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I mentioned this on discord. Suggesting an alternative to Roth conversion ladders: instead of making this a fixed goal of converting a certain amount of money every year, no matter what. We could implement a more opportunistic strategy to harvest traditional IRA money into Roth, based on estimated taxable income, and user-defined tax-rate thresholds.
For example: a married couple meeting their expenses with a taxable income of 50k would be in the 12% federal tax bracket. In 2022 the 12%federal tax bracket goes up to ~$83k, this presents an opportunity to convert $33k to Roth at a relatively low rate of taxes. This could be structured as cash flow priority, to pay the state and federal taxes. I think this is actually quite a bit more generalizable and useful than the strict roth conversion ladder, but I could see how some folks would still want to be able to pick a strict roth conversion strategy that ignores the nuances of tax-efficiency. From my perspective though, the textbook roth ladder isn’t applicable. I think if you planned your FIRE journey from age 20, you could set yourself up for a perfect roth ladder, but if you’ve got complicated situations (various small income streams, rental income, hobby businesses, or just variable self-employment income) an auto-adjusted roth conversion strategy is going to be a lot more useful for modeling your asset growth. And once you’ve got a roth conversion cashflow priority built, you can then model different scenarios, and compare the impact of converting only some or all of your tax-deferred money to roth. Especially if you get even more into the weeds, and let users model higher future tax rates on the RMDs, vs. current tax rated on roth conversions.
I can geek out on these details for hours. I’ll end it here for now. -
This is definitely a key to the FIRE movement. I’m looking forward to seeing this added as it would help people understand when the optimal time is to stop contributing to traditional and switch to Roth 401ks. RMDs could be so large that paying the tax today might make sense with the expanding deficit.
