ROTH Conversion Ladder Calculator
So I’ve gotten a few comments that my last post on how to access your retirement accounts was a bit opaque on the details. In order to remedy that, I’ve pulled together a quick little calculator to show exactly how all this works!
The Roth Conversion Ladder Calculator
You can find the calculator along with all of our other tools and research here (you’ll have to log in to access). The calculator is pretty easy to use. It starts with some very basic assumptions around return rates, inflation, expenses, how much you plan to convert from IRA/401k balances into Roth Accounts every year, and the basics of your account balances. We’ll work through a more typical example than my wife and me. A couple with a large amount in traditional IRA’s and 401ks, a smaller amount in taxable accounts, and a very small amount in Roth IRAs. Additionally, over the years they’ve made about $80k in after tax contributions to their 401k. Let’s assume the following inputs and balances at the start of retirement.
The model assumes you follow the basic path I laid out in the previous post:
- Utilize after tax accounts first
- Convert after-tax contributions to 401ks and IRAs to Roth IRA immediately
- Convert a set amount of your traditional IRA/401ks to Roth accounts every year
- After your taxable accounts are depleted you begin drawing down your Roth contributions/Rollovers
Source of living expenses
The results show a few interesting things about how this process functions. The first thing to understand is where your living expenses are coming from during this period.
This hypothetical couple spends the first seven years of retirement slowly drawing down their initial taxable account of $200k. After year seven that account is exhausted and they switch over to extracting Roth contributions and conversions that they’ve allowed to ferment for at least five years. From that point on all of their living expenses are covered by pulling out those conversions
Location of Assets
The next thing to understand is where exactly your assets are sitting throughout this process.
Our hypothetical couple starts out with a high balance in traditional IRAs/401ks, a smaller amount in taxable accounts, and a very small balance in Roth Accounts. Over time this picture will shift completely. They will fully draw down their taxable account while they move as much as possible from the traditional IRAs and 401ks to their Roth Accounts. As a result, the balances in their Roth accounts grow substantially over time until they are the only thing remaining.
This is also very advantageous if our hypothetical couple has children that they wish to leave anything left over. Roth accounts have a number of advantages for heirs, but the biggest is that you do not have to pay taxes on any of the distributions.
Amounts Accessible without Penalties
The final piece of the puzzle is the location and size of the balances they can access for living expenses without penalty.
The drawdown of the taxable accounts is clearly visible, as their accessible balances gradually decrease over the first five years. The other element to highlight is the balances in the Roth IRA that are available to access penalty free. For the first five years, these are flat, at the original value of the after-tax contributions. However, after the first five year period ends those balances begin to climb as their conversions become available for withdrawal.