How Bracket Management Roth Conversion Strategies Work

How do Bracket Management Distribution Strategies work for Tax Planning?

Income Lab plans can have portfolio distribution plans set to:

1. Pro-Rata
2. Order by Tax Treatment (e.g., "Taxable, Tax-Deferred, Tax Free")
3. Bracket Management (i.e., include Roth conversions when possible up to the specified bracket)

For more information on how to select or change a plan's distribution strategy, please see this article.

"Bracket Management" strategies begin with Tax-Ordered "Taxable, Tax-Deferred, Tax-Free" distribution method to produce the plan's needed portfolio withdrawals. In any year where, after these distributions are taken, there is still space in the targeted Federal ordinary income tax bracket, the plan will use Roth conversions to fill this space.

You will not see Roth conversions in a given year if there is no space in the target bracket because existing non-portfolio income already took the plan above the targeted tax bracket for the year. Similarly, if non-portfolio income and portfolio distributions needed to produce the planned total income level took the tax bracket above the targeted bracket, there will be no Roth conversions in that year. In these situations, you can observe the lack of "bracket space" by going to the Tax Lab and choosing "Explore" and "Income". Be sure to choose the desired strategy from the dropdown menu.

In this example, there are no Roth conversions in 2023-2025 because the plan includes self-employment consulting income that takes the total income above the 12% bracket.

Of course, if there are no available convertible tax-deferred assets in a given year, either because the plan doesn't contain any such accounts or because all such assets have been converted before this year, no Roth conversions will appear in the plan. (If you want to retain some assets as tax-deferred and not convertible, you can mark the account as "Excluded from Roth conversions".)

Please note that if the plan includes sunsetting of the TCJA in 2026, the plan will target the "corresponding" post-sunset tax bracket in 2026 and beyond.
 

It is impossible to target the 37% (39.6% post-sunset) bracket because this bracket has no top threshold.

If a plan is set to "gross-up" withdrawals to cover estimated taxes with the "How can I spend $X net of tax? " setting, taxes created by Roth conversions are first covered by any available non-portfolio income, then via withdrawals from taxable accounts, and finally by converting less than the full qualified account withdrawal (and using the net amount to pay taxes).