FiveK,FiveK wrote: ↑Mon Sep 13, 2021 10:48 pm A recent article, Tax Diversification Limits And Roth Optimization Benefits goes into some detail on this. E.g.,The article goes on to acknowledge that some guesswork is needed, but suggests...the reality is that splitting dollars between traditional and Roth retirement accounts isn’t just a form of diversification; because the outcomes are correlated to each other (as a change in tax rates that benefits one type of account adversely impacts the other type by the same amount), the net result is that tax diversification doesn’t actually diversify the risk, it simply neutralizes the opportunity altogether.This is pretty much the primary philosophy in the Traditional versus Roth - Bogleheads wiki: take a back-of-the-envelope guess at your retirement marginal tax rate, compare to your current rate, and choose Roth vs. traditional accordingly.the better approach is to try to Roth-optimize by timing when to shift between traditional and Roth accounts. Which, in practice, is easier than most realize, as while a household’s future is never certain, the Roth-vs-traditional decision has the most impact in years that are especially high or low in income… which are actually the years that are most easy to identify in the moment for a Roth optimization timing decision!
Thank you for posting this article! I really like Kitces' analyses. And I love his highly detailed and unique illustration of the equivalency of Roth vs. traditional, assuming constant tax rates.
I'll have to spend some quality time studying it, but something bugs me right off the bat...
He belabors the point that investment diversification is not like tax diversification. Yet in the nice graphic he uses to show how diversifying away from traditional only "narrows the range" of outcomes, reducing the upside potential benefit and the downside potential detriment of tax risk simultaneously. Well... isn't that exactly the same effect diversifying away from equities only with the addition of fixed income has?
I don't care what term it goes by, having more than only traditional pre-tax accounts does, indeed, seem to reduce the magnitude of the worst effects of tax risk.
Am I missing something? Is this just semantics, a case of Kitces using the term "diversification" in the strictest sense instead of a looser, more general sense?