Recent tax changes have made it possible for all investors to convert a Regular or Traditional IRA to a Roth IRA.
Two features of the Roth IRA that can be attractive for investors approaching retirement are
Thus a Roth conversion may be appropriate for investors who want flexible withdrawals, want to preserve the IRA for heirs and/or estimate the tax rate at conversion will be lower than during retirement.
- Withdrawals are tax free
- Investors are not required to begin Required Minimum Distributions at age 70 1/2
Millbrook Advisors LLC offers the interactive worksheet below to assist investors in making the conversion decision based on their own personal information. The results are the percentage difference between the present value of the cash flows of the two IRAs at different life expectancies.
The personal information:
- Age at conversion: Your age at the planned date of conversion. The example here is 55.
- Federal tax rate at conversion: At conversion, the full value of the Regular IRA is considered by the IRS as ordinary income and taxed accordingly; the balance after taxes is the beginning balance of the Roth IRA. Enter your estimate of your marginal Federal tax rate at the time of conversion, including the income resulting from the conversion.
- Federal tax rate during retirement: Enter your estimate of your marginal Federal tax rate during retirment.
- State tax rate: Enter your marginal state income tax rate if any. The example here is the Maine rate in 2015.
- Opportunity cost of capital: Enter your estimate of the real (after inflation) investment return your IRA will realize over its life.(actual real annual return of the S&P500 for the period 1995-2014 = 7.3%)