A financial tool that estimates the potential tax implications and future value associated with transferring funds from a traditional 401(k) account to a Roth 401(k) or Roth IRA. This calculation considers factors such as the current balance of the 401(k), the individual’s current and projected tax bracket, the expected rate of return on investments, and the time horizon before retirement. For example, a user might input a $100,000 401(k) balance, a 22% current tax bracket, an 8% expected annual return, and a 20-year retirement horizon to see the projected after-tax value under both scenarios.
This analysis is valuable because it assists individuals in making informed decisions about their retirement savings strategy. The primary benefit lies in understanding the trade-off between paying taxes now on the converted amount versus potentially paying no taxes on qualified withdrawals in retirement. Historically, this decision was less common, but as Roth accounts have gained popularity and as tax laws have evolved, the need for such evaluations has increased significantly, empowering individuals to optimize their retirement income.
