Roth Conversion
We do a fair amount of Roth IRA conversion planning and think this will become more important as taxes potentially increase in the future. My question is in regards to our Roth IRA conversion calculator.
We can choose the tax rate for the conversion amount, future tax rates, and the tax rate at death. We typically use the current marginal rate for the conversion but know that the effective rate is typically lower. For example, we have a client currently in the 22% marginal bracket but 12% effective tax rate.
Would you recommend we keep using marginal rates for the current conversion tax rate or use the current effective rate?
Permalink Submitted by William Tuttle on Wed, 2021-06-02 17:07
The effective rate is not relevant when you are making incremental changes in taxable income.
This applies to both additional taxable income from Roth conversions and reduced taxable income from the reduction in future taxable income from taxable voluntary distributions and/or RMDs.