Roth IRA Calculator

If you’ve been putting off doing a conversion to a Roth IRA from another retirement account, now is the time to do it. Roth conversions will still be available after 2010 ends, but if you do it in 2010, you will have 2011 and 2012 to pay the conversion tax. If you do it after 2010, you will have to pay all of that tax in one year. If you aren’t sure which to continue on with, you might want to check out our article on Traditional vs Roth IRAs.

For those confused about what the conversion tax is, I’ll try to explain it a little better.  With a Traditional IRA, you don’t have to pay taxes on the money that you drop into the account, but when you take the money out you’ll have to pay the taxes on it at whatever your tax rate is at that time.  With a Roth,  you pay the taxes up front and no taxes when you withdraw the money.  The conversion fee is basically making it so you pay the taxes on the money you put into your Traditional IRA, then after the conversion you won’t have to worry about any more taxation on that money.

A lot of people may think it’s silly to want to convert when you’ll have to pay fee’s right away, but most analysts expect tax rates to go up in the future so in reality you are just delaying the pain.

Here are a couple hints on whether you may want to look into converting:

• You believe your own, or your heirs tax rate will be higher in the future when withdrawing from the account.
• If you plan to pass the account down to your heirs and don’t want them paying tax on the gift.
• You don’t plan to take out any money in the next five years and is 60 years or older.
• Health does play a factor, so if you want to take the money out yourself, you should make sure you will live long enough to make up for the conversion tax.

Those are just some things that I’ve come up with, but just because you don’t match any of that criteria doesn’t mean you shouldn’t look into it further.  It’s very hard to outline a good game plan for every situation because there are so many different scenarios. Your accountant or tax planner is really the ultimate key to helping you make the final decision.

Hopefully this article gets you started on a process that isn’t exactly “fun” but very necessary.  If you need a Roth IRA Calculator or a Roth IRA Conversion Calculator, follow those links and do some financial planning.