of ERISA (if applicable) (ii) depending on the investments and services selected for the IRA, you may pay more or less in transaction costs than when the assets are in the Plan, (iii) if you are between the age of 55 and 59 ½, you would lose the ability to potentially take penalty-free withdrawals from the plan, (iv) if you continue working past age 70 ½ and transferred your plan assets to a new employer’s plan, you would not be subject to required minimum distribution and (v) withdrawing assets directly would be subject to federal and applicable state and local taxes and possibly be subject to the IRS penalty of 10% if under age 59 ½.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

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