Roth conversion tools: Free resources
December 15, 2009
Earlier in the year I asked a regular source of mine, H. Jude Boudreaux, director of financial planning at Bellingrath Wealth Management, to “test drive” four different free calculators available on the Internet.
A side-by-side comparison of four calculators — at vanguard.com (which appears to have since been taken down), dinkytown.net, moneycentral.msn.com, and rothretirement .com — showed that the estimated after-tax balance following a Roth conversion can vary by as much as several hundred thousand dollars, depending on the assumptions built into each calculator.
Moreover, all four calculators were fairly limited in that they assumed a client would convert an IRA or 401(k) in one lump sum in 2010. In fact, the change in tax law allows investors the option of spreading the recognizable income from a Roth conversion over the years 2011 and 2012.
In comparing the calculators Mr. Boudreaux assumed that his fictitious client was single, 50 years old, and earned $50,000 a year.
His chief conclusion about the tools was that they can give advisers or investors at best a fast and dirty ballpark idea of whether a conversion might be right for them. Advisers will probably find the tool available at Rothretirement.com most helpful among the following list (including links), which encompasses the calculators Mr. Boudreaux examined as well as others that advisers have told us about since that story appeared in July.
Brentmark Software Inc.
With Brentmark's calculator users can manually change tax rates, among many other factors, and measure the effects of those changes on the final outcome.
Beverly Deveny, an IRA technical consultant with E. Slott & Co. LLP of Rockville Centre, N.Y., said that it is this flexibility that keeps her using the Brentmark calculator despite her feelings about the calculators in general.
“I personally have never found a Roth calculator I was 100% happy with,” she said “Just from a numerical standpoint there are so many things to take into account.”
Brentmark Software Inc. mainpage.
Dinkytown.net Roth IRA Savings Calculator
This calculator and others available at the site were built by KJE Computer Solutions LLC. Intended for investors, the calculator is very simple and it has just six inputs: starting balance, current age, expected rate of return, annual contribution, age of retirement, and marginal tax rate. All these inputs can be changed. There is also a check box for increasing the rate to the maximum allowable.
While using the calculator at the site is free, Dinkytown sells it and its other suite of calculators to advisers for embedding on their own websites on a yearly subscription basis as well.
Moneycentral.msn.com Roth IRA Calculator
This free wizard-driven tool takes an investor or adviser through multiple pages. On the first page it asks current age, inflation rate (default is 3%), filing status (four choices here).
This takes you to Page 2, where you are asked if you already have a “regular IRA” and if so its current value or all those of a household (this input changes based on filing status), followed by non-deductible contributions, and how you intend to pay taxes on the rollover (whether from the IRA itself or other funds).
Page 3 inquires whether you and your spouse (again this input changes based on filing status) are covered by a retirement plan at work, whether each of you will make the maximum contribution, and your expected rate of return (default is 9% but can be altered to whatever you like), and plans for money saved from the deductible part of tax-deductible IRA contribution (choices are “to spend it or pay down taxes” or “Invest it in a taxable account”).
Page 4 inputs include the age you plan to begin receiving IRA distributions (this is an open box with the default set to 60 years), and how many years you expect to receive distributions (again, an open entry, the default is set at 20). The fifth and final inputs page asks about current and projected income, the percent of pre-retirement income you intend to have in retirement, your year 2000 taxable income, and the marginal state and local tax rate.
You end up with a simple results page that lists your expected annual income distributions. There is a lengthy explanation of assumptions.
This attractively designed and intuitive site is probably the best of the free calculators we've examined thus far. It offers tutorials and each input has a helpful pop-up explanation of the information requested.
Of the four free calculators evaluated by Mr. Boudreaux he said he liked the one available at rothretirement.com the best because it allowed him to see how much money his fictitious client's beneficiaries would stand to inherit.
He also liked that it came with sliders that allowed him to adjust such variables as income.
Mike Book, national director of sales and marketing for Archimedes Systems, Inc., in Waltham, Mass., which helped develop the calculator at rothretirement.com, said that the online tool is not intended to provide users with a definitive answer on whether converting to a Roth IRA makes sense. Instead, he said, it's supposed to give them a fuller view of their financial options and be something to talk about with their advisers.
“We are giving them an ‘aha' moment,” he said. “The goal is to send them back to their financial organization or adviser.”