Submitted by David Wright on Fri, 2023-06-16 16:50

The BETR paper is fairly clear that present vs. future tax rates are still a primary factor in looking at Roth conversions.  Common thinking is that tax rates are highest during your peak earning years, and will likely come down during early-mid retirement unless there are significant RMDs.  BETR analysis kicks in when it appears the future tax rate and current tax rate are close, and it is a way to calculate the advantages relative to a single number.  

Submitted by David Mertz on Fri, 2023-06-16 20:04

  • Believing that you need your future tax rate to be less than or equal to your present tax rate for a Roth conversion to be beneficial generally sells Roth conversions short, as explained in the Vanguard research paper.  Roth conversions can be quite beneficial even if the present tax rate is somewhat more than the expected future tax rate due to moving savings from taxable accounts to nontaxable accounts by paying the taxes with funds from taxable accounts.  Given enough subsequent growth, the lost gain potential on the money paid to taxes for the Roth conversion will be more than offset by the future tax savings on the growth.
  • Many people underestimate their expected marginal tax rate in retirement.  For some, things like an increase in income due to taking taxable distributions causing an increase the taxable amount of Social Security benefits can have a multiplying effect on the marginal tax rate.

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