A number of topics are cued up which will be posted over the coming months. Feel free to respond to this post if there are topics you’d like to see.
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“Probability of Success” Added to Monte Carlo
A Monte Carlo analysis randomizes the rate of return each year similar to what would happen in the real world. The Monte Carlo function in this worksheet is designed so that the average CAGR across a large number of iterations, like 500+, will be close to the rate of returns entered by the user in the Scenario.
Release v3.1c adds the “Probability of Success” percentage to the Monte Carlo worksheet. This makes it easy for people to see, at a glance, the percentage of iterations that have a positive net worth in the final year.
As an example, in the chart below, 45% of the iterations resulted in a negative net worth (the red bars) and 55% had a positive net worth (the blue bars). This “Probability of Success” is therefore 55%.
Registered customers can message the Etsy shop owner for the latest version.
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“Head of Household” Now Available as Filing Option
Release v3.1b adds Head of Household as a filing option. When users select this option, it will use the Head of Household Federal tax brackets. It will also automatically change the standard deduction to $22,250.
See link below for a comparison of how the filing status impacts the net worth and taxes over time. In this example, only filing status and the standard deduction were changed with the other values held constant. As would be expected, “Married Filing Jointly” had the best result since it has the biggest tax advantage. “Head of Household” was slightly better than “Single”. This is partially due to the advantage in the lower/middle brackets, but also due to the larger standard deduction.
Registered customers can message the Etsy shop owner for the latest version.
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Is the “fill up your bracket” approach good enough for a Roth Conversion?
A common rule of thumb with Roth conversions is to convert just enough each year to “fill up” your current tax bracket without spilling into a higher one. This is better than doing nothing, but is rarely optimal. This strategy can leave a a lot of money on the table–potentially millions of $’s over a lifetime.
The optimal conversion amount is highly dependent on factors like the rate of return, the size of your IRA, and the amount of savings you have in taxable accounts to pay for conversion taxes. None of these factors are considered in the fill-up your bracket approach.
The complexities of these factors along with interest rates, inflation, RMDs, IRMAA, NIIT, Social Security payments, Federal taxes and State taxes make it impossible to have a one-size-fits-all approach. The Roth IRA Conversion Optimizer takes all of those factors into account and will clearly show the impact to your net worth over time.