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Roth IRA Conversion Calculator Assumptions
Conversion
Conversion is assumed to be made on December 31 of the conversion year.
All assets entered are assumed to be eligible for conversion.
Taxes due on the conversion are assumed to be paid from assets outside of the IRA. In addition, any early distribution penalties are assumed to be paid from outside assets.
If account owner is married and both spouses have assets eligible for conversion, the older spouse's assets are presumed to be converted first for illustration purposes, followed by the conversion of the younger spouse's assets.
In situations where spousal information is not entered, for purposes of estimating the federal income tax cost of conversion, it is assumed the account owner files his or her federal income tax return for the year of conversion as a single filer.
Estimated taxes on conversion projections taxed in 2011 are based on actual 2011 federal income tax rates and brackets. Estimated taxes on conversion projections taxed in 2012 are based on actual 2012 federal income tax rates and brackets. Estimated taxes on conversion projections taxed in 2013 are based on pre-EGTRRA tax rates and pre-EGTRRA tax brackets increased by actual cost-of-living adjustments for years 2002-2012, and increased by an assumed 3 percent cost-of-living adjustment for 2013.
State and local taxes that may apply to the conversion are not factored in the projection.
If a future conversion year is selected, the IRA assets available for possible conversion grow at the user-defined "Future Expected Annual Rate of Return" starting with the year after the current year.
The user has assets available outside his or her IRA sufficient to pay 100% of the estimated federal income tax due on the conversion
When nondeductible IRA basis is converted to a Roth IRA, tax is not paid on the portion of the conversion that represents the return of basis. For partial conversion projections, a pro rata portion of the IRA basis is deemed to be converted.
The projections assume conforming state law in regards to conversion eligibility. While most states have adopted conforming tax law regarding conversions, it is recommended that tax advice on applicable state law be sought prior to conversion.
For current year and future year conversions, the "Current Balance of all your IRAs" is assumed to be the projected value of the assets on December 31 of the current year after any required minimum distributions and/or discretionary withdrawals have been withdrawn. The conversion projections for that future year are based on the value of those assets on December 31 of the conversion year.
If SIMPLE IRA assets are included as retirement assets available for possible conversion, it is assumed that it has been at least two years since the account owner first participated in any SIMPLE IRA plan maintained by the individual's employer.
Tax Filing Status
If account owner is married and spousal information is entered, it is assumed that a joint federal tax return is filed.
Expected Monthly Withdrawals
"Expected Monthly Withdrawals" are presumed to be taken first from the holding account, then from the Traditional IRA (if IRA Owner is married, then oldest spouse first) and finally from the Roth IRA (if IRA Owner is married, then oldest spouse first).
"Expected Monthly Withdrawals" are not automatically increased for inflation.
If the primary IRA owner or the spouse (or both) will be age 59½ or younger in the year when they plan to start taking their monthly withdrawals, these withdrawals are potentially subject to a 10% IRS early distribution penalty.
The projections generated by this tool do not reflect this potential 10% early distribution penalty
Distributions
For projection purposes, all traditional IRA distributions (except for the return of basis) are taxed at the applicable "expected tax rate in retirement".
All projected Roth IRA distributions are assumed to be nontaxable.
Withdrawals from the Traditional IRA are "grossed up" to provide a net withdrawal (after taxes) equal to the requested monthly withdrawal amount.
Required Minimum Distributions (RMDs) from Traditional IRA assets for the account owner (and his/her spouse, if married) start in the year(s) the individual attains age 70½.
Projected RMDs from Traditional IRA assets are based on the Uniform Lifetime table according to the IRA owner's date of birth, unless the account owner is married and his/her spouse is more than 10 years younger than the account owner. In that case, projected RMDs are calculated using the couple's dates of birth and the Joint and Last Survivor table.
Projected distributions are only taken from Traditional IRA assets when necessary, either to satisfy federally required (RMD) requirements, or in the event that the available holding account assets are insufficient to meet the projected "Estimated Monthly Withdrawals" for a given year.
Projected RMDs that are not needed to meet the "Estimated Monthly Withdrawals" for a given year are placed in the holding account and grown at the user defined "Future Expected Annual Rate of Return."
Projected distributions are taken from the Roth IRA only in the event that the projected "Expected Monthly Withdrawals" for a given year cannot be satisfied.
"Expected Monthly Withdrawals" are assumed to be withdrawn annually on December 31. For example, if the user-defined monthly withdrawal amount is $2,000, a withdrawal of $24,000, plus any applicable taxes, is deemed to be made on December 31 of each year beginning with the year the user plans to start withdrawing money from his or her retirement account.
RMDs from traditional IRA assets are assumed to be withdrawn on December 31 of the applicable distribution year.
Payout Period
The payout period begins with year of the user-defined age you plan to start withdrawing money from your retirement accounts and ends in the year when the primary owner or spouse (if married), whoever is older, turns age 95.
Holding Account
In the case of a partial conversion (10% to 90%), the difference between the tax on a 100% conversion and the tax on the partial conversion is placed in the holding account at the time of conversion. This amount grows at the user defined "Future Expected Annual Rate of Return."
In the case of no conversion, the amount of the tax on a 100% conversion is placed in the holding account. This amount grows at the user defined "Future Expected Annual Rate of Return."
In the case of a 100% conversion, nothing is placed in the holding account at the time of conversion.
Projected RMDs that are not needed to meet the "Estimated Monthly Withdrawals" for a given year are placed in the holding account and grown at the user defined "Future Expected Annual Rate of Return."
Annual growth of assets in the holding account is treated as earnings and is taxed, annually, at the user-defined "Expected Tax Rate in Retirement."
Future Expected Annual Rate of Return
The "Future Expected Annual Rate of Return" is the projected annual rate of return on investments held within the IRA owner's (and spouse's if applicable) Traditional and/or Roth IRA, as well as within the individual's (or couple's) holding account.
Expected Tax Rate in Retirement
The "Expected Tax Rate in Retirement" represents the user's estimate of the overall effective tax rate that will apply to taxable distributions from any Traditional IRA assets and interest rate growth on the holding account.
Hypothetical Balances
Balances for the "If you don't convert" scenario include traditional IRA balances plus holding account balances. Balances for the "If you convert" scenario include Roth IRA balances plus traditional IRA balances (if user selects to convert less than 100%) plus holding account balances.
