Personal Investments • Re: When should I convert to Roth, if at all?

Thanks, Exchme. This advice was really helpful. My initial look at this used pralana's "simple portfolio model," which did not get into asset allocations but allowed me to specify the expected rate of return in each account type. I had put Roth higher than tax-deferred, which biased the model into chasing the higher returns, just as you said. That was why it was suggesting Roth conversions filling up the 32% tax bracket, which was more than my intuition.

Good catch on why the model was suggesting something inappropriate!

...The optimization now suggests filling up to the 24% tax bracket in some years, and in some years just the 10% or 22% bracket.

That still seems odd, even if 10% is a typo for 12%, but highly odd if it really is suggesting years that stop in the 10% bracket.

Do you see any reasons why that pattern would be truly optimal?

Without knowing details of the optimization algorithm, a couple of possibilities come to mind:
1) The model hits one of the "mesas" in the tax code, e.g., the 27% one shown in the marginal tax rate wiki, and can't "see" that pushing past that section will lead to a region with lower tax costs and thus better results.
2) The width of the mesa is actually broad enough that stopping short of it in some few years is slightly better than going toward the top of the 24% bracket in all years. If so, it may be that "slightly" is well within the error band of uncertainties in future tax rates, investment returns, etc.

I also modeled what would happen if I died at 75 instead of 95. That produces a hit of $1.5M in the portfolio by the end of the plan, due to the single-filer status of the surviving spouse and loss of SS income. But happily, converting up through the 24% tax bracket remains a near-optimal approach, so the conversion strategy is not that sensitive to life expectancy.

That's what one might expect: the optimal path is to aim for a constant marginal tax rate each year, with the optimum conversion amount changing as other income changes.

Is that what you are seeing?

Statistics: Posted by FiveK — Sat Oct 12, 2024 11:45 pm

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