Roth IRA Conversion Calculator Assumptions

The Roth IRA Conversion Calculator uses a methodology that focuses on the value received from the IRA. It calculates the present value of each required minimum distribution from the IRA after netting out Federal income taxes. Estate taxes are not included in the analysis. Distributions from the traditional IRA will generally need to be taken much earlier than those from a Roth IRA due to the application of the required minimum distribution rules. For more information on required minimum distributions, see the NewRMD web site at http://www.newrmd.com/.

Generally, distributions from the Roth IRA are not subject to Federal income taxes. However, Federal income taxes are payable on amounts converted from a traditional IRA to a Roth IRA. The Federal income taxes paid on the conversion are shown as negative numbers in the Roth IRA conversion scenarios. The Roth IRA Conversion Calculator makes a number of assumptions in its calculations including the following:

  1. Life Expectancy Assumptions:
    The IRA owner is assumed to die at the end of his life expectancy using the Single Life Expectancy table used for Required Minimum Distributions (see the Single Life Table at IRC §1.401(a)(9)-9 in the regulations available online at http://www.newrmd.com/). The program uses the joint life expectancy (of the owner and spouse) to calculate when the surviving spouse is assumed to die. The same mortality table is used to calculate the joint (second-to-die) life expectancy. Neither the IRA owner nor the spouse is assumed to die within the first five years of the analysis. Dates of death are assumed to occur at the end of the year. If the spouse is the beneficiary, the surviving spouse is assumed to rollover the IRA owner’s IRA soon after the death of the IRA owner.

  2. IRA Distribution Assumptions:
    All IRA distributions and conversions are assumed to occur at the beginning of the year with required minimum distributions taken annually. If the IRA owner is already taking required minimum distributions at the time of the Roth IRA conversion, it is assumed that a distribution is taken prior to the conversion.

  3. Federal Income Tax Assumptions:
    The income value you enter should be your AGI (adjusted gross income) leaving out any required minimum distributions or conversion amounts. This income value is used to compute the Federal income tax that is subtracted from the traditional IRA’s distributions. It is also to compute the Federal income tax on the conversion to a Roth IRA. The entered AGI value is used as entered for all years of the analysis and is the same value used for Federal Income taxes for the IRA owner, spouse, and heir. If the beneficiary is the spouse, the owner’s filing status is assumed to be married filing joint with two exemptions. The spouse’s filing status (used after the death of the IRA owner) is assumed to be single with one exemption. The heir’s filing status (used after the death of the spouse) is assumed to be married filing joint with two exemptions. If the beneficiary is not the spouse, the IRA owner’s filing status is assumed to be single with one exemption. Federal income tax brackets are adjusted each year using the entered assumed inflation rate.

  4. 4 Year Conversion Assumptions:
    For the 4 year conversion scenario, the total conversion is assumed to be spread out equally over the first four years. Each year’s conversion is one-fourth of the starting balance increased for growth.

The Roth IRA Conversion Calculator does not determine eligibility for Roth IRA conversions. The Roth IRA Conversion Calculator is intended to serve as an educational tool, not investment or tax advice. Your circumstances are unique; therefore, you should consult a planning professional if you feel you need more personal advice. Because your circumstances will likely change over time, it is a good idea to review your financial strategy periodically to be sure it continues to fit your situation. All examples are hypothetical and are intended for illustrative purposes only.

For more information on Roth IRAs, see the Roth IRA Web Site at http://www.rothira.com including articles such as Roth IRA Myths.

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