i-ORP: Any way to force tax deferred savings?

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corn18
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i-ORP: Any way to force tax deferred savings?

Post by corn18 » Wed Jun 13, 2018 3:57 pm

I have been running scenarios in i-ORP and found that there is no way to force savings into my 401k. It actually puts all my annual contributions into my Roth and taxable. That might be fine for optimization of taxes, but it causes an issue with matching. I contribute $24,500 and get a $17,000 match. I won't stop doing that, so the i-ORP balance for tax deferred at retirement (and subsequent conversions) are all off because of that. i-ORP shows no contributions between now and retirement to my 401k.

Anyone found a way to address this?

Corn

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: i-ORP: Any way to force tax deferred savings?

Post by mhalley » Wed Jun 13, 2018 4:38 pm

Are you using extended version? It looks like leaving the tax deferred acount initial balance is causing the error.
https://www.i-orp.com/BigGraph/extended.html
Last edited by mhalley on Wed Jun 13, 2018 4:52 pm, edited 2 times in total.

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corn18
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Re: i-ORP: Any way to force tax deferred savings?

Post by corn18 » Wed Jun 13, 2018 4:40 pm

mhalley wrote:
Wed Jun 13, 2018 4:38 pm
Are you using extended version?
https://www.i-orp.com/BigGraph/extended.html
Affirmative.

mhalley
Posts: 5721
Joined: Tue Nov 20, 2007 6:02 am

Re: i-ORP: Any way to force tax deferred savings?

Post by mhalley » Wed Jun 13, 2018 4:54 pm

I've used the tool many times in the past and didn't have this problem, maybe you should report it to the I-orp site manager.
orplanner@gmail.com

ExitStageLeft
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Re: i-ORP: Any way to force tax deferred savings?

Post by ExitStageLeft » Wed Jun 13, 2018 6:14 pm

I noticed a similar problem just now in i-ORP. I had the same assumed yield, 6%, for all three account types. By changing the Stock Investments Rate of Return so that Roth yield is slightly higher than tax-deferred it defaulted to spending down the tax-deferred first. It took a 0.2% difference between IRA and Roth yield for that to work.

Edit: This is actually for spend down. For savings, I put my annual 401k contribution in the Tax-deferred Account Maximum Annual Contribution field, and left all other contributions blank.

Tdubs
Posts: 21
Joined: Tue Apr 24, 2018 7:50 pm

Re: i-ORP: Any way to force tax deferred savings?

Post by Tdubs » Wed Jun 13, 2018 7:21 pm

As you note, ORP is an optimizer. So you can't fight city hall.

I had the same question as you on this thread, and also contacted the guy who runs ORP (James Welch)--he's very accessible.

viewtopic.php?f=1&t=251375&p=3966739#p3966120

I was able to minimize the problem by setting the after-tax return to zero percent, but still had about $4k go to the after-tax (in the grand scheme of my portfolio, not a big error). ORP at least helped me appreciate that it is really important to get some of your money into Roth and after-tax accounts early. That way you can maximize your conversions to Roth early on in lower tax brackets while living on your after-tax account mostly tax free.

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corn18
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Re: i-ORP: Any way to force tax deferred savings?

Post by corn18 » Wed Jun 13, 2018 7:48 pm

Tdubs wrote:
Wed Jun 13, 2018 7:21 pm
As you note, ORP is an optimizer. So you can't fight city hall.

I had the same question as you on this thread, and also contacted the guy who runs ORP (James Welch)--he's very accessible.

viewtopic.php?f=1&t=251375&p=3966739#p3966120

I was able to minimize the problem by setting the after-tax return to zero percent, but still had about $4k go to the after-tax (in the grand scheme of my portfolio, not a big error). ORP at least helped me appreciate that it is really important to get some of your money into Roth and after-tax accounts early. That way you can maximize your conversions to Roth early on in lower tax brackets while living on your after-tax account mostly tax free.
Ok, thanks for the thread and the info. Not a big deal. The data did show that I have a good path to early 401k conversions that will eliminate any RMD's. I am fortunate that my plan is to retire @ 55 at the company that has all my 401k dollars. I checked with the plan administrator and they allow withdrawals and conversions per the rule of 55, so I can start conversions immediately. And all the conversions can happen in the 12% bracket. I have a nice mix of 401k, Roth and after tax so that really helped i-ORP lay out the conversion plan.

I was surprised how little tax I would have to pay over the withdrawal period. I started late so not huge capital gains in the taxable account. I have been getting a lot into Roth with the backdoor and mega backdoor.

Life is good.

gneeby
Posts: 53
Joined: Wed Jul 02, 2008 1:49 pm

Re: i-ORP: Any way to force tax deferred savings?

Post by gneeby » Sat Jun 16, 2018 9:23 am

corn18 wrote:
Wed Jun 13, 2018 3:57 pm
I have been running scenarios in i-ORP and found that there is no way to force savings into my 401k. It actually puts all my annual contributions into my Roth and taxable. That might be fine for optimization of taxes, but it causes an issue with matching. I contribute $24,500 and get a $17,000 match. I won't stop doing that, so the i-ORP balance for tax deferred at retirement (and subsequent conversions) are all off because of that. i-ORP shows no contributions between now and retirement to my 401k.

Anyone found a way to address this?

Corn
Near the end of ORP's Extended form, in the Taxes section, lies the parameter "Current Marginal Personal Income Tax Rate". This is your pre-retirement tax (current) tax rate on your current income:

current tax rate = taxes this year/gross income.

The default value is 15%.

The short answer to your question "is increase this number".

ORP balances your pre-retirement taxes against the retirement taxes that it computes when it decides how to make savings withdrawals. If your pre-retirement tax rate is low compared to your retirement tax rate then ORP will pay taxes now on Roth or taxable contributions, not the higher taxes on 401K withdrawals in retirement. On the other hand, said the one armed financial adviser, if your pre-retirement tax rate is higher then your retirement tax rate, then ORP will grab the tax -deferred deduction now in the form of tax-deferred savings and pay taxes on withdrawals later.

The question becomes "is the 15% default too low?" What should it be? Should this rate actually be your next higher tax bracket, instead? ORP will honor whatever you put in here.

Your council is solicited.

gneeby
Posts: 53
Joined: Wed Jul 02, 2008 1:49 pm

Re: i-ORP: Any way to force tax deferred savings?

Post by gneeby » Mon Jun 18, 2018 12:25 pm

corn18 wrote:
Wed Jun 13, 2018 3:57 pm
I have been running scenarios in i-ORP and found that there is no way to force savings into my 401k. It actually puts all my annual contributions into my Roth and taxable. That might be fine for optimization of taxes, but it causes an issue with matching. I contribute $24,500 and get a $17,000 match. I won't stop doing that, so the i-ORP balance for tax deferred at retirement (and subsequent conversions) are all off because of that. i-ORP shows no contributions between now and retirement to my 401k.

Anyone found a way to address this?

Corn
Revisit the size of you tax-deferred account, pension and other sources of taxable income. The reason you may need to increase the current, marginal tax rate is that you are operating in retirement with a large taxable income. ORP will then, correctly, prefer to pay taxes now and save in your Roth or taxable account rather than pay more taxes during retirement.

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