Modeling Net-of-Tax Spending Capacity in Income Lab with Roth Conversions

Understanding the difference between gross and net-of-tax income is one of the trickiest parts of retirement planning. Fortunately, Income Lab makes it easier to answer the real-life question: “What can I actually spend?” Unlike other tools that score your spending goals, Income Lab helps you build a plan that directly targets net-of-tax spending.

Why Gross vs. Net Matters

Most retirement planning discussions, like the 4% rule, focus on gross withdrawals. For example, if you're withdrawing from an IRA, the account supports a certain level of gross-of-tax income regardless of your tax rate. Whether taxes double or get cut in half, the gross withdrawal amount remains the same. That’s why answering “How much can I withdraw?” is inherently a gross-of-tax question.

But retirees care about what they can spend, not just what they can withdraw. Especially during high-tax years (like Roth conversions), modeling net-of-tax income becomes essential.

Step-by-Step Workflow to Model Net-of-Tax Spending

1. Start with a “How much can I spend?” plan.  
   1. Use the client’s resources and goals (e.g., variable expenses, legacy targets) to build a baseline plan.
2. Estimate net-of-tax income using a qualified-funds-first order.  
   1. Run a plan that draws from Tax-Deferred, then Taxable, then Tax-Free accounts without Roth conversions. This forces withdrawals to be taxed as ordinary income, giving you a conservative net-of-tax estimate.
3. Set a net-of-tax spending target.  
   1. Take one of the net income levels from Step 2 and enter it in the Expenses > Baseline Expenses tab. Then switch the primary plan question to: “How can I spend $X, net of tax?”
4. Use Tax Lab to evaluate Roth conversion opportunities.  
   1. See if conversions improve the plan’s efficiency or reduce lifetime taxes.
5. Apply the Roth conversion strategy. 
   1. Incorporate the recommended conversion schedule into your plan.
6. Check the plan’s risk level.  
   1. Make sure the new plan isn’t too aggressive. If needed, adjust the spending target and repeat steps 3–6.

Final Thoughts

This process isn’t as simple as we’d like, but it’s the most accurate way to model real spending power in retirement. And that’s exactly why advisors are irreplaceable. The complexity of retirement income and tax planning presents both a challenge and an opportunity.