When you convert your Traditional IRA into a Roth IRA, you can take qualified distributions from the Roth IRA account without paying any taxes. To make the conversion, you must pay income taxes on any earnings and any deductible contributions in the year you convert.
Should I Consider a Roth IRA Conversion?
Converting to a Roth IRA may be worthwhile if:
- You do not have to use any of your tax-deferred assets to pay the tax bill incurred by the conversion, AND
- You can leave your Roth IRA invested for a long time (for example, 10 to 20 years) to compensate for the taxes paid.
- Morningstar® IRA Conversion Calculator
Estimate the effects of conversion on your taxes today and your retirement savings online.
- Roth IRA Conversion Worksheet
Calculate if it is worthwhile to convert your Traditional IRA(s) to a Roth IRA.
- External Convert to a Roth IRA Form
Convert a Traditional IRA held at another institution to a T. Rowe Price Roth IRA.
- Internal Convert to a Roth IRA Form
Convert a T. Rowe Price Traditional IRA to a T. Rowe Price Roth IRA.
| A Hypothetical Investor Example | ||
| Hypothetical Investor: Tim Schaeffer | ||
| Investor's current age: | 45 | |
| Amount to convert to a Roth IRA:1 | $25,000 | |
| Plans to make retirement withdrawals for: | 30 years | |
| Plans to begin taking withdrawals at: | Age 65 | |
| Before retiring, expects an average rate of return of:* | 8% annually | |
| After retiring, expects an average rate of return of:* | 6% annually | |
| Federal and state taxes (before and after retirement): | 25% federal 5% state 28.75% combined |
|
| Investor's conversion tax liability: | $7,188 | |
| Stays in Traditional IRA2 | Converts Into Roth IRA | |
| Value at Retirement | $137,258 | $116,524 |
| Total After-Tax Withdrawals During Retirement3 | $248,611 | $271,734 |
1Assumes all converted assets were taxable.
2Instead of removing assets from the converted IRA to pay the taxes, this example assumes that the taxes were paid using non-IRA assets. To make the comparison valid, we create a separate, taxable account equal to the amount paid in taxes, and add its value at retirement to the Traditional IRA column. Assets in the taxable account grow at an 85% efficiency rate compared with assets in the IRA. Capital gains rate = 20%.
3Annual after-tax withdrawal increases 3% annually to maintain purchasing power. Account balance is $0 at the end of the 30-year distribution period.
*The rates of return assumed are for illustrative purposes only and do not represent the return of any specific security.
2Instead of removing assets from the converted IRA to pay the taxes, this example assumes that the taxes were paid using non-IRA assets. To make the comparison valid, we create a separate, taxable account equal to the amount paid in taxes, and add its value at retirement to the Traditional IRA column. Assets in the taxable account grow at an 85% efficiency rate compared with assets in the IRA. Capital gains rate = 20%.
3Annual after-tax withdrawal increases 3% annually to maintain purchasing power. Account balance is $0 at the end of the 30-year distribution period.
*The rates of return assumed are for illustrative purposes only and do not represent the return of any specific security.
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