Roth conversion calculator

How the formula works

A conversion moves pre-tax dollars into a Roth by paying income tax on them now. On an amount \(A\) converted at your current marginal rate \(t_n\), the tax due this year is simply

After that, everything rides on where the tax comes from. Write the growth over \(t\) years at return \(r\) as \(G=(1+r)^t\). If you pay the tax from outside funds, the entire amount keeps compounding inside the Roth and every dollar comes out tax-free:

If instead you pay the tax from the IRA itself, only what is left after tax — \(A(1-t_n)\) — makes it into the Roth to grow:

Now the other side. Don't convert and the whole balance grows tax-deferred, then the withdrawal is taxed at your retirement rate \(t_r\): a bare \(A\,G\,(1-t_r)\). But when the conversion tax would have been paid from outside funds, that bare figure is not apples-to-apples — those tax dollars could themselves have been invested. Hold the out-of-pocket cost equal and credit the wait side with \(T\) grown in a taxable side account, whose contributions are already taxed so only its gains are taxed at retirement:

Setting \(V_{\text{convert}} = V_{\text{wait}}\) and solving for the retirement rate gives the break-even — the future rate at which converting and waiting tie:

Above this rate, converting wins; below it, waiting does. When the tax is paid from the IRA there is no side account and the whole thing collapses to a pure rate comparison — converting wins exactly when your future rate exceeds your current one, so the break-even is just

Paying the tax from outside funds is the real lever. It does not just avoid shrinking the balance — it effectively shelters more money, because the tax dollars move from a taxable home into the tax-free Roth wrapper. That is why the break-even rate drops well below your current rate in the outside-pay case: you can come out ahead even if your future rate is somewhat lower than today's. A second, quieter advantage: a Roth has no required minimum distributions in the owner's lifetime, so the balance can keep compounding untouched for decades, while a traditional IRA forces taxable withdrawals starting at age 73 whether you need the money or not.

What each input means

Amount to convert — \(A\)

The pre-tax balance you move into the Roth this year. You need not convert a whole account at once; converting a slice at a time is how people fill up a low bracket without spilling into the next one.

Current marginal tax rate — \(t_n\)

The rate on your next dollar of income today — the rate the conversion is taxed at. A large conversion is itself extra income, so watch that it does not push part of the converted amount into a higher bracket this year (see the assumptions).

Expected retirement tax rate — \(t_r\)

The rate you expect withdrawals from the un-converted traditional balance to be taxed at later. This is a forecast, not a fact: it depends on future brackets, your other retirement income, and where you live. Its gap from \(t_n\) is most of the decision.

Years until withdrawal — \(t\)

How long the money compounds before you spend it. A longer horizon magnifies the value of tax-free growth — and the drag on the taxable side account — so it leans the answer toward converting.

Expected annual return — \(r\)

The nominal yearly growth assumption, applied equally to the Roth, the traditional balance and the side account. A long-run figure like 6–7% is a common starting point; nothing guarantees it.

Pay the conversion tax from…

Outside funds models the powerful case: the tax comes from a taxable account, the whole balance keeps compounding tax-free, and the wait side is credited with those tax dollars invested taxably. The IRA itself means the tax is withheld from the conversion, so less money makes it into the Roth and the decision turns purely on the two rates.

A worked example

The worksheet's defaults: convert $100,000 at a 22% rate now, expecting a 24% rate in 20 years, a 7% return, paying the tax from outside funds.

The conversion tax due now is $100,000 × 22% = $22,000, paid from a taxable account. Over 20 years the growth factor is \((1+0.07)^{20} = 3.8697\). From there the two paths part:

• Convert. The full $100,000 compounds tax-free: $100,000 × 3.8697 = $386,968, and every dollar is yours at withdrawal.
• Don't convert — the IRA. The same $100,000 grows to $386,968 tax-deferred, then the withdrawal is taxed at 24%: $386,968 × (1 − 24%) = $294,096.
• Don't convert — the side account. The $22,000 you did not hand the IRS is invested taxably; at 7% it grows to $85,133, of which $22,000 was contributed and $63,133 is gains. Taxing only the gains at 24%: $22,000 + $63,133 × (1 − 24%) = $69,981.
• Don't convert — total. $294,096 + $69,981 = $364,077.

So converting comes out $22,891 ahead. Two forces push the same way here: the future rate (24%) is higher than today's (22%), so converting wins on the rate alone, and paying the tax from outside funds widens the gap further by sheltering the $22,000 of tax dollars inside the Roth. Pay the tax from the IRA instead and the edge shrinks to $7,739 (converting wins), because the $22,000 of tax never gets to compound tax-free. The break-even retirement rate is 18.9%: above it converting wins, below it waiting does — and because the outside-pay lever pushes that break-even well under today's 22%, converting can pay off even if your future rate slips somewhat below your current one.

Assumptions and limits

• Marginal rates are treated as flat — one rate now, one later. Real brackets are progressive, and a large conversion is itself income: it can push part of the converted amount into a higher bracket this year, so the true cost can exceed \(A\,t_n\). Converting in smaller annual slices is the usual answer.
• It ignores the knock-on effects of the higher income a conversion creates in that year — a bigger modified AGI can raise Medicare Part B and D premiums two years later (IRMAA), shrink an ACA marketplace subsidy, or affect the taxation of Social Security. None of these are in the arithmetic here.
• It ignores the five-year rule: converted amounts generally must season five years before the converted principal can be withdrawn penalty-free if you are under 59½, and each conversion starts its own clock.
• The side account is simplified — its gains are taxed once, at retirement, at the retirement rate. A real taxable account is drag-taxed along the way on dividends and turnover, which would make waiting look slightly worse still; this is the defensible, favourable-to-waiting version.
• State income tax is ignored, both on the conversion now and on withdrawals later; the return is the same smooth line for every account.
• This is arithmetic, not advice. It shows what your rate and return assumptions imply; it cannot know your future bracket or your other income.

Questions people ask

What is a Roth conversion?

It is moving money from a pre-tax account — a traditional IRA or an old 401(k) — into a Roth IRA. You pay ordinary income tax on the amount you convert in the year you do it, and in exchange the money then grows and comes out tax-free, with no required minimum distributions during your lifetime. Nothing about your investments has to change; only the tax wrapper does.

When does a conversion make sense?

Broadly, when your tax rate today is low relative to what you expect later. Classic windows are a low-income year — a gap between jobs, early retirement before Social Security and pensions start, a year of business losses — and a market dip, when the same shares convert for fewer taxable dollars. The years after you retire but before RMDs begin at 73 are a common conversion runway, as is simply expecting higher future rates. On the defaults, converting wins whenever the retirement rate is above the 18.9% break-even.

Should I pay the conversion tax from the IRA or from outside?

From outside, almost always. Paying the tax from a taxable account lets the entire converted balance keep compounding tax-free, which effectively shelters those tax dollars inside the Roth. Paying it from the IRA shrinks what gets converted and, if you are under 59½, the withheld amount is itself a taxable — and possibly penalised — withdrawal. On the defaults the outside-pay edge is $22,891; pay from the IRA and it falls to $7,739.

What is the five-year rule on a conversion?

Each conversion starts its own five-year clock. If you are under 59½, withdrawing the converted principal before that clock is up generally triggers the 10% early-withdrawal penalty (the tax was already paid at conversion). This is separate from the five-year rule on Roth earnings. It rarely matters if you are converting for the long haul, but it can bite if you might need the money soon.

Can a conversion trigger other costs besides the income tax?

Yes, and this is the part people miss. The conversion is extra income in that year, so a big one can bump part of itself into a higher bracket, raise your Medicare IRMAA premiums two years later, push you past an ACA subsidy cliff, or increase the share of your Social Security that is taxed. Spreading conversions across several years and watching the relevant thresholds is how people keep those side effects in check.