McQ wrote: ↑Sun Aug 15, 2021 4:29 pm
Hello FiveK: I'm a little more than halfway to that tool, or rather to a 'proof of concept' spreadsheet demonstration of exactly how tax drag works, following up on some numbers upthread...But, not ready for primetime yet.
Excellent news! And if summer days lead you to pursuits other than typing away at a keyboard...join the crowd.
Don't know if more volunteer work of this type gets done when outdoor conditions are unfavorable, but it would not be surprising.
It will document exactly how constant tax rates can still lead to a Roth conversion payoff, and how much lower future tax rates might be and still have the conversion payoff.
That does seem the best approach. Whenever a distribution is assumed to come from a converted Roth account, whether voluntary or enforced by inherited RMD rules, that provides a "spendable after tax amount".
Whether spent at that time or invested taxably, the question becomes "what tax rate would withdrawal from an unconverted traditional account have to incur at the same time to provide the same "spendable after-tax amount." When only traditional and Roth accounts are pertinent, the answer is simple: the same rate as imposed on the original Roth conversion.
When taxable accounts enter the fray, that's when "somewhat" lower rates on future withdrawals (compared with current contribution/conversion marginal rates) can still favor the Roth path.
Just a word to all about why I believe it is important to consider the case where RMDs 'force' removal of funds from the tax shelter in excess of spending needs. I argue for reinvesting the after-tax amount to maintain comparability with the Roth conversion scenario. As has been stated again and again in the DBSH and Woodspinner threads, many converters expect to leave the Roth funds to heirs--to not spend from the Roth. If Roth funds are not being spent, than the counterfactual TDA funds, had there been no conversion, must also not be spent, excepting the haircut from taxes. So they get reinvested in taxable, where a new source of tax drag commences.
If regular withdrawals were to be made from the Roth funds, up to the after-tax value of the forced RMD from the counterfactual TDA, then all the counterfactual RMD could be spent as well; comparability would still be maintained.
No argument about the potential utility of this analysis.
For what it's worth, the use of the word counterfactual may be more distracting than worthwhile. Note that for a person considering whether to convert or not, neither choice is yet "factual".