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If you've been poking around in the world of retirement, you may have heard of a roth conversion. A Roth IRA conversion calculator can give you an accurate idea of how much money you could have at retirement and how the conversion would affect your assets.

But what is a roth conversion? Read some commonly asked questions below, to learn what a Roth conversion is and how using a Roth conversion calculator can be helpful.


Why use a roth conversion calculator?

You're looking ahead at retirement, and that's a good thing. Maybe you've been advised by a financial planner or friends that converting some (or all) of your assets to a Roth IRA could be beneficial.

Without working through the numbers, you'll never know. A Roth IRA Conversion Calculator helps you figure out if the conversion is the right decision.

It's a helpful tool that models the result of a Roth transfer based on current and future tax rates. It will estimate how much more or less money you will end up with at retirement, giving you a better way to budget.

What is a roth conversion?

When you move assets that you have in before-tax retirement savings, such as a Traditional IRA to a Roth IRA, that's called a conversion.

A Roth conversion also occurs when you move your assets from other retirement plans, such as a 401(k), 403(b) or a 457 plan.

In all cases, the money you contributed to these retirement plans came with a deferred tax, meaning that it lowered your taxable income plus you didn't pay taxes on your contributions.

Benefits of a Roth Conversion

The amount that is converted is considered ordinary income for tax purposes, but you get the benefit of tax-free potential growth later.

There are other benefits too. But the main benefit of a Roth conversion is that the funds in your Roth IRA will not be subject to income tax when withdrawn.

If you have a large number of assets which could put you in a high tax bracket, converting some of the money to a Roth IRA can allow you to withdraw qualified distributions, tax-free.

What situations make a roth conversions beneficial?

1. You Have A Large Number Of Assets

As mentioned, if you expect to have a large number of assets in a Traditional IRA or 401(k), eventually you're going to need to pay taxes on that when you make withdrawals.

In addition, there will be required minimum distributions.

2. You Expect Higher Future Taxes

Not a lot of us will have so much money in our retirement funds that a Roth conversion would help. However, there will be times when our income puts us in a lower tax bracket.

You can plan your conversions to coincide with these times. Converting to a Roth IRA in timed increments is a helpful way to avoid higher taxes on large conversions.

A Roth conversion calculator can help you figure out how much to transfer and when. What you'll be doing is spreading out the income and therefore spreading out the taxes you'll pay.

Tax brackets come in ranges. So, for example, if you make 100,000 and the next tax bracket up is $150,000, you can convert as much as $50,000 and still be in the same tax bracket.

3. Your 401k Is With Your Previous Employer

Another thing to consider is an old 401(k) from an employer you no longer work for. Do you really want an old employer to manage your retirement fund? Or do you want that control yourself?

4. You Want To Avoid RMDs

Roth IRAs don't have required minimum distributions, you can continue to accumulate money in your Roth IRA and withdraw from other retirement accounts.

#5: Better Access To Your Savings

Finally, you can use the money in a Roth IRA to help with the downpayment on a new home without penalty. If you are a first-time homebuyer, this is a great advantage.

When is a roth conversion not right?

1. The Conversion Puts You In A Higher Tax Bracket

If you don't know what your tax situation will be when you convert, and if it could put you in a higher tax bracket, it's best not to take that chance.

2. You Don't Have Money To Pay Conversion Taxes

You do need to pay taxes on the conversion with after-tax money. If you end up having to pull from other retirement assets to pay these taxes, or don't have the money at all, then a conversion is not the right choice.

3. You Don't Have Much Saved

If you don't have a lot of money in your retirement account, and therefore will be in a low tax bracket, then paying taxes on it now when you're in a higher bracket doesn't make sense.

4. You Expect Lower Future Taxes

Some states have very low state income taxes. If you will be relocating to one of these states, don't convert.

5. You'll Need The Money In Less Than 5 Years

Finally, if you need these funds within five years, don't convert to a Roth IRA.

Funds must remain in a Roth IRA for at least five years if you are under age 59 1/2 before withdrawing from it without penalty.

What are the roth conversion rules?

Regardless of age, income or filing status, everyone is eligible to convert to a Roth IRA. However, there are rules.

1) If you have a Traditional IRA, you can pull funds from that and roll over the money to a Roth IRA. You have 60 days to deposit that money into your Roth.

2) If you neglect to do that within 60 days, the amount withdrawn will be subject to income tax, and you will have to pay a 10% early distribution tax penalty.

3) You will have to pay regular income tax on the funds converted. But any contributions that you made to your traditional IRA will not be taxed.

4) You will not be subject to RMDs. But if you're taking out RMDs from other retirement accounts, you can't convert those distributions to your Roth IRA.

5) You must keep your assets in a Roth IRA for five years before withdrawing in order to avoid the 10% penalty.

6) If you become disabled, you can avoid taxes and penalties on withdrawals.

How do I convert?

Transferring or rolling over assets to a Roth IRA from other retirement accounts is fairly easy. But it's best if you find a financial advisor that you trust and who is familiar with tax rules.

Do your homework by asking friends and family which company they work with. There are a lot of well-established companies that will work hard to secure your assets. And there are a lot that will not.

Now that you can answer the question what is a Roth conversion, and you understand the benefits, you can make an informed decision to determine if this is right for your finances.

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