These sections also provide you with information about an extremely cost effective and highly functional lifetime retirement planning calculator software tool with sophisticated, yet easy-to-use Excel Roth IRA conversion and contribution analysis functionality.
This long-range family financial planning software provides fully integrated retirement savings calculator, retirement investment calculator, and retirement withdrawal calculator features. It short, it allows you to develop your own highly automated and comprehensive lifetime financial plan and then to examine the trade-offs involved with designated Roth k, Roth b, Roth , and Roth IRA vs traditional IRA conversions, contributions, and withdrawals.
Simultaneously, VeriPlan will also automatically project any applicable 50 state income taxes and local income taxes, which would also be quite low in any year when federal income tax rates would be this low. And, not that this decision could be worth tens of thousands of dollars either positively or negatively, depending upon how your lifetime financial circumstances unfold over time.
Yet, it is likely that only a minority of tax payers overall will benefit more by contributing to Roth retirement accounts or converting to Roth accounts — rather than contributing to traditional retirement accounts, taking the up-front income tax break, and paying state and federal income taxes on needed and required minimum distributions in retirement. Those for whom Roth account assets make sense could obtain a financial benefit that would significantly increase their lifetime net worth.
Furthermore, these people could accumulate substantial tax-free assets, which they could pass on to their heirs who, in turn, could also enjoy many years of additional tax-free asset growth. Yet many others, who might choose Roth account investments, would pay substantially more in income taxes at the outset and never realize a return on these higher initial tax expenditures over their lifetimes. For them, their Roth decision would reduce their lifetime net worth, and perhaps reduce their potential retirement assets substantially.
It discusses why only a minority of the population is likely to fit this profile. For the others, traditional tax-advantaged accounts contributions would tend to be preferable to Roth accounts in lifetime real dollar net present value terms. For these retirement asset accumulators, the significant tax advantages related Roth account inheritability can introduce an additional dimension to the analytical complexity.
Despite the additional complexity, owning estate assets in Roth accounts would allow these substantial retirement asset accumulators to pass on a significant portion their estate to heirs through Roth account inheritability provisions. Furthermore, these inherited Roth accounts would have some very appealing tax-free investment growth features for those heirs. Here are the two primary publications to start with:. Note that the retirement planning calculator software discussed below incorporates and automates the important federal retirement plan tax rules discussed in these documents.
This lifetime and retirement investment calculator and financial planning software automates and hides the bulk of this retirement account rule complexity. Sadly, the Roth conversion calculators that have been rushed to the market or provided on the Internet recently tend to be overly simplistic and unable to model comprehensively the lifetime financial affairs of your family. Simple tools just cannot model all the moving parts of the Roth retirement investment decision across your lifetime.
Why would any reasonably sophisticated person want to rely upon any Roth conversion calculator software tool for Microsoft Excel that did not measure all relevant factors that could affect their own interests with respect to lifetime Roth account contributions and Roth conversions? The Roth decision dilemma for individuals is that it front-loads state and federal ordinary income tax payments — sometimes at quite high total state and federal marginal income tax rates.
Yet, the potential and uncertain payoff can only be realized years or decades into the future through tax savings during retirement. Say you're 40, and think you are on track to retire at 50 with that IRA's help. To make it happen, you could take these steps:. Pay the income taxes on that withdrawal--remember, you didn't pay any taxes on it when you first contributed it--but pay the taxes from a different source than the IRA if possible.
One reason to do this is to keep from bumping yourself into a higher income tax bracket, which could easily happen if you converted the whole pile at once.
This could be another reason to do the ladder. If withdrawing a certain portion of your IRA each year after the five-year waiting period gets you to retirement sooner versus converting everything at once , laddering could be worth the work. As you can probably see by now, converting to a Roth takes a bit of planning and forethought. There's a lot to consider: income, taxes, projected investment returns, avoiding penalties, even estate planning. That's where WealthTrace comes in. There are a lot of conversion calculators out there, but in my not-so-unbiased opinion , none come close to what WealthTrace can do for you.
Sometimes these calculators get bundled in on a site with other calculators that do much simpler calculations, such as a required minimum distribution RMD calculator, or a calculator of how long it might take to pay off a loan. So a person might think that an IRA conversion is along the lines of those things in terms of complexity.
Julie and David are only in their mid-thirties and thinking about retiring when they are 50 or so. That's not bad, given their age. But they are interested in finding out if there's anything they can do to bump it up. The WealthTrace Roth Conversion Scenario allows the couple to see what the effect of doing a transfer to a Roth might have on the probability of their plan's success.
They can try different start ages for the transfer; specify the number of years over which to do the transfer the laddering mentioned above ; see if it makes sense to transfer all or part of the Roth; and then--and this is a feature unique to WealthTrace--run the new numbers through a Monte Carlo simulation. Take a look at what happens if Julie and David start the transfer over a five-year period when David turns There are a number of factors to consider before taking this step.
We always recommend a one-on-one expert planning session for those thinking about doing an IRA conversion. Some of the free Roth conversion calculators out there are fine as far as they go.
But they don't go far enough. For something as important as retirement, make sure you have the details you need to make an informed decision.
WealthTrace covers all the bases. Small changes to savings and spending can have a big effect on a plan. Sign up for a free trial of WealthTrace to find out more.
Do you want free tips on how to retire early? If calculation correctness is important to you, create your own Excel sheet that matches your case.
Question - does it treat the RMD as the only income in determining beneficiary taxation? Alan, The software initially has the IRAs owned by the owner. The default case is that upon the death of the owner, the IRAs pass to a spouse. At each stage, the software user is able to specify additional income, and annual expenses. As a result, during this period, the calculated income tax is substantially too small. This problem does not appear to exist during the period when the IRA owner or the spousal beneficiary is alive.
The user must specify both an assumed earnings rate on this Other Assets account as well as an assumed tax rate on the earnings from this account. However, if instead one envisions earnings on Other Assets to be subject to tax as ordinary income, e. The program does not have an option to add the income from earnings on Other Assets to the RMD and other specified income to determine an overall AGI upon which income taxes are calculated.
So, the user must take the annual income tax outputs from the Retirement Plan Analyzer and compare them to the income taxes output from tax software, e. One must then adjust the assumed income tax rates input for earnings on Other Assets in Retirement Plan Analyzer until the annual overall income tax outputs between RPA and Turbotax converge.
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