grabiner wrote: ↑
Mon Jun 29, 2020 9:34 am
whereskyle wrote: ↑
Mon Jun 29, 2020 9:04 am
Is there not a viable argument that the Roth reliably reduces risks in virtually every case where contributors/converters are married with children, such that the marginal tax rate forecast becomes the most unreliable aspect of the prediction? In contrast to predicting future marginal tax rates (which seems to me a bit silly for Bogleheads. We don't predict the market but we will predict tax rates?), no matter what, there will be no child tax credit in retirement (in the majority of cases), and, no matter what, one of the spouses will die during retirement, putting the survivor in a higher tax bracket with likely similar expenses and need for similar annual income. Given that these two facts are virtual certainties (excluding simultaneous death and later in life child-rearing), while future marginal tax rates are anyone's guess, doesn't the Roth more likely than not win on the probabilities for the married with children investor?
The child tax credit is a fixed-dollar amount, and the pre-2018 exemptions were fixed reductions in income. Unless you are in the phase-out of the credit, or the personal exemptions cause you to cross a tax bracket boundary, neither one affects your maginal tax rate.
What happens after one spouse dies does favor having some Roth money, to reduce the risk that RMDs will be more than the other spouse needs and will push the survivor into a higher tax bracket. The surviving spouse can then withdraw from the traditional account up to the top of the appropriate tax bracket, then take all other expenses from a Roth (or a taxable account where capital gains are taxed at a nearly-fixed 15%). This issue may also be better resolved by converting traditional to Roth in retirement (which also reduces RMDs), rather than contributing to Roth in a higher tax bracket while working.
FiveK wrote: ↑
Sat Jun 27, 2020 8:45 pm
AFAIK, no such tool exists publicly. Several good tools handle pieces, e.g., opensocialsecurity, RPM,
financial toolbox, and I-ORP, but nothing does it all. And that's for the "simple" case of specified life expectancies, investment returns, tax law, etc., let alone a probabilistic approach.
Another common issue is MFJ vs. single filing status.
That one is probabilistic (assuming the change occurs due to unforeseen death).
I'm late to this thread, so I apologize for that.
I'd just like to report that I ran a test case using RPM where DW is 4 years older than DH. In a scenario, where DH lives to be 92 and DW lives to be 96, they stay in the MFJ filing status. In this scenario both DH and DW are retired at 56 and 60 years of age, respectively. I tried to keep effective tax rate pretty consistently in the 17% effective tax rate range, doing Roth conversions that were sized to remain in that effective tax rate, and was able to a keep marginal tax rates for the hypothetical couple mostly in the 22% marginal rate bracket, with some tax years moving into the 24% marginal rate bracket in the middle-end portion of the scenario, before dropping in the final years where they are mostly spending their Roth conversion account last.
Then, I made adjustments to that scenario in the Setup page, including social security payout adjustments, where DH lives to age 84 and DW lives to 96. When the DW changes to Single Filing status, the tax rates for DW jump into the 32% marginal rate bracket, and even has one year in the 37% marginal rate bracket. I made some adjustments to this scenario to make the effective tax rate pretty consistently in the 19% effective tax rate range, while DH and DW are both still kicking, by doing larger Roth conversions that were sized to remain in that 19% effective tax rate range. This reduced the size of the RMDs for the DW, as a widow, later. After making these adjustments, when DW changes to having a single filing status, the effective tax rate remains in the 19% effective tax rate range, the marginal rates do not spike into the 32% marginal rate bracket at all. DW is making a larger draw from the Roth accounts sooner.
This isn't a lot of testing, nor is it exhaustive in any way. It does suggest that a middle course of action might be best. Put retirement savings in 401(k) and Traditional IRA accounts, and if you have enough runway to do Roth conversions between age 60 and age 72, do the Roth conversions that will keep the surviving spouse out of the higher marginal tax rate brackets later, when he or she becomes a single filer. You might pay more in income taxes for the first ten years or so of retirement, but the surviving spouse will pay far less income tax as a single filer. This looks like it results in more spendable money and probably paying the lowest legal amount of income tax. We may not know how many years we have on this earth, but we can use the statistics that we have to help guide us in our decision-making.