rothTool™, Roth v. Ordinary IRA Conversion Calculator
The Taxpayer Relief Act of 1997 created the Roth IRA and revised may of the existing rules for the more the traditional plans.
What is a Roth IRA
Funded with non-deductible contributions, distributions from a Roth IRA may be 100% income tax-free if they meet certain requirements and become ‘qualified distributions’.
For individuals filing an individual return, the contribution phase out to participate in a Roth IRA begins with an Adjusted Gross Income of $95,000 and is eliminated for those individuals with incomes in excess of $115,000. For married taxpayers filing joint returns, the limits are $150,000 and $160,000. It is estimated that 95% of all taxpayers will qualify for the new Roth IRA. The maximum contribution is equal to $2,000 less the amount contributed to a tax-deductible IRA (or the current non-deductible IRA).
Very simply, the new rules allow more people to maximize the benefits of an IRA. This new IRA will be even more flexible, allowing money to be either invested longer or to be available for withdrawal early without penalty for certain college costs or a first home.
What is rothTool
rothTool will assist you in answering the following key IRA questions for your clients…
The rules for determining eligibility to participate in an IRA are extremely complex. Which of the three IRA accounts am I eligible for, and how much can I contribute?
Of the three types of IRA accounts available: a) Tax-deductible; b) non-deductible; and c) Roth which one do I choose? Which of these IRA types will produce the best results over time?
Certain taxpayers may transfer their existing taxable IRAs to the new tax-free Roth IRA. Should I convert? Which of these IRAs will produce the best future results? Is there a time limit to make the conversion? Should the tax be paid with funds out side the IRA or paid from IRA values?
rothTool is a 2nd generation 'Ordinary IRA' vs. 'Roth IRA' planning tool that will give you increased flexibility assisting your clients select the best combination of the Ordinary IRA and/or the Roth IRA.
rothTool allows you to view the current plan as opposed to an alternate plan. The alternate plan could be 100% Roth IRA or only 20% Roth IRA and 80% Ordinary IRA -- you pick the split that produces the desired results.
rothTool uses different income tax brackets and rates of return both before and after retirement. Set both the time period before retirement and the number of years that retirement is estimated to last. You also have the option of establishing the percentage of the annual tax savings that will be re-invested – from 0% to 100%
rothTool uses a Conversion/Tax Savings account is used to balance the comparison when taxes are paid from personal funds. This same account is used to accumulate the tax-savings (if the savings are reinvested) resulting from annual contributions to an Ordinary IRA. The same distributions options listed above are also available for this account -- three types of accounts deserve three possible options.
rothTool reports will show year-by-year the comparative results of your analysis. These reports can be illustrated in 'Actual Dollars' (no-inflation) or adjusted for inflation illustrating the values of today's purchasing power. Reports include...
Cover Page: This page is designed to introduce your client to the analysis.
Planner's Notes: You can add your notes regarding this client and save the notes with the client file.
IRA Eligibility: This report looks at eligibility to participate in an Ordinary IRA (tax-deductible or non-deductible) or an ordinary IRA. The entries on the Client Information screen relating to income, type of tax return filed, and plan participation are used to generate this report.
Assumptions/Explanation: Details of the assumptions and important dates are included on this report.
Summary and Comparison: This is a one-page summary of the calculations. The time span runs from today through the end of the analysis. The end of the analysis generally is the mortality age of the client or the beneficiary, whichever spans the most years.
Graphic Summary: This report contains two graphs - one for the current plan and one for the alternate plan. Together they provide a picture of the plans over time. The time span runs from today through the end of the analysis.
Select Single Year Summary: This report is identical to the 'Summary and Comparison' report above except that you can select the year to end the report by changing the year in the report toolbar.
Values-Current Plan: A year-by-year summary of annual values beginning today and ending with the last year of the report. This report assumes no conversion is made. These values are the combination of the Ordinary IRA assuming no conversion and the Conversion/Tax-Savings Account.
Values-Alternate Plan: A year-by-year summary of annual values beginning today and ending with the last year of the report. This report assumes a portion (ranging from 0% to 100%) of the current Ordinary IRA is converted to a Roth IRA.
Estate-Current Plan: A year-by-year summary of annual values beginning today and ending with the last year of the report. This report assumes no conversion is made. This report is designed to illustrate maximum impact and assume no marital deduction.
Estate-Alternate Plan: A year-by-year summary of maximum estate shrinkage beginning today and ending with the last year of the report. This report assumes a portion (ranging from 0% to 100%) of the current Ordinary IRA is converted to a Roth IRA. This report is designed to illustrate maximum impact and assume no marital deduction.
Distribution Factors: Based on the dates of birth of Client and Beneficiary, this report compares the actual minimum distribution factors for an Ordinary IRA and a Roth IRA.
Detail-Current Ordinary IRA: A year-by-year summary of annual values beginning today and ending with the last year of the report. This report assumes no conversion is made. Similar to the 'Values-Current Plan' report above.
Detail-Adjusted Ordinary IRA: A year-by-year summary of annual values beginning today and ending with the last year of the report. This report assumes a portion (ranging from 0% to 100%) of the current Ordinary IRA is converted to a Roth IRA. This report reflects the amount remaining after the assumed conversion.
Detail-New Roth IRA: A year-by-year summary of annual values beginning today and ending with the last year of the report. This report assumes a portion (ranging from 0% to 100%) of the current Ordinary IRA is converted to a Roth IRA. This report reflects the amount converted.
Detail-Conversion Tax Account: A year-by-year summary of annual values beginning today and ending with the last year of the report. This account contains reinvested tax-savings from a tax-deductible annual deposit and any taxes paid from personal assets at the time of the conversion. It is added to the Ordinary IRA to come up with the Current Plan Values in the comparison.
Historical Inflation: A graph that illustrates historical inflation beginning with your client's year of birth and ending last year.
Projected Inflation: A graph that projects inflation's impact on the value of $100 beginning today and ending with the last year of the report. The inflation rate used is the rate entered on the 'Investment Return / Taxes /Inflation' screen.
Financial Pyramid: A one page financial planning chart
System Requirements
The minimum recommended system configuration is a Pentium computer operating with either Windows 95, Windows 98 or Windows NT.
The Price
rothTool is priced at $45
Questions that may influence your decision...
iraTool, rothTool and distTool will handle all required minimum distribution calculations associated with both traditional IRA accounts and the new Roth IRA accounts. For a Roth IRA there are no minimum distribution requirements during the account owner's life, or if the designated beneficiary is the account owner's spouse. However, if there is a non-spouse beneficiary, the account must be distributed either:
- By December 31 of the year containing the fifth anniversary of the grantor’s death; or,
- Over the life expectancy of the designated beneficiary starting no later than December 31 of the year following the year of the owner’s death. Life expectancy for beneficiary is calculated using the attained age of the non-spouse beneficiary, as of the beneficiary’s birthday in the year distributions are required to begin.
iraTool, rothTool and distTool all have the following options regarding life expectancy calculation options:
Recalculate participant only;
Recalculate participant and beneficiary;
Recalculate participant and not beneficiary;
Recalculate beneficiary and not participant; or,
No recalculation of life expectancy for participant or beneficiary.
3. What distribution options are available to determine the payout at retirement?
iraTool, rothTool and distTool all allow you to set different (or the same) distribution patterns for the Ordinary IRA and the Roth IRA. Planned distributions may include:
Minimum Distributions;
Amortization to a given age;
Amortization to a given age but not less than the Required Minimum Distribution;
Distribution of a percentage of the accumulated fund;
Distribution of a percentage of the accumulated fund but not less than the Required Minimum Distribution;
Level withdrawal amount;
Level withdrawal amount but not less than the Required Minimum Distribution; and,
Level withdrawal amount increasing by a stated percentage each year and not less than the Required Minimum Distribution.
3. Does the software have the ability to handle both the recalculation of life expectancies and term certain methods?
4. Does the software have the ability to handle spousal rollovers for Roth IRAs?iraTool, rothTool and distTool will handle both recalculated and non-recalculated (sometimes referred to as term certain) methods.
5. Does the software take into account estate taxes?Spousal rollovers can be handled for both traditional and Roth IRA plans. Because of the design of iraTool, you can assume that the surviving spouse continues, or rolls over, the remaining account balance. By setting up a second scenario, the surviving spouse can even designate grandchildren allowing the illustration of the 'Stretch IRA' concept.
Estate taxes are automatically calculated for each year of the plan. For additional estate assets you can also designate both a growth rate and a percentage administrative expense charge. 6. Is the software updated to reflect '98 tax changes?
The '98 tax changes are reflected in iraTool, rothTool and distTool.
The Price
rothTool is priced at $45
distTool is priced at $45
iraTool is priced at $80 (contains both rothTool and distTool)