RothCalc: Deterministic Tax Conversion & Early Retirement Modeling Tool

Should I do a Roth Conversion?

Roth conversions are a little over emphasized. The problem is you kinda need to know what tax bracket your going to be in 27 years in the future. For that you need to know your with draw strategy as well. This is really something more. This site tends to recommend almost always going traditional with roth conversions and if you follow the link the auto moderator gave it goes into why. But it's a bit more complicated than what it goes into. People try to optimize there retirement and you really shouldn't do that. What you need is an understanding of a target final allocation mix. And a plan to achieve that mix. Say your 55 today and want to with draw 100K from your investments. If you, because your married, pull out 50K of your traditional, you'll only pay \~11% on that 50K. Then if you withdraw \~48K from a brokerage, you'll pay 0% tax on any of that because your married. Even if that's like 90% capital gains). The 50K + 43K (capital gains portion) = 93K which is under the 0% tax bracket. Then the remaining.. 2K you pull from your ROTH to get 100K. Or pull out 52K and make 150K instead with again 0% tax. Your effective rate is \~5.5% on 100K. It's \~3.6% on 150K. Which is hardly worth worrying about. In this situation a Roth conversion just may not be worth it unless your existing saving rate would put too much in traditional or not enough in Roth. Or something like that. The point is you need to tax strategize and see if a Roth Conversion makes sense. Now... say the taxes double. Ok. Well, your still paying \~11% on 100k. And you can reduce that by reducing traditional withdraw and relying more on ROTH. Having this mix of investments basically allows you to pick your tax rate effectively. Certainly I'd like zero. But the other angle here is if investing in traditional allows you to be able to amass more wealth over the ROTH that in principal the difference accounts for over any realistically tax you'd pay. So.. say you want to pull out 100K again. Ok. In roth, it's easy, you pull out 100K. And your done. Try to do that in traditional and you'll pay 5.5K in taxes. So you would pull out \~112K to account for that. (112 \* 0.89 \~=100K). If saving in traditional puts you in a position say.. that you could withdraw 130K and your accounts could support that. Then who cares about 11.5% tax rate. Your pulling out more than you would have through ROTH. Anyway. I'm not against roth conversions. They are just another tool. All I'm saying is to really benefit from them. You kinda need to know quite a bit about your long term plans and the state of the world in 27 years. Roth conversions take time to recover. If your going to do them, you really only potentially benefit from them if you do them in low tax brackets. Most of yours would be done probably in the 22% tax bracket. Anything you convert them to will need to recover \~30%+ to break even. So you need at least a few years. So 100K in traditional getting back to 100K in ROTH at this rate would take likely a couple years. In that same time that original 100K would have been 130K if you left it alone in the traditional. So comparing a 100K slice in say 24 years (since it should take \~3 years to recover). The difference per 100K staying in traditional vs converted into roth is \~300K. Which using the generic 4$ rule... is \~12K per year. Which kinda makes this a wash. Now projecting that longer may change that. As your not going to need 100% of your income the day you retire. But my point is that's why you need low tax brackets. And you need a run way long enough to recover. But not too long. So they tend to work better as you near retirement. The point of all this is it's not a straightforward answer. Personally I like vanguard BETR calculation better: [https://investor.vanguard.com/investor-resources-education/news/a-betr-calculation-for-the-traditional-to-roth-ira-conversion-equation](https://investor.vanguard.com/investor-resources-education/news/a-betr-calculation-for-the-traditional-to-roth-ira-conversion-equation)