FEATURE |
WHY THE FEATURE IS IMPORTANT |
Cost of Capital |
Also called minimum required rate of
return. This is to consider the time value of
money. When analyzing an investment that exists for a number of years,
this is essential. A dollar today is worth much more than a dollar 20
years from now. Put another way, if the financial analysis does not consider
the time value of money, it is worthless! |
Rate of Return |
This is what you earn on the IRA. |
Pay Rollover Tax from IRA Funds |
Some investors won't have funds outside
of the IRA to pay the rollover tax. If the free Roth IRA Calculator
assumes that the rollover tax will be paid from funds outside of the IRA but
the tax is actually paid with IRA funds, the computations are likely to give
very incorrect results. |
10% Early Distribution Penalty Applies |
If the Traditional IRA to Roth IRA
rollover conversion tax is paid from IRA funds and the IRA owner is younger
than 59˝ years old, a 10% penalty will apply to Traditional IRA funds used
to pay the rollover tax. You can make the wrong Roth Vs Regular IRA
decision, if this is ignored. |
Pay Rollover Tax in 2011 & 2012 |
Most will want to pay the 2010 rollover
tax in 2011 & 2012. There are notable exceptions. Your taxes may be
lower, if paid in 2010 when your income is much lower in 2010 than in 2011
and 2012. Your taxes might be much lower, if paid in 2010, if tax
rates go much higher in 2011 and 2012 due to the budget deficit and related
tax rate increases. |
Is the Rollover Year 2010? |
You can spread the Roth rollover tax over
2011 and 2012, if the rollover is 2010. If the rollover is a different year,
the conversion tax will be paid when income for that year is taxed. |
Take Distributions from the Roth IRA |
You don't have to take distributions from
a Roth IRA, unless the Roth IRA is inherited. The cashflows will be
different if you don't take distributions from the Roth IRA. |
Nondeductible IRA Amount |
The amount that was contributed to a
nondeductible does not create any rollover tax. |
Distribute the IRA over Years |
Some IRA owners will want to take
distributions over a certain number of years. |
Take the Same After-Tax Distributions
each Year |
Some IRA owners will want to take the
same amount each year from the IRA. It is important to consider the
after-tax amount. The after-tax amount will be different than
the pre-tax amount for the Regular IRA. If you need $10,000 each year
from your Traditional IRA, you will need to take a larger amount, because it
is taxable. Thus, to receive $10,000 net of tax from a Traditional
IRA, you might need an IRA distribution of $14,000 ($4,000 was withheld for
tax.) However, if you need $10,000 from a Roth IRA, you take a $10,000 Roth
distribution, since it is tax free. |
Current Tax Rate |
It may be important to use different tax
rates for before and after retirement. |
Tax Rate During Retirement |
It may be important to use different tax
rates for before and after retirement. |
Rate for Estate Tax |
Traditional IRAs and Roth IRAs can both
be subject to estate tax. You cannot assume that the estate tax will be the
same for both types of IRAs, since the balances at death could be different. |
Estimated Date of Death |
We don't like to think of these things,
but this is important in estimating when estate tax, if any, is paid, and
when the heirs will pay tax, if any, the inherited IRA. |
Heirs' Tax Rate |
Heirs will pay tax on Traditional IRA
distributions. If there is estate tax paid, heirs may also get a deduction
for something called Income in Respect of the Decedent (IRD). These can be
significant factors in the economics of a Traditional vs. Regular IRA. |