Did the new rules on IRAs kill Roth conversions? Not by a long shot.

A tax law taking effect a month ago reduced the value of IRAs as an estate planning tool. It did not, however, kill the economics of a Roth conversion. Take a second look at converting. It could make your family tens of thousands of dollars better off.

With a Roth, you pay tax upfront on retirement savings but create an account whose distributions are tax-free for you and your heirs. Paradoxically, paying tax sooner than later is often a winning strategy. I have created a calculator that shows you whether converting pays off for you.

Example: Sally, 60, is thinking about Rothifying $100,000 of an IRA that she won’t be needing to live on. She’s in the 40% tax bracket (state and federal combined) and consumes $40,000 of cash outside the IRA to cover the tax bill. She names her spouse as beneficiary. The Roth IRA money compounds untouched for 29 years.

When the second of this couple dies, the money goes to their kids. The kids let the account sit for another ten years, at which point they are compelled, under the recently enacted Secure Act, to liquidate it. (For more on the law, see Seismic Retirement Changes.)

With a modest assumption about investment returns, we find they’ll have $566,000. Without the Roth conversion they’d have only $501,000. The latter figure includes what the $40,000 would turn into if it weren’t used to pay taxes now.

You’ll see this hypothetical example when you download the calculator. After downloading, make a copy of the file and put in your own age and tax bracket on the copy. It’s likely you will have a hefty gain from Rothifying.

The same calculator can be used to decide whether a 401(k) salary deferral this year should be a deductible sum going into the usual kind of 401(k) or a nondeductible sum going into a Roth 401(k).

In our hypothetical example, Sally assumes that her tax bracket will shrink to 35% during retirement and that the heirs will be in that lower bracket, too. This gives the lie to the commonly heard theory that Roth accounts don’t make sense for people who expect their tax bracket to go down.

How is that possible? That paying tax now at 40% is better than paying tax later at 35%?

There are two reasons that Roth accounts can come out ahead in this situation. One is that the Roth IRA has no distribution mandate (other than the one that applies ten years after Sally and her husband have both died). With a non-Roth IRA, Sally has to make withdrawals beginning at age 72, and those proceeds, deposited into a brokerage account, get whacked by taxes.

Another reason the Roth is a winner is that Sally is in effect sheltering the $40,000, too. Without the Roth, investment returns on this pile of dough would be taxed.

Sally and her heirs might, of course, choose not to let the money pile up for 39 years. They might spend some. But the only way to make a fair comparison between the Roth and the no-Roth option is to put all spending on the same date. In this calculator, the comparison date is at the end: The family either hoards the Roth IRA until the last possible moment or else hoards a combination of IRA and taxable account until the same year.

You can play around with the tax brackets and see what happens. You can also modify Sally’s assumptions to suit your circumstances, by going to the second tab (labeled “Roth”) and looking at lines 12 through 18. For example, Sally thinks it’s a toss-up whether she will owe the 3.8% Obamacare tax on investment returns earned outside the IRA. You might have a different forecast.

The calculator assumes that money both inside and outside the IRA is invested in a conservative fund earning a modest return from a combination of unrealized appreciation of fund shares and a payout that is partly eligible for the favorable rate on long-term gains and qualified dividends. With the non-Roth option, there will be money in a taxable account; here, the model includes a step-up on the fund shares when the older generation dies and a capital gain tax bill when the kids liquidate a decade later.

Here are some of the factors that make Roth conversions and Roth 401(k) deferrals more compelling:

—You expect your tax rate to go up. Don’t forget that the Trump tax cuts expire in 2026 and that a Medicare premium formula effectively creates a surtax on retirees.

—Your family might be paying federal or state estate tax. The economic value of the Roth tax shield (in Sally’s case, a $40,000 investment) does not appear anywhere on an estate tax return.

—You expect to do better than the 3% real return we assume for Sally.

—You’re young.

—You expect to be paying that 3.8% investment tax.

Here are some of the factors that make a Roth less compelling:

—After retirement, you will move from a high-tax state to a low-tax state.

—You could leave your IRA to low-bracket relatives such as improvident grandchildren.

—You’re philanthropic. Non-Roth IRAs are great vehicles for charitable gifts during your retirement (within limits) and for charitable bequests (with no limits).

—The conversion, or the 401(k) Roth choice, would tip you into a higher bracket.

—You’ve already done a lot of Rothifying. It’s a good idea to maintain some non-Roth money in order to have tax-planning flexibility later in life.

Here’s a factor that makes a Roth conversion a downright bad idea:

—You don’t have outside cash to cover the conversion tax.

The calculator is a read-only Google Drive file. To use it, you have to make a copy and put your inputs on your copy. Please do not “request access” to the original.

Related: Don’t Rush to Take 2020 RMDs.

Originally published at Forbes

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