Effective tax rate for converting absolute dollars to effective dollars

It's specific to each person/situation. I'd get everything set as best you can, run an analysis, then to to the Taxes tab in the Tabular Projections. Scan down the effective tax rate column throughout the years and come up with a realistic average, either by eyeballing it or doing the math.

Then use that in Financial Assets->Management. Keep in mind that in the taxes tab, the marginal column is your top federal income rate while the effective column is for your overall total income taxes, including state/local.

Thanks Bill, that makes sense.

Don

If you are passing your estate to your heirs, it would be your estimate of the marginal tax rate that they will pay as they withdraw IRAs inherited from you on top of their own income. If you have multiple heirs with different earning potential or different state tax rates, average them as best you can.

On the other hand, if you are passing your IRAs to charity, the tax rate would be zero and therefore Roth conversions would be less attractive.

Can I make sure I understand this field? it's only purpose is to show what money will be left after taxation of roth conversions, as monies come out of IRAs into Roths? As such, the simplest case would represent your average margical tax rate during conversions? Or am I getting things incorrect?

@jkandell

Yes, it's whatever rate you think is appropriate to apply to any funds that you haven't removed from you IRA at death. As you suggest, that can be your lifetime average marginal rate (giving thought to LTCG phase-in, SS taxation, IRMAA, NIIT, etc.) in the event that you withdraw more than planned or live longer than you planned. If you are bequesting the money to heirs you care about, you might make a guess at the marginal rate they will face during the 10 years they have to get the money out of the IRA and add a bit for the fact that had you put the money in Roth, they would have an average of 5 more years to keep the money protected from tax drag.

For some, zero will be a good number, say if they are doing QCDs and giving the residual to charity or have only distant relatives and no particular interest in minimizing taxes on the bequests. (But then you should enter a very long life - if you have no interest in what happens after you pass, then your planning horizon should be for a long life. If you beat the odds and live a long time, you want to have planned for that, if you don't live extra-long, then it doesn't matter to you.)

@ricke Aha. Thank you. But I might be getting confused between this use of effective taxation and that in the roth conversion screen, quoted below. I had assumed the same effective tax entry was used for this function as well as the end of life. I'm thinking of the graph that shows baseline vs roth conversion, with 'effective' box checked (rather than absolute). Is this only to be used if heirs will inherit the IRAs or is it also to be used to show a more realistic comparison of the benefits of roth conversion during your lifetime? And if the latter, would I set it at my marginal taxation of typical roth conversion?

Absolute dollars reflect actual account balances and effective dollars reflect account balances with all money in tax-deferred accounts being reduced to estimate its after-tax value (the effective buying power of this money). This translation process is based on a user-specified effective tax rate setting provided on the Build > Financial Assets > Management page. This control lets you provide that value to allow for the possibility that the funds in the tax-deferred accounts might be inherited by someone in a different tax bracket than you.

@jkandell

Yes, if you have no heirs of interest and change plans and withdraw more money from your IRA than you had originally thought you might, then choosing your current plan's marginal rate would be a good choice. I have a sibling in this situation, the realization has dawned that the money is piling up and they are now ramping up spending and paying more taxes. But if you have favorite charities, maybe the extra withdrawals will actually be done as QCDs which would greatly decrease your interest in Roth Conversions as the best money to give away is money that has never been taxed.

If charities are not on your mind and you think your spending will just continue according to your plan, then what I would do is to set a very long lifespan in the program. That way, most of the IRA money will come out anyway due to RMDs. The idea is if you are not planning for heirs, then only one-way regret is possible. If you have no heirs and die soon, then you had enough money to live even if you did large Roth Conversions and of course you can't regret anything after death. But if you live a long time and didn't plan for that, you can certainly have a problem.