If a client with an existing IRA qualifies to convert to a Roth IRA, he or she has two alternatives: 1.Keep the Traditional IRA and pay taxes at the time of withdrawal. (But keep possession of conversion tax funds to invest.) 2.Convert to a Roth IRA by paying the conversion tax due. The Roth IRA will NOT be subject to tax at the time of withdrawal. This tool helps the client decide which is the better alternative. The question the client should ask is: "Will I increase my future wealth by paying the conversion taxes and converting to a Roth IRA? Or by investing the amount needed to pay the conversion taxes in a different investment?” |
No script is provided for this screen. |
Assumptions: •The conversion takes place after 1998 and the conversion tax is paid in one year. •Only the current IRA balance is considered. Future contributions are not considered. •Effective tax brackets are used (tax is paid on all income from the IRA at these rates) as opposed to marginal rates where some of the income is taxed at lower rates. •The conversion taxes are paid from lifestyle (or an account other than the Traditional IRA) and are fully invested. •The client qualifies for conversion. To compare the two alternatives, we calculate three projected values: •The value of the Traditional IRA in the future •The value of the Roth IRA in the future •The value of the Conversion Tax Account in the future. These values are calculated using simple to follow spreadsheets. They can each be viewed in their entirety by clicking the [Documentation] button. |