Variable Tax Rate

[kleinfelter]

FRP has "Income Tax Rate" and "Investment Tax Rate" fields. However, I'll have very different tax rates in my early retirement vs later. This is because my wife will continue to draw salary for the first 8 years.

I'm sure I'm not the only person with a younger spouse who will work longer than me. The "Additional Inputs" page nicely handles income and expense streams that come and go (such as spouse salary). Any suggestions on how to model with a tax rate which changes?

[jimr]

These can also be set in additional inputs in the rate able (rate table is on top, cash flow table is on the bottom).

[kleinfelter]

Ah. Very good. I had missed that. Thank you.

[Mark963]

I'm trying to estimate the impact of making Roth conversions from a 401K to avoid the "tax torpedo" caused by RMDs. My tax rates look to be pretty low for several years after retirement. Would I need to somehow calculate the tax rate for each year that the conversion would be made vs the tax rates for the 401K RMDs and then put those in by year in the "additional details"? Is there a way that FRP can calculate estimated taxes by a table/function based on income?

[jimr]

Making adjustments to tax rates in additional inputs may add more fidelity to your plan as long as you can make decent estimates of your true average tax rates under the various circumstances. There's probably a good risk of falling into a trap where the risk of estimation errors is greater than the potential accuracy gain. It's tough to say.

It would be theoretically possible for FRP to incorporate some sort of income->tax rate table but imo that'd be another case where there's a very high risk of adding more error than signal since there are so many different special cases around income tax rates. It gets even more complicated once non-US users are factored into the mix. These same considerations are what led me to go with a an oversimplified tax model that sacrifices some fidelity for predictability and simplicity.

If you'd like to experiment with this for fun, I'd suggest using the year-by-year detailed view output to try to make a best guess of your likely income tax rates for various years. You'd need to consider the size of the taxable portfolio and the likely taxable gains it'd throw off plus any taxable income you receive. Keep in mind that the FRP model automatically taxes all taxable portfolio gains each year (even unrealized capital gains) at the investment tax rate.

Jim