ORP says I should stop all pre-tax contribs

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Admiral
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ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 10:12 am

8-10 years from FI.

I am struggling with the fact the numerous runs of I-ORP tell me to make contribs ONLY to Roth and taxable accounts. 24% current marginal bracket. (My company basic contrib and match cannot be Roth, pre-tax only. My portion can be either.)

Even plugging in savings that are half of what we are currently saving, the planner shows we will have more than my projections show we will need. By a lot.

Should I move everything to Roth and save less? This will be difficult mentally.

This is primarily due to large pre-tax balance and ORP's assumption that tax rates will revert, so it shows a lot of Roth conversions from age 58-70 to the top of the (future) 15% bracket.

Cannot stop working any earlier than 8 years from now.

After years on this forum the thought of not saving the max pre-tax and saving in taxable or Roth is very mentally taxing. Currently save 55k/year plus pension contrib.

What to do??

livesoft
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Re: ORP says I should stop all pre-tax contribs

Post by livesoft » Fri Apr 12, 2019 10:14 am

Make sure you use the same expected annual growth in all your investment accounts. Otherwise i-ORP always says to put the most money in the highest growth account if you can. It also says to withdraw first from the lowest growth account.

(I haven't used it in a while, so maybe these "features" have been addressed?)
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MotoTrojan
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Re: ORP says I should stop all pre-tax contribs

Post by MotoTrojan » Fri Apr 12, 2019 10:15 am

Admiral wrote:
Fri Apr 12, 2019 10:12 am
8-10 years from FI.

I am struggling with the fact the numerous runs of I-ORP tell me to make contribs ONLY to Roth and taxable accounts. 24% current marginal bracket. (My company basic contrib and match cannot be Roth, pre-tax only. My portion can be either.)

Even plugging in savings that are half of what we are currently saving, the planner shows we will have more than my projections show we will need. By a lot.

Should I move everything to Roth and save less? This will be difficult mentally.

This is primarily due to large pre-tax balance and ORP's assumption that tax rates will revert, so it shows a lot of Roth conversions from age 58-70 to the top of the (future) 15% bracket.

Cannot stop working any earlier than 8 years from now.

After years on this forum the thought of not saving the max pre-tax and saving in taxable or Roth is very mentally taxing. Currently save 55k/year plus pension contrib.

What to do??
Perhaps split the difference? Many just blindly go pretax forever. I’m sure you’ll be fine either way.

smitcat
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Re: ORP says I should stop all pre-tax contribs

Post by smitcat » Fri Apr 12, 2019 10:19 am

livesoft wrote:
Fri Apr 12, 2019 10:14 am
Make sure you use the same expected annual growth in all your investment accounts. Otherwise i-ORP always says to put the most money in the highest growth account if you can. It also says to withdraw first from the lowest growth account.

(I haven't used it in a while, so maybe these "features" have been addressed?)
Yes - you are exactly correct and this is not well understood by some users.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 10:20 am

livesoft wrote:
Fri Apr 12, 2019 10:14 am
Make sure you use the same expected annual growth in all your investment accounts. Otherwise i-ORP always says to put the most money in the highest growth account if you can. It also says to withdraw first from the lowest growth account.

(I haven't used it in a while, so maybe these "features" have been addressed?)
Well here are the defaults, which i am using:

Stock Investments Rate of Return (7%)
Stock dividend rate (3.26%)
Fixed Income % Yield (3%)

Inflation Rate (2% income, 4% spending)

After-tax Account Capital Gains Tax Rate (15%)

livesoft
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Re: ORP says I should stop all pre-tax contribs

Post by livesoft » Fri Apr 12, 2019 10:22 am

^So don't use the defaults. :)
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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 10:24 am

livesoft wrote:
Fri Apr 12, 2019 10:22 am
^So don't use the defaults. :)
Well yeah but this does not appear to be account-type specific. IOW if you hold stocks in taxable and tax advantaged, it applies the rate to both account types.

Unless I am not understanding the input fields.

livesoft
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Re: ORP says I should stop all pre-tax contribs

Post by livesoft » Fri Apr 12, 2019 10:38 am

You would have to have 100% stocks in taxable and tax-advantaged in order for them to have the same expected performance. If one account had a different allocation to stocks, then the account with the lower allocation would be expected to have a lower performance and i-ORP would sell it preferentially or tell you not to contribute to it.
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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 10:46 am

livesoft wrote:
Fri Apr 12, 2019 10:38 am
You would have to have 100% stocks in taxable and tax-advantaged in order for them to have the same expected performance. If one account had a different allocation to stocks, then the account with the lower allocation would be expected to have a lower performance and i-ORP would sell it preferentially or tell you not to contribute to it.
Not sure I follow. You set the stock/bond allocation for each account. It applies the return value (stock or bond) that you specify to each asset class, regardless of account. It accounts for taxes, if applicable, either as tax drag (taxable) or as income tax (on distribution of pre-tax account).

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Ketawa
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Re: ORP says I should stop all pre-tax contribs

Post by Ketawa » Fri Apr 12, 2019 10:53 am

Admiral wrote:
Fri Apr 12, 2019 10:46 am
Not sure I follow. You set the stock/bond allocation for each account. It applies the return value (stock or bond) that you specify to each asset class, regardless of account. It accounts for taxes, if applicable, either as tax drag (taxable) or as income tax (on distribution of pre-tax account).
If you say your Roth IRA or Roth 401k or taxable account is 100% stocks while your Traditional 401k has some bonds, then the system will tell you to save everything in Roth or taxable because it thinks that you'll make more money by doing that.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 10:57 am

Ketawa wrote:
Fri Apr 12, 2019 10:53 am
Admiral wrote:
Fri Apr 12, 2019 10:46 am
Not sure I follow. You set the stock/bond allocation for each account. It applies the return value (stock or bond) that you specify to each asset class, regardless of account. It accounts for taxes, if applicable, either as tax drag (taxable) or as income tax (on distribution of pre-tax account).
If you say your Roth IRA or Roth 401k or taxable account is 100% stocks while your Traditional 401k has some bonds, then the system will tell you to save everything in Roth or taxable because it thinks that you'll make more money by doing that.
Hmm. Ok. So is there a workaround? Do I need to discount the expected return somehow?

There are things about it that are constraining (no more maximum retirement income, only ability to set an estate value) as well as its penchant for only looking at the most optimal tax situation. But, even with those limitations, it still has value.

aristotelian
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Re: ORP says I should stop all pre-tax contribs

Post by aristotelian » Fri Apr 12, 2019 11:00 am

I can't comment on ORP, but you might run your numbers through this spreadsheet. If you are pretty certain your retirement tax rate will be below 24%, I would still go with pretax. When in doubt, you can always do some of each. https://docs.google.com/spreadsheets/d/ ... 1374797127

bradpevans
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Re: ORP says I should stop all pre-tax contribs

Post by bradpevans » Fri Apr 12, 2019 1:55 pm

Is your tax-deferred balance so high that even reasonable withdraw amounts place you in the upper brackets?

Like 3 million at age 70 ~ 100K per year, with other sources pushing you higher?

I'm puzzled too - its hard to beat a 401K with zero tax in, progressive tax rates out.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 2:00 pm

bradpevans wrote:
Fri Apr 12, 2019 1:55 pm
Is your tax-deferred balance so high that even reasonable withdraw amounts place you in the upper brackets?

Like 3 million at age 70 ~ 100K per year, with other sources pushing you higher?

I'm puzzled too - its hard to beat a 401K with zero tax in, progressive tax rates out.
The projected balance in 10 years (age 58) based on current (ie all pre-tax) contribs and a 5% real RoR is appx $1.8m, with $275k in Roth. At age 70, it would be $2.5m and 400k in Roth.

Part of the issue is that there will be a pension involved. 35k low estimate, 48k likely, 60k possible. Combines with 2 SS payments, at age 70 we're looking at over 100k to fill the lower brackets, BEFORE any RMDs.

Hydromod
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Re: ORP says I should stop all pre-tax contribs

Post by Hydromod » Fri Apr 12, 2019 2:14 pm

I would suppose you would be taking much larger RMDs than needed to cover expenses, which would push you up the brackets.

This is where contributing to the Roth now will lower the RMDs later.

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TomatoTomahto
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Re: ORP says I should stop all pre-tax contribs

Post by TomatoTomahto » Fri Apr 12, 2019 2:19 pm

I didn’t find I-ORP all that helpful; it might have been operator error.

For at least the following reasons, we stopped pre-tax contributions:
1. A generous company match goes to pre-tax, so the pre-tax balance will inexorably increase regardless. They are currently near $3M.
2. The possibility of a generous company pension
3. The ability to “cram” more into a bequest (ie, in Massachusetts’ rough estate taxes, there is no distinction made between $1 Roth or $1 traditional).
4. The possibility of higher marginal rates in the future, and the near certainty of higher rates in 2025
5. The “tax savings” of traditional would go to taxable equities (ie, they won’t be spent), so that will throw off something like an additional 2%
Okay, I get it; I won't be political or controversial. The Earth is flat.

miket29
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Re: ORP says I should stop all pre-tax contribs

Post by miket29 » Fri Apr 12, 2019 2:48 pm

Admiral wrote:
Fri Apr 12, 2019 10:12 am
I am struggling with the fact the numerous runs of I-ORP tell me to make contribs ONLY to Roth and taxable accounts. 24% current marginal bracket. (My company basic contrib and match cannot be Roth, pre-tax only. My portion can be either.)
A little off topic, but if your 401K allows after-tax contributions and in-plan conversions to Roth then you should not be putting money into taxable accounts until you hit the total 401K annual limit.

For 2019, the maximum allowable contribution to a 401(k) account – including employee salary deferrals and after-tax Roth contributions, as well as employer matching and elective contributions – is $56,000, or 100% of employee compensation. So add up your company basic contrib and match, then anything past the standard $19K limit + catchup if you are eligible you should contribute as after-tax dollars instead of to a taxable account. Since these are after-tax dollars they don't cost you anything different than putting them into a taxable account, but since you put them into your 401K and regularly convert them to 401K Roth they will never be taxed again.
Last edited by miket29 on Fri Apr 12, 2019 2:49 pm, edited 1 time in total.

Bacchus01
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Re: ORP says I should stop all pre-tax contribs

Post by Bacchus01 » Fri Apr 12, 2019 2:48 pm

I think there is a pretty good argument that as your balance builds, only contribute to the employer match. It’s hard to pass up those matches.

However, in my case, they match 50% all the way up to the $19K number. At mid-40s, we have over $1M in pre-tax 401ks. I will have a pension of about $65k/year even if I stopped working now, but it keeps growing. Then combined soc security of $45k...we will have too much tax sheltered and end up with large RMDs. We almost have to retire early and start ROTH conversions.

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Re: ORP says I should stop all pre-tax contribs

Post by livesoft » Fri Apr 12, 2019 2:50 pm

Admiral wrote:
Fri Apr 12, 2019 10:57 am
Hmm. Ok. So is there a workaround? Do I need to discount the expected return somehow?
The work-around is to set the expected return for each type of account to be identical.
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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 2:54 pm

miket29 wrote:
Fri Apr 12, 2019 2:48 pm
Admiral wrote:
Fri Apr 12, 2019 10:12 am
I am struggling with the fact the numerous runs of I-ORP tell me to make contribs ONLY to Roth and taxable accounts. 24% current marginal bracket. (My company basic contrib and match cannot be Roth, pre-tax only. My portion can be either.)
A little off topic, but if your 401K allows after-tax contributions and in-plan conversions to Roth then you should not be putting money into taxable accounts until you hit the total 401K annual limit.

For 2019, the maximum allowable contribution to a 401(k) account – including employee salary deferrals and after-tax Roth contributions, as well as employer matching and elective contributions – is $56,000, or 100% of employee compensation. So add up your company basic contrib and match, then anything past the standard limit (you need to decide whether to contribute pre-tax or Roth) you should contribute as after-tax dollars instead of to a taxable account. Since these are after-tax dollars they don't cost you anything different than putting them into a taxable account, but since you put them into your 401K and regularly convert them to 401K Roth they will never be taxed again.
They eliminated the after tax 403b option. So it's Roth or taxable for my portion. Right now nothing goes to taxable as there's a sizeable amount there now. I'm just reporting what I-ORP said. I cannot eliminate the 12k to pretax, I have no choice. The choice is what to do with anything beyond that. Right now we are also putting 12k into pre-tax 403b, and 25k into a 457 plan, pre tax. However we cannot afford to do those amounts post-tax, it would be less as Roth (we have that option). 12k probably, maybe 15k combined. So 35k would be the new total, with 12k as pre-tax.
Last edited by Admiral on Fri Apr 12, 2019 3:01 pm, edited 1 time in total.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 2:58 pm

livesoft wrote:
Fri Apr 12, 2019 2:50 pm
Admiral wrote:
Fri Apr 12, 2019 10:57 am
Hmm. Ok. So is there a workaround? Do I need to discount the expected return somehow?
The work-around is to set the expected return for each type of account to be identical.
As noted, I already did that. That's the default: all the returns are identical regardless of account type. What's different is the expected return for each ASSET TYPE can different. There is no other option.

livesoft
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Re: ORP says I should stop all pre-tax contribs

Post by livesoft » Fri Apr 12, 2019 3:00 pm

Admiral wrote:
Fri Apr 12, 2019 2:58 pm
As noted, I already did that. That's the default: all the returns are identical regardless of account type. What's different is the expected return for each ASSET TYPE can different. There is no other option.
This then means that you have set the asset allocation for each account type to be the same.
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marcopolo
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Re: ORP says I should stop all pre-tax contribs

Post by marcopolo » Fri Apr 12, 2019 3:07 pm

Admiral wrote:
Fri Apr 12, 2019 2:58 pm
livesoft wrote:
Fri Apr 12, 2019 2:50 pm
Admiral wrote:
Fri Apr 12, 2019 10:57 am
Hmm. Ok. So is there a workaround? Do I need to discount the expected return somehow?
The work-around is to set the expected return for each type of account to be identical.
As noted, I already did that. That's the default: all the returns are identical regardless of account type. What's different is the expected return for each ASSET TYPE can different. There is no other option.
The expected return of each account is the weighted sum of the expected return for the asset, and the allocation percentage of each asset class in that account.

Since you are using the default return expectations for each asset class, the only way to have i-orp behave rationally is to set the asset allocation ( the percent of stock/bond/cash) the same for ALL your accounts. This makes the account expected returns equal.

This is not how most people invest their accounts. But, that is the only way i-orp will do anything other than steer all your money into the highest expected return account
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 3:17 pm

marcopolo wrote:
Fri Apr 12, 2019 3:07 pm
Admiral wrote:
Fri Apr 12, 2019 2:58 pm
livesoft wrote:
Fri Apr 12, 2019 2:50 pm
Admiral wrote:
Fri Apr 12, 2019 10:57 am
Hmm. Ok. So is there a workaround? Do I need to discount the expected return somehow?
The work-around is to set the expected return for each type of account to be identical.
As noted, I already did that. That's the default: all the returns are identical regardless of account type. What's different is the expected return for each ASSET TYPE can different. There is no other option.
The expected return of each account is the weighted sum of the expected return for the asset, and the allocation percentage of each asset class in that account.

Since you are using the default return expectations for each asset class, the only way to have i-orp behave rationally is to set the asset allocation ( the percent of stock/bond/cash) the same for ALL your accounts. This makes the account expected returns equal.

This is not how most people invest their accounts. But, that is the only way i-orp will do anything other than steer all your money into the highest expected return account
Ok that is a good explanation. I will try to set for all stock and report back on what the results are. I'm not sure, however, that your explanation is precisely what i-orp does. It does try to create the maximal amount of disposable income. But, not at the expense of paying higher taxes. So, one has the option of telling it to convert pre-tax to Roth up to the top of a specified bracket, for example (which I have done, up to top of 22%). It tries to give you the most money possible while paying the lowest amount of tax. So, while it sees that I am currently in 24%, it assumes that the brackets will revert to 15 and 25%, and it basically has me in 25% bracket for only 4 years, and then from 62-70 in 15%, and then tiny amounts (like 4k) in the 25% bracket til age 92.

By age 70 is has drained the pre-tax account completely.

delamer
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Re: ORP says I should stop all pre-tax contribs

Post by delamer » Fri Apr 12, 2019 3:30 pm

Admiral wrote:
Fri Apr 12, 2019 2:00 pm
bradpevans wrote:
Fri Apr 12, 2019 1:55 pm
Is your tax-deferred balance so high that even reasonable withdraw amounts place you in the upper brackets?

Like 3 million at age 70 ~ 100K per year, with other sources pushing you higher?

I'm puzzled too - its hard to beat a 401K with zero tax in, progressive tax rates out.
The projected balance in 10 years (age 58) based on current (ie all pre-tax) contribs and a 5% real RoR is appx $1.8m, with $275k in Roth. At age 70, it would be $2.5m and 400k in Roth.

Part of the issue is that there will be a pension involved. 35k low estimate, 48k likely, 60k possible. Combines with 2 SS payments, at age 70 we're looking at over 100k to fill the lower brackets, BEFORE any RMDs.
This is the crux of the issue.

If you’ll have $100K+ in pensions plus SS, how does that compare to your projected expenses?

In other words, how much will you need to withdraw from your investments to meet your expenses?

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 3:33 pm

delamer wrote:
Fri Apr 12, 2019 3:30 pm
Admiral wrote:
Fri Apr 12, 2019 2:00 pm
bradpevans wrote:
Fri Apr 12, 2019 1:55 pm
Is your tax-deferred balance so high that even reasonable withdraw amounts place you in the upper brackets?

Like 3 million at age 70 ~ 100K per year, with other sources pushing you higher?

I'm puzzled too - its hard to beat a 401K with zero tax in, progressive tax rates out.
The projected balance in 10 years (age 58) based on current (ie all pre-tax) contribs and a 5% real RoR is appx $1.8m, with $275k in Roth. At age 70, it would be $2.5m and 400k in Roth.

Part of the issue is that there will be a pension involved. 35k low estimate, 48k likely, 60k possible. Combines with 2 SS payments, at age 70 we're looking at over 100k to fill the lower brackets, BEFORE any RMDs.
This is the crux of the issue.

If you’ll have $100K+ in pensions plus SS, how does that compare to your projected expenses?

In other words, how much will you need to withdraw from your investments to meet your expenses?
Pre-age 70, below 3%. After age 70, 1% or less. Of course we can and probably will spend more. But anywhere near 4% is unlikely.

delamer
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Re: ORP says I should stop all pre-tax contribs

Post by delamer » Fri Apr 12, 2019 3:48 pm

Admiral wrote:
Fri Apr 12, 2019 3:33 pm
delamer wrote:
Fri Apr 12, 2019 3:30 pm
Admiral wrote:
Fri Apr 12, 2019 2:00 pm
bradpevans wrote:
Fri Apr 12, 2019 1:55 pm
Is your tax-deferred balance so high that even reasonable withdraw amounts place you in the upper brackets?

Like 3 million at age 70 ~ 100K per year, with other sources pushing you higher?

I'm puzzled too - its hard to beat a 401K with zero tax in, progressive tax rates out.
The projected balance in 10 years (age 58) based on current (ie all pre-tax) contribs and a 5% real RoR is appx $1.8m, with $275k in Roth. At age 70, it would be $2.5m and 400k in Roth.

Part of the issue is that there will be a pension involved. 35k low estimate, 48k likely, 60k possible. Combines with 2 SS payments, at age 70 we're looking at over 100k to fill the lower brackets, BEFORE any RMDs.
This is the crux of the issue.

If you’ll have $100K+ in pensions plus SS, how does that compare to your projected expenses?

In other words, how much will you need to withdraw from your investments to meet your expenses?
Pre-age 70, below 3%. After age 70, 1% or less. Of course we can and probably will spend more. But anywhere near 4% is unlikely.
I actually meant dollar amounts, not percentages.

My point is that I-ORP simply may be reflecting that you’ve already saved enough to meet your goals.

There is a lot of emphasis on this forum about maxing out all retirement savings. And that may be good advice for those with well-paying jobs and no pensions — or those with unstable careers. But for those of us with stable jobs and pensions, it may not be necessary. We saved enough to take advantage of all matches and to limit federal and state income taxes, but we never came close to maxing out retirement accounts.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 3:50 pm

livesoft wrote:
Fri Apr 12, 2019 3:00 pm
Admiral wrote:
Fri Apr 12, 2019 2:58 pm
As noted, I already did that. That's the default: all the returns are identical regardless of account type. What's different is the expected return for each ASSET TYPE can different. There is no other option.
This then means that you have set the asset allocation for each account type to be the same.
I changed all accounts to 100% stock. Now it does show contribs to pre-tax (6k), 6k-9k to after tax, and 17k to Roth every year until age 58. It also unsurprisingly shows RMDs starting at 35k and going up to 100k at age 92. I would be solidly in the 25% bracket from age 70 onward.

One limitation is that you cannot force it to put a set amount in pretax (as I said, I have no choice with employer plan). There is no "minimum pre-tax contrib" there's only "Roth IRA Maximum Annual Contribution" and "Maximum Annual Contribution of All Types."

marcopolo
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Re: ORP says I should stop all pre-tax contribs

Post by marcopolo » Fri Apr 12, 2019 4:03 pm

Admiral wrote:
Fri Apr 12, 2019 3:17 pm
marcopolo wrote:
Fri Apr 12, 2019 3:07 pm
Admiral wrote:
Fri Apr 12, 2019 2:58 pm
livesoft wrote:
Fri Apr 12, 2019 2:50 pm
Admiral wrote:
Fri Apr 12, 2019 10:57 am
Hmm. Ok. So is there a workaround? Do I need to discount the expected return somehow?
The work-around is to set the expected return for each type of account to be identical.
As noted, I already did that. That's the default: all the returns are identical regardless of account type. What's different is the expected return for each ASSET TYPE can different. There is no other option.
The expected return of each account is the weighted sum of the expected return for the asset, and the allocation percentage of each asset class in that account.

Since you are using the default return expectations for each asset class, the only way to have i-orp behave rationally is to set the asset allocation ( the percent of stock/bond/cash) the same for ALL your accounts. This makes the account expected returns equal.

This is not how most people invest their accounts. But, that is the only way i-orp will do anything other than steer all your money into the highest expected return account
Ok that is a good explanation. I will try to set for all stock and report back on what the results are. I'm not sure, however, that your explanation is precisely what i-orp does. It does try to create the maximal amount of disposable income. But, not at the expense of paying higher taxes. So, one has the option of telling it to convert pre-tax to Roth up to the top of a specified bracket, for example (which I have done, up to top of 22%). It tries to give you the most money possible while paying the lowest amount of tax. So, while it sees that I am currently in 24%, it assumes that the brackets will revert to 15 and 25%, and it basically has me in 25% bracket for only 4 years, and then from 62-70 in 15%, and then tiny amounts (like 4k) in the 25% bracket til age 92.

By age 70 is has drained the pre-tax account completely.
What you are describing is exactly what one would hope you could analyze with I-ORP. And, if you do it with the same expected return settings, it will do that nicely. But, if you have unequal expected returns, that usually swamps the efficiencies you are trying to analyze, and I-ORP aggressively pushes your money into those accounts with the higher expected returns. The author of the program is aware of this, there have been a few exchanges with him on this forum about it.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: ORP says I should stop all pre-tax contribs

Post by inbox788 » Fri Apr 12, 2019 5:03 pm

Hydromod wrote:
Fri Apr 12, 2019 2:14 pm
I would suppose you would be taking much larger RMDs than needed to cover expenses, which would push you up the brackets.

This is where contributing to the Roth now will lower the RMDs later.
Still trying to understand ORP, and how it differs significantly from my understanding.

I really don't understand how it's better to pay 24% or more today than to try to convert up to 24% tax bracket later, unless the projection is that the minimum tax bracket will be 24% or more throughout. Plus there the issue of NIIT, which is likely present now, but may not be later.

I've come to the conclusion that if you're going to be in the 22/24% brackets now and later (pension + SS + RMD + capital gains), you're either paying the taxes now or later and it won't be that big a difference. [Pay later unless there is a compelling benefit to paying now] The main thing to do is to take advantage of 12% or less opportunities [pay now] and try to avoid 32%+ situations [which is a good problem to have to pay later]. Aside from Roth conversions, I don't see many other options. The annuities and 1031 exchanges might have some impact if you've got those considerations.

The only persuasive argument I've come across is if you're maxed out all tax advantaged opportunities, and you can shelter more after tax dollars in a Roth 401k over a long enough period and in sufficient amount to overcome the additional higher taxes now, but I think you need examples of how much (amount and time) that would involve. It might apply only in rare situations.
Admiral wrote:
Fri Apr 12, 2019 2:00 pm
The projected balance in 10 years (age 58) based on current (ie all pre-tax) contribs and a 5% real RoR is appx $1.8m, with $275k in Roth. At age 70, it would be $2.5m and 400k in Roth.

Part of the issue is that there will be a pension involved. 35k low estimate, 48k likely, 60k possible. Combines with 2 SS payments, at age 70 we're looking at over 100k to fill the lower brackets, BEFORE any RMDs.
How are you distributing you AA across accounts? I'd be putting all the bonds in tax deferred and all stock in Roth and taxable with the aim of slowing down growth in tax deferred. I'm taking the attitude that high tax bracket later in life is a very good problem to have, and you don't have to solve it now or ever.

Use QCDs from your tax deferred if you want to make charitable contributions.

Lastly, QLACs might be considered, but I don't understand them well enough to know.

Does or can ORP take these factor into account?

Hydromod
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Re: ORP says I should stop all pre-tax contribs

Post by Hydromod » Fri Apr 12, 2019 5:31 pm

One thing to consider is whether (case 1) Roth contributions today are at the low end of the 24 % bracket versus (case 2) RMDs without Roth contributions are high into the bracket. In the first case, just a small amount is taxed at 24 % and in the second case quite a bit is taxed at 24 %.

Presumably ORP would favor the first case.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Fri Apr 12, 2019 6:15 pm

inbox788 wrote:
Fri Apr 12, 2019 5:03 pm
Hydromod wrote:
Fri Apr 12, 2019 2:14 pm
I would suppose you would be taking much larger RMDs than needed to cover expenses, which would push you up the brackets.

This is where contributing to the Roth now will lower the RMDs later.
Still trying to understand ORP, and how it differs significantly from my understanding.

I really don't understand how it's better to pay 24% or more today than to try to convert up to 24% tax bracket later, unless the projection is that the minimum tax bracket will be 24% or more throughout. Plus there the issue of NIIT, which is likely present now, but may not be later.

I've come to the conclusion that if you're going to be in the 22/24% brackets now and later (pension + SS + RMD + capital gains), you're either paying the taxes now or later and it won't be that big a difference. [Pay later unless there is a compelling benefit to paying now] The main thing to do is to take advantage of 12% or less opportunities [pay now] and try to avoid 32%+ situations [which is a good problem to have to pay later]. Aside from Roth conversions, I don't see many other options. The annuities and 1031 exchanges might have some impact if you've got those considerations.

The only persuasive argument I've come across is if you're maxed out all tax advantaged opportunities, and you can shelter more after tax dollars in a Roth 401k over a long enough period and in sufficient amount to overcome the additional higher taxes now, but I think you need examples of how much (amount and time) that would involve. It might apply only in rare situations.
Admiral wrote:
Fri Apr 12, 2019 2:00 pm
The projected balance in 10 years (age 58) based on current (ie all pre-tax) contribs and a 5% real RoR is appx $1.8m, with $275k in Roth. At age 70, it would be $2.5m and 400k in Roth.

Part of the issue is that there will be a pension involved. 35k low estimate, 48k likely, 60k possible. Combines with 2 SS payments, at age 70 we're looking at over 100k to fill the lower brackets, BEFORE any RMDs.
How are you distributing you AA across accounts? I'd be putting all the bonds in tax deferred and all stock in Roth and taxable with the aim of slowing down growth in tax deferred. I'm taking the attitude that high tax bracket later in life is a very good problem to have, and you don't have to solve it now or ever.

Use QCDs from your tax deferred if you want to make charitable contributions.

Lastly, QLACs might be considered, but I don't understand them well enough to know.

Does or can ORP take these factor into account?
I won't need much RMD to cover expenses. Mostly they will be covered. Unless we decide to live high on the hog. LIkely the money will be gifted to kids or reinvested.

Part of the complexity is that James Welch (creator of i-ORP) has baked the "old" (that is, previous) tax rates into the model. So, there's no 22, 24, etc. It's 15 and then boom you're at 25%. This makes sense, if one assumes that the rates will revert, which they are scheduled to do. I am not currently near 32% and don't expect to be later.

For some of us, it's nearly a wash: 24% now, 25% later. It's more of an issue of how far into the upper bracket one is. And I agree, a large RMD is a good problem. For me it's more about "can I afford to save less, and if I am saving less, it's going to be a lot less, because it's after tax."

I am 70/30, all bonds are in tax deferred. Roth is stocks and REITs. Taxable is stocks.

EDIT TO ADD: My Roth is 1/6 the size of my pre-tax, and thus cannot hold all of my stock allocation. Thus the majority of stocks are in pre-tax. This is one reason to begin to build up the Roth account, so I can hold more stock there.

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Re: ORP says I should stop all pre-tax contribs

Post by Hydromod » Fri Apr 12, 2019 8:32 pm

We are in a similar situation, although you have been more proactive. I'm just putting together my 10-year plan. It's more complicated because I remarried five years ago and we're adjusting portfolios, plus I have two kids in college for the next eight years and we have some renovations to get done. So I'm worried about both current cash flow and retirement at the same time.

I looked at ORP to try and understand how to do the modeling myself. I'm not sure that linear programming can handle all of the complexities of both tax brackets and capital gains brackets. But it represents the tax rates as steadily increasing effective tax rates just fine.

I have been running some independent calculations to look at the trade off between contributing to Roth 403b versus traditional 403b. I'm all traditional. I had originally come to the conclusion that contributing the max to traditional was going to be roughly a wash with contributing the same total to Roth+tax (maintaining current cash flow), because our brackets are likely to be about the same. Lots of discussion here show this is expected.

However, once I started thinking about consequences if I died early, it was nowhere near a wash. In this case, the survivor is now filing as single, but the RMDs are about the same (age difference...). In my simulations, the tax load sometimes jumped by 50 percent.

Looking at mortality tables, we have about a fifty/fifty shot of one living at least ten years longer than the other. This life expectancy issue isn't really discussed much on this board when calculating the tradeoff.

Now I'm convinced that the smart move for me is to switch completely to Roth 403b to plan for the expected change from MFJ to single. It works out fine if we switch now, on our timeline, so I expect similar for you.

No harm in taking the approach, likely some upside. I don't think ORP considers this, but I may be wrong.

Tdubs
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Re: ORP says I should stop all pre-tax contribs

Post by Tdubs » Fri Apr 12, 2019 9:33 pm

Hydromod wrote:
Fri Apr 12, 2019 8:32 pm
We are in a similar situation, although you have been more proactive. I'm just putting together my 10-year plan. It's more complicated because I remarried five years ago and we're adjusting portfolios, plus I have two kids in college for the next eight years and we have some renovations to get done. So I'm worried about both current cash flow and retirement at the same time.

I looked at ORP to try and understand how to do the modeling myself. I'm not sure that linear programming can handle all of the complexities of both tax brackets and capital gains brackets. But it represents the tax rates as steadily increasing effective tax rates just fine.

I have been running some independent calculations to look at the trade off between contributing to Roth 403b versus traditional 403b. I'm all traditional. I had originally come to the conclusion that contributing the max to traditional was going to be roughly a wash with contributing the same total to Roth+tax (maintaining current cash flow), because our brackets are likely to be about the same. Lots of discussion here show this is expected.

However, once I started thinking about consequences if I died early, it was nowhere near a wash. In this case, the survivor is now filing as single, but the RMDs are about the same (age difference...). In my simulations, the tax load sometimes jumped by 50 percent.

Looking at mortality tables, we have about a fifty/fifty shot of one living at least ten years longer than the other. This life expectancy issue isn't really discussed much on this board when calculating the tradeoff.

Now I'm convinced that the smart move for me is to switch completely to Roth 403b to plan for the expected change from MFJ to single. It works out fine if we switch now, on our timeline, so I expect similar for you.

No harm in taking the approach, likely some upside. I don't think ORP considers this, but I may be wrong.
ORP tries to get as much out of pretax as possible early in retirement for just these kinds of uncertainty in your tax situation. At least that is what the author of the site told me some time ago.

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Re: ORP says I should stop all pre-tax contribs

Post by Peter Foley » Fri Apr 12, 2019 10:58 pm

livesoft wrote:
Make sure you use the same expected annual growth in all your investment accounts. Otherwise i-ORP always says to put the most money in the highest growth account if you can. It also says to withdraw first from the lowest growth account.
I don't have any reason to doubt that this is the the way the program works. However, the usual advice is to put one's bond allocation in tax deferred and stocks in a Roth (to the extent possible). Over time it would be realistic to expect some additional annual growth in the Roth account. If that is the way you have invested wouldn't you want the program to take that into account?

I suggest running the numbers through the Retiree Portfolio Model and see if you get similar results.

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Re: ORP says I should stop all pre-tax contribs

Post by LeeMKE » Fri Apr 12, 2019 11:01 pm

You can communicate with James Walsh by emailing him from the address on the website. He is the best person to look at your actual entries and decipher what is going on.

My own educated guess is that I-ORP is trying to moderate the taxes when RMDs force your Social Security into taxable status. I doubt I-ORP is telling you to save in taxable and Roth because you entered misleading assets in the accounts.

Before I-ORP, Fidelity showed that my tax burden for about 5 years in my 80s, would be +35%. This was caused by my having RMDs from a too large 401K and IRA. In my case, Roth Conversion was necessary, and luckily I'd already started doing some of it. Then, I discovered I-ORP and could see how that recommendation balanced my withdrawals from the larger Roth account to stay under the bar and smooth out the taxes.

Me, I'd be reluctant to give up any free money from my employer. But I'd ask James Walsh how to run your numbers to begin some Roth conversions now, and then ramp conversions up as soon as you retire. I don't know your details, but maybe you don't have enough time after retirement to rebalance between after tax and taxable, so you need to change your savings now.
The mightiest Oak is just a nut who stayed the course.

randomguy
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Re: ORP says I should stop all pre-tax contribs

Post by randomguy » Fri Apr 12, 2019 11:12 pm

Peter Foley wrote:
Fri Apr 12, 2019 10:58 pm
livesoft wrote:
Make sure you use the same expected annual growth in all your investment accounts. Otherwise i-ORP always says to put the most money in the highest growth account if you can. It also says to withdraw first from the lowest growth account.
I don't have any reason to doubt that this is the the way the program works. However, the usual advice is to put one's bond allocation in tax deferred and stocks in a Roth (to the extent possible). Over time it would be realistic to expect some additional annual growth in the Roth account. If that is the way you have invested wouldn't you want the program to take that into account?

I suggest running the numbers through the Retiree Portfolio Model and see if you get similar results.
Yes. The program really needs to maintain an AA for you (i.e stocks in ROTH first is fine but going from 50/50 at retirement to 100/0 in 20 years cause you do a bunch of roth conversions isn't) but that is really hard to do. Just think about how hard it is to set up a 50/50 portfolio across taxable, tax deferred, and tax free given that a dollar in each of them has a different value and that difference changes depending on your tax situation which also changes with the account values. I totally understand why he doesn't do it.

If your not really anal (i.e. you don't really care if you are 50/50 or 60/40) you can hand wave about most of these issues and get a rough solution that is about right.

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Re: ORP says I should stop all pre-tax contribs

Post by marcopolo » Fri Apr 12, 2019 11:14 pm

LeeMKE wrote:
Fri Apr 12, 2019 11:01 pm
You can communicate with James Walsh by emailing him from the address on the website. He is the best person to look at your actual entries and decipher what is going on.

My own educated guess is that I-ORP is trying to moderate the taxes when RMDs force your Social Security into taxable status. I doubt I-ORP is telling you to save in taxable and Roth because you entered misleading assets in the accounts.
It is not an issue of misleading assets, it has to do with the relative different expected returns of different asset classes assigned to different accounts. I-ORP does not handle that case in the way one would expect, mainly, I think because that becomes a very complex optimization problem with changing allocation in various accounts. There was a fairly recent discussion (with the author) regarding the gory details of this issue about midway through the discussion in this thread:
viewtopic.php?f=10&t=273109
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: ORP says I should stop all pre-tax contribs

Post by inbox788 » Sat Apr 13, 2019 1:33 am

Hydromod wrote:
Fri Apr 12, 2019 8:32 pm
However, once I started thinking about consequences if I died early, it was nowhere near a wash. In this case, the survivor is now filing as single, but the RMDs are about the same (age difference...). In my simulations, the tax load sometimes jumped by 50 percent.

Looking at mortality tables, we have about a fifty/fifty shot of one living at least ten years longer than the other. This life expectancy issue isn't really discussed much on this board when calculating the tradeoff.

Now I'm convinced that the smart move for me is to switch completely to Roth 403b to plan for the expected change from MFJ to single. It works out fine if we switch now, on our timeline, so I expect similar for you.

No harm in taking the approach, likely some upside. I don't think ORP considers this, but I may be wrong.
Yes, the singles tax brackets are a lot lower and I haven't been considering that possibility. I've been taking the simplistic view and only considering the married filing jointly, and was only planning on converting up to the top of the 22% bracket and maybe overflow a little into the 24%, but not through the whole range, thinking it would be unlikely to be higher in retirement. I'll have to reconsider the single brackets during the mid/late 80's RMDs as an alternative, and there's a much higher chance of being higher than 24%. On the other hand, the preservation of stretch IRA calls for deferring as much as possible as long as possible, so they're conflicting goals and outcomes. Very challenging.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Sat Apr 13, 2019 7:13 am

marcopolo wrote:
Fri Apr 12, 2019 11:14 pm
LeeMKE wrote:
Fri Apr 12, 2019 11:01 pm
You can communicate with James Walsh by emailing him from the address on the website. He is the best person to look at your actual entries and decipher what is going on.

My own educated guess is that I-ORP is trying to moderate the taxes when RMDs force your Social Security into taxable status. I doubt I-ORP is telling you to save in taxable and Roth because you entered misleading assets in the accounts.
It is not an issue of misleading assets, it has to do with the relative different expected returns of different asset classes assigned to different accounts. I-ORP does not handle that case in the way one would expect, mainly, I think because that becomes a very complex optimization problem with changing allocation in various accounts. There was a fairly recent discussion (with the author) regarding the gory details of this issue about midway through the discussion in this thread:
viewtopic.php?f=10&t=273109
I went back and read that thread, which was somewhat helpful. This is a complicated problem (or perhaps "issue"). In my case (since I started the thread) there's another complication: In the years when ORP recommends Roth conversions (age 58 to 68 or older) my spouse may still be working. Her salary would fill up the lower brackets...almost to the top of 22%, making any significant conversions taxed at 24%. The same bracket we are in now. So, how to account for this? There's no way to do it, because ORP only models retirement contributions and withdrawals, not taxable income during working years and whether that stops for half of a married couple. I would guess this situation is not that uncommon (if only due to age deltas).

And, as to the AA issue, as noted (in that thread, by James Welch) it's not so easy to just shift stocks to bonds or vice versa among tax-favored accounts. If the amounts in Roth vs pre-tax are significantly unequal (which they are in my case), just adding 15-20k to Roth each year and nothing to tax advantaged is not going to move the needle much (and ESP if the employer contrib is pre-tax). This can only be accomplished through conversions, which are taxable events.

letsgobobby
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Re: ORP says I should stop all pre-tax contribs

Post by letsgobobby » Sat Apr 13, 2019 8:04 am

Deleted
Last edited by letsgobobby on Thu Apr 18, 2019 12:14 am, edited 1 time in total.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Sat Apr 13, 2019 8:18 am

letsgobobby wrote:
Sat Apr 13, 2019 8:04 am
Admiral wrote:
Fri Apr 12, 2019 2:00 pm
bradpevans wrote:
Fri Apr 12, 2019 1:55 pm
Is your tax-deferred balance so high that even reasonable withdraw amounts place you in the upper brackets?

Like 3 million at age 70 ~ 100K per year, with other sources pushing you higher?

I'm puzzled too - its hard to beat a 401K with zero tax in, progressive tax rates out.
The projected balance in 10 years (age 58) based on current (ie all pre-tax) contribs and a 5% real RoR is appx $1.8m, with $275k in Roth. At age 70, it would be $2.5m and 400k in Roth.

Part of the issue is that there will be a pension involved. 35k low estimate, 48k likely, 60k possible. Combines with 2 SS payments, at age 70 we're looking at over 100k to fill the lower brackets, BEFORE any RMDs.
what are you planning to do for income between 58 and 70?
My spouse will have a pension at my age 58, so if she retires we will live on that plus pre-tax distributions. However she will probably work into her 60s, and her salary will cover our expenses. Her FRA is my age 65 so we will have that additional income, if we don't want to wait until we are both 70 (which we probably will).

petulant
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Re: ORP says I should stop all pre-tax contribs

Post by petulant » Sat Apr 13, 2019 8:33 am

I think the main factor ORP is capturing that you need to think about is just that, by deferring tax on so much income while you already have strong pretax savings + pension, there is a real possibility you will get stuck with RMDs and pension and social security at the same time, causing high taxes. Now if you can separately model that and are completely sure your strategy is fine on this front, I wouldn't worry too long about the quirks with ORP.

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Re: ORP says I should stop all pre-tax contribs

Post by dknightd » Sat Apr 13, 2019 8:45 am

I find I-ORP to be a very very useful tool. I hope somebody keeps it alive after James passes (He is older than me).
I find it particularly useful for "what if" analysis. I put it various possible options, then see what it computes.
By varying some parameters your results can change quite a bit. Other times, not so much. Unfortunately nobody can know what some of the parameters might be.
OP you must have some very unique parameters if it suggests investing in after tax before tax advantaged. The only time I can see contributing to a non tax advantaged account first is if that account earns more, or is somehow taxed less. Or if you were planning to retire before 59.5. But perhaps there are parameters I have not considered . . .

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Sat Apr 13, 2019 8:57 am

dknightd wrote:
Sat Apr 13, 2019 8:45 am
I find I-ORP to be a very very useful tool. I hope somebody keeps it alive after James passes (He is older than me).
I find it particularly useful for "what if" analysis. I put it various possible options, then see what it computes.
By varying some parameters your results can change quite a bit. Other times, not so much. Unfortunately nobody can know what some of the parameters might be.
OP you must have some very unique parameters if it suggests investing in after tax before tax advantaged. The only time I can see contributing to a non tax advantaged account first is if that account earns more, or is somehow taxed less. Or if you were planning to retire before 59.5. But perhaps there are parameters I have not considered . . .
Indeed perhaps I do here's the output for taxable

Code: Select all

Age       AccBal   Stocks  AftxTrns  Contrib  Distrib Illiquid   Yield  CapGains 
 BegBal        80       80        0        0        0        0        0        0
048            86       86        0        8        0      700        0        0
049            99       99        0        9        0      714        0        0
050           112      112        0        9        0      728        0        0
051           126      126        0       10        0      743        0        0
052           142      142        0       11        0      758        0        0
053           160      160        0       11        0      773        0        0
054           178      178        0       12        0      788        0        0
055           199      199        0       12        0      804        0        0
056           221      221        0       13        0      820        0        0
057           245      245        0       14        0      837        0        0
058            62       62        0        0      198      853        2       16
And now Roth:

Code: Select all

Age       AccBal   Stocks  IRA2Roth  Contrib  Distrib 
 BegBal       139      139        0        0        0
048           150      150        0       15        0
049           172      172        0       15        0
050           196      196        0       15        0
051           221      221        0       15        0
052           248      248        0       15        0
053           277      277        0       15        0
054           308      308        0       15        0
055           341      341        0       15        0
056           376      376        0       15        0
057           414      414        0       15        0
058           526      526       83        0        0
059           527      527        0        0       36
060           471      471        0        0       92
061           414      414        0        0       90
062           356      356        0        0       87
063           299      299        0        0       83
064           240      240        0        0       80
065           189      189        0        0       68
066           136      136        0        0       65
067            83       83        0        0       63
068           155      155       66        0        0
069           206      206       40        0        0
070           200      200        0        0       20
071           201      201        0        0       13
072           209      209        0        0        6
073           230      230        6        0        0
074           278      278       32        0        0
075           297      297        0        0        0
076           318      318        0        0        0
077           340      340        0        0        0
078           364      364        0        0        0
079           389      389        0        0        0
080           417      417        0        0        0
081           446      446        0        0        0
082           477      477        0        0        0
083           510      510        0        0        0
084           546      546        0        0        0
085           584      584        0        0        0
086           625      625        0        0        0
087           669      669        0        0        0
088           716      716        0        0        0
089           766      766        0        0        0
090           820      820        0        0        0
091           877      877        0        0        0
LastYear      938      938        0        0        0
EDIT TO ADD: Note, this is AFTER I changed the AA to 100% stocks for ALL accounts, as per the advice upthread.

LeeMKE
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Re: ORP says I should stop all pre-tax contribs

Post by LeeMKE » Sat Apr 13, 2019 9:12 am

In the years when ORP recommends Roth conversions (age 58 to 68 or older) my spouse may still be working. Her salary would fill up the lower brackets...almost to the top of 22%, making any significant conversions taxed at 24%. The same bracket we are in now. So, how to account for this? There's no way to do it, because ORP only models retirement contributions and withdrawals, not taxable income during working years and whether that stops for half of a married couple. I would guess this situation is not that uncommon (if only due to age deltas).
I-ORP does account for your spouses income and timing. Look again at your entries. (There have been several comments posted that come from people who are not familiar with I-ORP, so that is making this more complicated than necessary.) And I would suggest that I-ORP is trying to save you from a much higher tax bracket (37%) later in retirement. The withdrawal tables do not show the working years, but that data is being accounted for in the tool.

For married couples, it is recommended that you also play around with the mortality of each player to understand how the recommendations change, before you commit to a specific plan. An early death can sabotage a perfectly good retirement in some cases (but not likely yours).
The mightiest Oak is just a nut who stayed the course.

dknightd
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Re: ORP says I should stop all pre-tax contribs

Post by dknightd » Sat Apr 13, 2019 9:17 am

I don't understand those numbers, It looks like you plan to leave $1M to your heirs.

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Admiral
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Re: ORP says I should stop all pre-tax contribs

Post by Admiral » Sat Apr 13, 2019 9:20 am

dknightd wrote:
Sat Apr 13, 2019 9:17 am
I don't understand those numbers, It looks like you plan to leave $1M to your heirs.
I put in $2m (current dollars). The reason for this is because the only ways (as per James Welch) to put a ceiling on disposable income in the tool is to enter a desired estate value at death. Otherwise it will fully maximize spending. It will likely be higher.

dknightd
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Re: ORP says I should stop all pre-tax contribs

Post by dknightd » Sat Apr 13, 2019 9:27 am

Admiral wrote:
Sat Apr 13, 2019 9:20 am
dknightd wrote:
Sat Apr 13, 2019 9:17 am
I don't understand those numbers, It looks like you plan to leave $1M to your heirs.
I put in $2m (current dollars). The reason for this is because the only ways (as per James Welch) to put a ceiling on disposable income in the tool is to enter a desired estate value at death. Otherwise it will fully maximize spending. It will likely be higher.
Honestly if you can plan to leave $2m, and still have enough to live comfortably. Why worry?
Edit: Likely i-orp is suggesting you put money into after tax so your heirs can take advantage of the increased basis they will see.

LeeMKE
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Re: ORP says I should stop all pre-tax contribs

Post by LeeMKE » Sat Apr 13, 2019 9:44 am

+1 dknightd
Edit: Likely i-orp is suggesting you put money into after tax so your heirs can take advantage of the increased basis they will see.
I don't know this for sure, but it sounds likely to me.
The mightiest Oak is just a nut who stayed the course.

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