Roth IRA Conversion Calculator Championed for Income Investors

The Roth IRA conversion calculator championed for income investors by retirement expert Bob Carlson is aimed at reaping three key advantages.

Carlson’s proprietary Roth IRA (individual retirement account) conversion calculator is intended to lock in today’s income tax rates, to reduce required minimum distributions (RMDs) and to remove assets from traditional IRAs that are taxed as ordinary income at the highest rates. Instead, Carlson developed a conversion calculator of his own to accomplish these goals.

For income lovers seeking to maximize their funds, the Roth IRA calculator could be instrumental in addressing all three of those common challenges. For those interested in learning more about Carlson’s Roth IRA conversion calculator, click here.

Bob Carlson, head of Retirement Watch, created a proprietary Roth IRA Conversion Calculator.

Carlson’s Roth IRA Conversation Calculator Caters to Income Investors

Self-directed investors who like dividends may find Carlson’s Roth IRA conversion calculator a great way to decide whether now is a good time to shift funds out of traditional IRAs to Roth IRAs. Carlson’s Roth IRA conversion calculator provides questions that investors should ask to determine the next best step.

Let’s face it, the one-size-fits-all approach for certain investment questions will not work with anything as individualized as IRAs. Some online Roth IRA conversion calculators are not accurate, with roughly two out of every three giving the wrong answer, according to the CPA Journal.

For starters, some online Roth IRA conversion calculators require investors to enter their private financial information. Doing so leaves investors vulnerable to potential security breaches.

Carlson’s Roth IRA Conversation Calculator Caters to Tax-Conscious Income Investors

Income tax rates may be as low as many investors will see in their lifetimes, With the Tax Cut and Jobs Act expiring after 2025 or simply because the federal budget deficits and debt are so high.

In traditional IRAs. capital gains and qualified dividends become ordinary income. All distributions of investment income and gains from traditional IRAs thereby are taxed at one’s highest tax rate.

Long-term capital gains and qualified dividends have favorable tax treatment when earned in a taxable account and are tax-free when distributed from a Roth IRA. Earning income in a traditional IRA converts them into the least favorable type of income, warned Carlson, a pension fund chairman who also leads of the Retirement Watch investment newsletter.

“You create tax problems for your beneficiaries by leaving them a traditional IRA to inherit,” Carlson counseled. “They must distribute the entire IRA within 10 years after inheriting it, and they will be taxed on the distributions just as you have. They really only inherit the after-tax value of a traditional IRA, and the inheritance could push them into a higher tax bracket and increase their overall taxes.”

Want to Reduce Required Minimum Distributions? Try Carlson’s Conversion Calculator

One of the big headaches of reaching retirement age is the federal law about taking required minimum distributions (RMDs). Carlson’s Roth IRA conversion calculator can help.

Ideally, a taxpayer can reduce future required minimum distributions, if circumstances allow. The owner of a Roth IRA doesn’t have lifetime RMDs, but owners of traditional IRAs do.

“RMDs create a lot of problems for some IRA owners,” Carlson told me.

Who Wants to Remove Assets from Traditional IRAs that are Taxed at the Highest Rates

To remove assets from traditional IRAs that tax ordinary income at the highest rates, consider using a Roth IRA conversion calculator to determine if it is good idea for each individual. Relying on general rules of thumb could get an investor into trouble, because each person’s situation is different.

Important factors to weigh are the difference between one’s current income tax rate and future income tax rate, the level of an individual’s investment return, how long the income and gains compound in a Roth IRA after a conversion, whether the IRA is needed to maintain a standard of living, etc.

“An IRA conversion calculator lets you change each of these variables and see what the long-term results would be under different scenarios,” Carlson told me.

Danger, Danger, Danger to Leaving Assets in an IRA or 401(k) as Long as Allowed

In the March 2023 issue of Retirement Watch, Carlson wrote to his subscribers about the many dangers of leaving assets in an IRA or 401(k) as long as allowed.

“There are several potential dangers to leaving assets in a traditional IRA or 401(k) for as long as allowed,” cautioned Carlson. “Distributions from a traditional retirement account are taxed as ordinary income subject to your top income tax rate. The IRA might be earning long-term capital gains, qualified dividends and other tax-advantaged income. But it’s all taxed as ordinary income when distributed. It might be better to take the money out of the account early, pay the taxes and invest the after-tax amount to earn tax-advantaged gains and income.”

Another danger is one’s income tax rate might increase. People generally believe their income tax rate declines once they retire, Carlson commented.

“That was the case when we had a lot of tax brackets, Carlson wrote. “But since the Tax Reform Act of 1986, we’ve had relatively few tax brackets. Many people stay in the same bracket after retiring. In addition, tax rates for each of the brackets might increase. The Tax Cut and Jobs Act of 2017 is set to expire after 2025. If Congress doesn’t act, tax rates will jump back to their pre-2018 levels. Or at some point, Congress might raise taxes to close the budget deficits and pay for the outstanding debt. The big risks for retirees are the Stealth Taxes, which either directly target retirees or affect retirees more than other taxpayers.”

The Stealth Taxes include the inclusion of Social Security benefits in gross income, the Medicare premium surtax (also known as IRMAA), the 3.8% surtax on net investment income and others.

Conversation of Traditional IRAs into Roth IRAs is Gaining Popularity

Conversion of all or part of a traditional IRA to a Roth IRA is gaining popularity. Investors pay a tax to convert the IRA by including the converted amount in gross income. But a conversion eliminates future RMDs for the owner and, after a five-year waiting period, distributions of income and gains are tax free.

“Distributions to beneficiaries also are tax free, but most beneficiaries will have to distribute the entire Roth IRA within 10 years after inheriting it,” Carlson wrote in the April 2023 issue of Retirement Watch. “I’ve discussed the pros and cons of IRA conversions and the best times to do conversions in my books and past issues, most recently in the December 2022 and September 2022 issues. You can convert any amount you want, and there’s no limit on the number of conversions you can do. Some people convert just enough each year to avoid jumping into the next higher tax bracket.”

For investors who like the thought of locking in today’s income tax rates, reducing required minimum distributions (RMDs) and removing assets from traditional IRAs that are taxed as ordinary income at the highest rates, Carlson’s conversion calculator could be well worth a try.

Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.