The general rule of thumb is that if you think you will be in a lower tax bracket in retirement, do not do Roth conversions. This assumes, of course, that you know what future tax brackets will be. Maybe giving PRC the ability to play around with potential future tax brackets to see at what point (tax rates) Roth conversions would make sense. Tax brackets have changed a lot in history, and right now we are at relatively low rates. Will that last?? See below tax bracket history:
World War I
In order to finance U.S. participation in World War One, Congress passed the 1916 Revenue Act, and then the War Revenue Act of 1917. The highest income tax rate jumped from 15 percent in 1916 to 67 percent in 1917 to 77 percent in 1918. War is expensive.
After the war, federal income tax rates took on the steam of the roaring 1920s, dropping to 25 percent from 1925 through 1931.
The Depression
Congress raised taxes again in 1932 during the Great Depression from 25 percent to 63 percent on the top earners.
World War II
As we mentioned earlier, war is expensive.
In 1944, the top rate peaked at 94 percent on taxable income over $200,000 ($2.5 million in today’s dollars3). That’s a high tax rate.
The 1950s, 1960s, and 1970s
Over the next three decades, the top federal income tax rate remained high, never dipping below 70 percent.
The 1980s
The Economic Recovery Tax Act of 1981 slashed the highest rate from 70 to 50 percent, and indexed the brackets for inflation.
Then, the Tax Reform Act of 1986, claiming that it was a two-tiered flat tax, expanded the tax base and dropped the top rate to 28 percent for tax years beginning in 1988.4 The hype here was that the broader base contained fewer deductions, but brought in the same revenue. Further, lawmakers claimed that they would never have to raise the 28 percent top rate.
The 28 percent top rate promise lasted three years before it was broken.
The 1990s-2012
During the 1990s, the top rate jumped to 39.6 percent.
However, the Economic Growth and Tax Relief and Reconciliation Act of 2001 dropped the highest income tax rate to 35 percent from 2003 to 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 maintained the 35 percent tax rate through 2012.
2013 – 2017
The American Taxpayer Relief Act of 2012 increased the highest income tax rate to 39.6 percent. The Patient Protection and Affordable Care Act added an additional 3.8 percent on to this making the maximum federal income tax rate 43.4 percent.
2018-2024
The highest income tax rate was lowered to 37 percent for tax years beginning in 2018. The additional 3.8 percent is still applicable, making the maximum federal income tax rate 40.8 percent.
https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx
Here is why future tax rates (brackets) will likely go up:
In CBO’s current law projection, deficits remain at 5 percent of GDP or higher throughout the next decade, the largest sustained budget gap in records going back to 1930. The chronic deficits are partly due to rising interest on the debt, which is set to exceed defense spending this year for the first time ever and grow to a record high of 3.2 percent of GDP next year before rising higher to 3.9 percent in 2034. Debt held by the public is projected to rise steadily from 99 percent of GDP this year to 106.3 percent in 2028, exceeding the high set at the end of World War II, and then escalate to 116 percent in 2034 and 166 percent in 2054.
Such projections and concerns about the sustainability of the federal debt led Fitch Ratings to downgrade U.S. debt from AAA to AA+ on August 1, 2023, noting “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”[7] Fitch expects the deficit to reach 6.3 percent of GDP this year and rise from there due to weak economic growth and an interest burden that will grow to 10 percent of revenue by 2025. For similar reasons, on November 10, 2023, Moody’s Investors Service lowered its outlook on the U.S. credit rating from “stable” to “negative,” signaling an increased risk of a downgrade over the next two years.[8] Standard & Poor’s had already downgraded U.S. debt in 2011 due to concerns about rising debt in the aftermath of the financial crisis and political brinksmanship around negotiations to lift the debt ceiling.
@Pizzaman, will changing tax rates in Build > Scenario Assumptions > Tax Assumptions accomplish this currently?
I assume you are talking about the online version, I am sticking with PRC Gold 2025, so I can't help with your question, sorry.
@pizzaman The Excel and Online models are the same in this regard: they both allow the user to specify a future year and percentage of increase for federal income taxes. The math is simple: the tool calculates taxes based on built-in tax tables and then multiplies that result by the percentage specified, starting in the specified year.
Stuart
Duh, how did I not see that (RTFM) 😫 Page 33 of updated PRC Gold manual.
I gave it a shot. PRC Gold 2025 only lets me increase Fed taxes at most by 25% (wishful thinking maybe 😆). Doing more ROTH conversions assuming a 25% increase in Fed taxes resulted in worse total saving at EOL. I assume this is because a little over 50% of our retirement money is already in ROTHs. So it appears we are done with ROTH conversions 🤗. More good sleeping at night!