Model to back into Roth conversion assumptions

[Scuba]

Given the market dip as well as an expected dip in our taxable income in 2020, we are considering a Roth conversion. I ran a model on Fidelity’s website that indicated we are better off not converting, but obviously the results are highly dependent on assumptions re current and future tax rates.

Instead of having a model tell me if a conversion is financially beneficial under certain assumptions, I’d like to find a model that tells me how much our future tax rates would have to be, and what assumptions we’d have to make about future rates of return, in order to make a conversion beneficial. Then I can evaluate the likelihood of this ever occurring.

Every time we’ve ever evaluated Roth conversions in the past vis our CPA, I-Orp, or the Fidelity tool, the answer for us has always been not to do it. However, I’m thinking the current environment and likely future appreciation of the investments may make 2020 a unique opportunity.

 

[Clone]

The optimization is a function of:
Market performance
Asset allocation
Current Tax Rates
RMD schedule
Personal need to withdraw for living expenses
Desire to leave pre-tax funds to heirs (or not)
Desire to leave post-tax funds to heirs (or not)
Age of demise (yourself + spouse)
Spouse (or not)
Impact on death of one spouse on pension/ social security
Future Tax Rates (as a function of MFJ or filing single)
impact on ACA eligibility
IRRMA impact

probably others


My challenge with all of this is that slight tweaking of the factors can drastically change the results. In particular, market performance (especially if you are a number of years away from RMDs and planning to take SS at 70). Next- longevity, because it impacts future tax rates as well as survivor benefits.

I looked at tax rates for (MFJ and for single) with the current tax rates and with the reversion tax rates. I came up with a SWAG that we would always be above a certain tax rate, and therefore it made sense to convert up to that current tax rate. If the market wains, then there will be less to convert. If the market runs strong, then we pay more taxes (not the worst problem). There was a very good thread where somebody did a step-by-step discussion. In some ways, this is similar to the optimum time to take SS. You can't know for sure until the game is over.

 

[pb4uski]

In my model, the marginal tax rate no vs later is the driving force. If you pay the tax out of taxable funds then there is a second-order impact of converting the amount paid in taxes from taxable to tax-free.