1. What is IRA Conversion Tax?

IRA conversion tax refers to the income tax owed when converting funds from a traditional IRA to a Roth IRA. The converted amount is treated as taxable income in the year of conversion and is subject to your marginal tax rate.

2. How Does the Calculator Work?

The calculator uses the IRA conversion tax formula:

Where:

• \( Converted\ Amount \) — The amount being converted from traditional IRA to Roth IRA (in dollars)
• \( Marginal\ Tax\ Rate \) — Your highest federal income tax bracket percentage

Explanation: The calculation multiplies the converted amount by your marginal tax rate to determine the additional tax liability for the conversion year.

3. Importance of Tax Calculation

Details: Accurate tax estimation is crucial for financial planning when considering IRA conversions. Understanding the tax implications helps determine if a conversion makes financial sense and allows for proper tax withholding or estimated tax payments.

4. Using the Calculator

Tips: Enter the amount you plan to convert in dollars and your current marginal tax rate as a percentage. Ensure both values are positive numbers with the tax rate between 0-100%.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between traditional and Roth IRA?
A: Traditional IRA offers tax-deductible contributions with taxable withdrawals, while Roth IRA uses after-tax contributions with tax-free qualified withdrawals.

Q2: When should I consider an IRA conversion?
A: Consider conversion when you're in a lower tax bracket than expected in retirement, or when you want to avoid required minimum distributions (RMDs).

Q3: Are there income limits for Roth IRA conversions?
A: No, the income limits for Roth IRA contributions do not apply to conversions. Anyone can convert regardless of income level.

Q4: Can I undo a Roth IRA conversion?
A: Previously, recharacterization was allowed, but current tax laws generally do not permit undoing Roth conversions after they're completed.

Q5: Does state tax apply to IRA conversions?
A: Most states follow federal treatment and tax IRA conversions as ordinary income, but some states have exceptions. Check your state's specific tax rules.