Forget ACA subsidies and Max out Roth conversions early?

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Johnsson
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Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 9:47 am

I have read many similar postings with many people on the fence as to whether or not to convert early (before 65) or starting at 65. I'm hoping you can assess my new plan.

My plan has been ACA subsidies until 65. However, I now believe it's likely, with the recent trillions allocated by our gov't for subsidies (even with very low interest rates), that tax rates will increase after 2025 beyond what's currently planned, if not before (I don't want to debate this possibility, and get this posting shut-down). Playing with https://www.i-orp.com/Inflate/extended.html (one of the best tools out there imho) I find there's not a big difference with overall spending (3K per year max, in our situation) whether doing conversions early or late or not at all.

Options I've been thinking about...

1. Convert early (costing more for health ins., estimated at a $20k annual cost times 6 years over ACA subsidized ins.), starting in 2021,
2. Convert starting at 65 (after ACA subsidies), or
3. Not convert, or
4. Something else?

Note: We turn 65 in 2026, when taxes are currently scheduled to increase.

What other factors or plans should we consider...? :confused

Our situation...

Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Overall AA: ~60/40

Thank you!! :sharebeer
Last edited by Johnsson on Sat May 30, 2020 10:17 am, edited 1 time in total.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

HomeStretch
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by HomeStretch » Sat May 30, 2020 9:56 am

Our plan in 2 years is to obtain healthcare coverage through the ACA exchange with subsidy. This means we will need to limit our Roth conversions until Medicare eligibility at age 65. I would rather have the savings from the known subsidy than the estimated tax savings from my prediction about future tax rates.

That said, it’s a decision that can change annually after re-assessing ACA subsidies, tax rates, growth in tax deferred balances, etc.

Ron Ronnerson
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Ron Ronnerson » Sat May 30, 2020 10:03 am

I would try to keep the subsidy if possible as $20k/year is fairly substantial. Even if taxes do go up, after 6 years, you would quite likely have something like an extra $150k or so ($120k invested over 6 years) that you didn’t spend on health insurance to throw toward the taxes.

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Johnsson
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 10:13 am

HomeStretch wrote:
Sat May 30, 2020 9:56 am
Our plan in 2 years is to obtain healthcare coverage through the ACA exchange with subsidy. This means we will need to limit our Roth conversions until Medicare eligibility at age 65. I would rather have the savings from the known subsidy than the estimated tax savings from my prediction about future tax rates.

That said, it’s a decision that can change annually after re-assessing ACA subsidies, tax rates, growth in tax deferred balances, etc.
With current tax law, we would be only need to pay ~$190k in 25% taxes on the conversions (the rest at 15% or below) if we start early and ~$700k in 22 & 25% taxes if we convert starting at 65. Quite a difference, allowing us to recoup several years worth of the extra healthcare cost we'd incur by not doing ACA).
Last edited by Johnsson on Sat May 30, 2020 10:15 am, edited 1 time in total.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

SteelCityMD
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by SteelCityMD » Sat May 30, 2020 10:15 am

Do you actually mean after-tax or are you referring to Roth/taxable.


After-tax means something specific and it’s not good news.

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Johnsson
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 10:17 am

SteelCityMD wrote:
Sat May 30, 2020 10:15 am
Do you actually mean after-tax or are you referring to Roth/taxable.


After-tax means something specific and it’s not good news.
Sorry. I mean taxable account (built with after-tax money). I'll edit the post.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

Chip
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Chip » Sat May 30, 2020 10:21 am

Johnsson wrote:
Sat May 30, 2020 10:13 am
With current tax law, we would be only need to pay ~$190k in 25% taxes on the conversions (the rest at 15% or below) if we start early and ~$700k in 22 & 25% taxes if we convert starting at 65. Quite a difference, allowing us to recoup several years worth of the extra healthcare cost we'd incur by not doing ACA).
It sounds like you're assuming that you would convert the same total amount starting at 65 as you would if you started now. I would question whether that is a reasonable assumption. You could just convert less and end up with higher RMDs.

I would just treat the loss of subsidy as a current "tax" and stick it in the spreadsheet. Also, don't forget IRMAA effects on Medicare premiums starting at age 63.

As mentioned earlier, it makes sense to evaluate this annually.

HomeStretch
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by HomeStretch » Sat May 30, 2020 10:29 am

+1

OP, if you haven’t already, also take into account the impact of the 3.8% tax on net investment income at higher AGI levels.

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Watty
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Watty » Sat May 30, 2020 10:43 am

Johnsson wrote:
Sat May 30, 2020 9:47 am
What other factors or plans should we consider...?
If you have capital gains in your taxable account then you can take long term capital gains an pay 0% in federal taxes up to the top of the 12% tax bracket. That may be more valuable than doing Roth conversions.

It will likely make sense for one of you to start Social Security at 62 and with the way that Social Security is taxed that may make Roth conversions less favorable. See this web site for a suggested claiming strategy.

https://opensocialsecurity.com/

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

You should also look at the numbers for using COBRA instead of the ACA for 18 months(36 in a few states) when you retire and you could do Roth conversions when you are using that. When I retired I used COBRA and it had a lot better coverage and as I recall it cost about the save as an ACA policy even with a subsidy. The reason is that COBRA costs do not vary with age but the ACA rates can be several times higher for someone that is in their 60s.

You need to look at your numbers three ways, as a couple and as if one of you survives the other. The survivor would only have one Social Security check and they would be in the higher single tax brackets.

With all the moving parts and possible changes it would likely make sense to just decide what to do year by year.
Johnsson wrote:
Sat May 30, 2020 9:47 am
Note: We turn 65 in 2026, when taxes are currently scheduled to increase.
Between this, your concerns about possible tax increases, and the higher tax brackets a single survivor would be in doing Roth conversions up to the top of the 24% federal tax bracket would be worth considering. That is only 2% higher than the 22% federal tax bracket so it is not that much higher.

One thing to keep in mind about the RMDs though is that they only start out at about 4% and you will not have to actually start drawing down the IRA until the RMD percentage is higher than the rate that the investments are growing. The RMD percentage does not get higher than 7% until you are 86 so you may not have to actually start drawing down the IRA until you are in your late 80s. I think people are a lot more concerned about RMDs than they need to be.

retiredjg
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by retiredjg » Sat May 30, 2020 11:37 am

Johnsson wrote:
Sat May 30, 2020 10:13 am
With current tax law, we would be only need to pay ~$190k in 25% taxes on the conversions (the rest at 15% or below) if we start early and ~$700k in 22 & 25% taxes if we convert starting at 65. Quite a difference, allowing us to recoup several years worth of the extra healthcare cost we'd incur by not doing ACA).
I'm not sure just what this means and you may not be willing to share the exact details. But if you are, it might be helpful to know. I don't know why you are looking at taxes paid at certain rates rather than how much the total tax is. Also looking at taxes later almost always means more tax dollars but it does not mean less money left in your pocket which is what you should really be looking at.

If you expect to have about $1.8 million in tax-deferred accounts when you retire next year, I think that is going to cause a log jam at some point if you don't start taking care of it early. A nice goal would be to get that number down to $500k or less before RMDs start at age 72. I don't see any need to reduce your tax-deferred account more than that.

Things that will get in way include

-taxes going up in 2026 as they are currently scheduled to do

-the NITT if you convert too much in a year

-IRMAA costs starting with your income at age 63 (not 65) and realizing that IRMAA for two can cost several thousand dollars a year if your income is high enough (you may be trading low early costs for higher later costs that last more years)

It sure is an attractive idea to save $20k a year using the ACA, but I'm not at all sure it is the best approach.

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FIREchief
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by FIREchief » Sat May 30, 2020 12:15 pm

Watty wrote:
Sat May 30, 2020 10:43 am
If you have capital gains in your taxable account then you can take long term capital gains an pay 0% in federal taxes up to the top of the 12% tax bracket. That may be more valuable than doing Roth conversions.
They actually decoupled the top of the zero percent LTCG rate from the normal brackets as part of the 2017 tax changes. It's currently at $80K and adjusted annually. That said, instead of targeting that, the OP may want to cap income at 4 times the federal poverty level ($67,640) to keep ACA subsidies.
It will likely make sense for one of you to start Social Security at 62 and with the way that Social Security is taxed that may make Roth conversions less favorable. See this web site for a suggested claiming strategy.
He should keep in mind that SS payments, both taxable and non-taxable will contribute to MAGI for ACA qualification purposes.
You should also look at the numbers for using COBRA instead of the ACA for 18 months(36 in a few states) when you retire and you could do Roth conversions when you are using that. When I retired I used COBRA and it had a lot better coverage and as I recall it cost about the save as an ACA policy even with a subsidy. The reason is that COBRA costs do not vary with age but the ACA rates can be several times higher for someone that is in their 60s.
This is a great suggestion.

(see my signature)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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FIREchief
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by FIREchief » Sat May 30, 2020 12:19 pm

Johnsson wrote:
Sat May 30, 2020 9:47 am
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Is "pre-tax" money in traditional IRA/401k?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Flobes
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Flobes » Sat May 30, 2020 12:37 pm

Johnsson wrote:
Sat May 30, 2020 9:47 am
...whether or not to convert early (before 65) or starting at 65... My plan has been ACA subsidies until 65.
HomeStretch wrote:
Sat May 30, 2020 9:56 am
This means we will need to limit our Roth conversions until Medicare eligibility at age 65.
Medicare starts at 65.

But unless your birthday is at the very beginning of the year, you may not want to go over the ACA cliff the year you turn 65.

Which means the start year for power Roth conversions may forward to 66, not 65.

Remember that ACA insurance price goes up each year based on age, let alone other yearly increases.

And then there's IRMAA fogging the Roth conversion window.

I suspended annual Roth conversions to maximize ACA benefits, @18k/year. I started Medicare at 65. I did not resume Roth conversions until my 66 year.

JBTX
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by JBTX » Sat May 30, 2020 12:53 pm

Johnsson wrote:
Sat May 30, 2020 9:47 am
I have read many similar postings with many people on the fence as to whether or not to convert early (before 65) or starting at 65. I'm hoping you can assess my new plan.

My plan has been ACA subsidies until 65. However, I now believe it's likely, with the recent trillions allocated by our gov't for subsidies (even with very low interest rates), that tax rates will increase after 2025 beyond what's currently planned, if not before (I don't want to debate this possibility, and get this posting shut-down). Playing with https://www.i-orp.com/Inflate/extended.html (one of the best tools out there imho) I find there's not a big difference with overall spending (3K per year max, in our situation) whether doing conversions early or late or not at all.

Options I've been thinking about...

1. Convert early (costing more for health ins., estimated at a $20k annual cost times 6 years over ACA subsidized ins.), starting in 2021,
2. Convert starting at 65 (after ACA subsidies), or
3. Not convert, or
4. Something else?

Note: We turn 65 in 2026, when taxes are currently scheduled to increase.

What other factors or plans should we consider...? :confused

Our situation...

Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Overall AA: ~60/40

Thank you!! :sharebeer
Not really info give enough info to say. It really depends on other variables.

Given you apparently have no Roth and ample traditional, I would say doing conversions would be worthwhile, if you can avoid the highest marginal rates, including impacts of ACA and eventually Medicare and social security. I'd probably consider them at a 22% marginal rate. Maybe 24%. Probably not 30 or above. That is just my arbitrary threshold. It may or may not turn out best for yours.

retiredjg
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by retiredjg » Sat May 30, 2020 1:07 pm

retiredjg wrote:
Sat May 30, 2020 11:37 am
Things that will get in way include

-taxes going up in 2026 as they are currently scheduled to do

-the NITT if you convert too much in a year

-IRMAA costs starting with your income at age 63 (not 65) and realizing that IRMAA for two can cost several thousand dollars a year if your income is high enough (you may be trading low early costs for higher later costs that last more years)
I've always been unsure just what income is included as "net investment income" so I did some reading on this IRS site and have a question.

https://www.irs.gov/newsroom/questions- ... income-tax

Under headings 8 and 9 regarding what is included as net investment income, it appears to me that a distribution from a 401k (etc) plan would not be considered "net investment income". But no such exclusion is given for a distribution from an IRA.

Could this mean that conversions of IRA to Roth IRA would count as NIT but conversions from 401k would not count?

I'm pretty unclear how and where in the process the tax is actually calculated for NIT.

It could matter to this poster if anybody knows.

curmudgeon
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by curmudgeon » Sat May 30, 2020 4:35 pm

retiredjg wrote:
Sat May 30, 2020 1:07 pm
retiredjg wrote:
Sat May 30, 2020 11:37 am
Things that will get in way include

-taxes going up in 2026 as they are currently scheduled to do

-the NITT if you convert too much in a year

-IRMAA costs starting with your income at age 63 (not 65) and realizing that IRMAA for two can cost several thousand dollars a year if your income is high enough (you may be trading low early costs for higher later costs that last more years)
I've always been unsure just what income is included as "net investment income" so I did some reading on this IRS site and have a question.

https://www.irs.gov/newsroom/questions- ... income-tax

Under headings 8 and 9 regarding what is included as net investment income, it appears to me that a distribution from a 401k (etc) plan would not be considered "net investment income". But no such exclusion is given for a distribution from an IRA.

Could this mean that conversions of IRA to Roth IRA would count as NIT but conversions from 401k would not count?

I'm pretty unclear how and where in the process the tax is actually calculated for NIT.

It could matter to this poster if anybody knows.
To my understanding Roth conversions would not count as investment income in themselves, but they would count in raising the income (MAGI) to a level which might trigger NIIT on your actual investment income (dividends and cap gains) from the taxable account.

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Johnsson
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 4:37 pm

Chip wrote:
Sat May 30, 2020 10:21 am
Johnsson wrote:
Sat May 30, 2020 10:13 am
With current tax law, we would be only need to pay ~$190k in 25% taxes on the conversions (the rest at 15% or below) if we start early and ~$700k in 22 & 25% taxes if we convert starting at 65. Quite a difference, allowing us to recoup several years worth of the extra healthcare cost we'd incur by not doing ACA).
It sounds like you're assuming that you would convert the same total amount starting at 65 as you would if you started now. I would question whether that is a reasonable assumption. You could just convert less and end up with higher RMDs.

I would just treat the loss of subsidy as a current "tax" and stick it in the spreadsheet. Also, don't forget IRMAA effects on Medicare premiums starting at age 63.

As mentioned earlier, it makes sense to evaluate this annually.
The software works to maximize available spending and level the tax rate (trying to avoid spikes). IRMAA is considered in calculations. I included added expense of $20k each year before Medicare for incremental insurance.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

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Johnsson
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 4:44 pm

FIREchief wrote:
Sat May 30, 2020 12:19 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Is "pre-tax" money in traditional IRA/401k?
About 40% IRA, 60% 401k. I plan to roll into the IRA next year. No backdoor Roth without aggravation.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

marcopolo
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by marcopolo » Sat May 30, 2020 5:04 pm

Johnsson wrote:
Sat May 30, 2020 9:47 am
I have read many similar postings with many people on the fence as to whether or not to convert early (before 65) or starting at 65. I'm hoping you can assess my new plan.

My plan has been ACA subsidies until 65. However, I now believe it's likely, with the recent trillions allocated by our gov't for subsidies (even with very low interest rates), that tax rates will increase after 2025 beyond what's currently planned, if not before (I don't want to debate this possibility, and get this posting shut-down). Playing with https://www.i-orp.com/Inflate/extended.html (one of the best tools out there imho) I find there's not a big difference with overall spending (3K per year max, in our situation) whether doing conversions early or late or not at all.

Options I've been thinking about...

1. Convert early (costing more for health ins., estimated at a $20k annual cost times 6 years over ACA subsidized ins.), starting in 2021,
2. Convert starting at 65 (after ACA subsidies), or
3. Not convert, or
4. Something else?

Note: We turn 65 in 2026, when taxes are currently scheduled to increase.

What other factors or plans should we consider...? :confused

Our situation...

Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Overall AA: ~60/40

Thank you!! :sharebeer
interesting that you came to this conclusion.

I have been running this excersize for a couple of years, and have asked here before as well.

I really want to do Roth Conversions, but I just could not see how the numbers work to make that advantageous.

We have a similar amount in tax-deferred, a bit more in taxable, and some already in Roth.

We do not plan to convert all of the pre-deferred to Roth as I would want to be able to fill lower tax brackets later.

Having run numerous simulations, here was the conclusion we came to. The cost of forgoing subsidies is roughly an additional 10% below the cliff, very high at the cliff, which keeps it effectively at or above 10% unless you convert really large amounts. So, we use 10% as what has to be overcome. So, unless you think your marginal tax bracket is going to be at least 10% higher when you withdraw later than where you are currently, you are better off taking the subsidy.

One aside on I-Orp. you mention that your taxable has equities, you did not mention what is in tax-deferred account, or any Roth you may already have. When you ran I-orp, how did you set up those accounts? If you tell i-orp you have bonds (lower return) in tax-deferred, and equities (higher return) in Roth, it will show you that you come out ahead doing aggressive Roth Conversions because it moves all you tax deferred bonds into Roth equities, seeking higher spendable dollars (which is its goal), but that is NOT what most people actually do, because it drastically increases your risk. Just want to make sure the analysis you did is telling you what you think it is saying.

Good luck to you.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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FIREchief
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by FIREchief » Sat May 30, 2020 5:18 pm

Johnsson wrote:
Sat May 30, 2020 4:44 pm
FIREchief wrote:
Sat May 30, 2020 12:19 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Is "pre-tax" money in traditional IRA/401k?
About 40% IRA, 60% 401k. I plan to roll into the IRA next year. No backdoor Roth without aggravation.
Without know your other income situation (pensions, SS, etc.), I would say at first glance it doesn't look like you have enough qualified pre-tax assets to argue for aggressive Roth conversions. I would think that maximizing ACA subsidies until you're fully on Medicare, and then performing Roth conversions to the beginning of the first IRMAA tier, would be reasonable. You don't want to pay taxes to convert all tIRA assets to Roth, because those funds might eventually be withdrawn tax free if you have significant deductible medical expenses.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

marcopolo
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by marcopolo » Sat May 30, 2020 5:38 pm

FIREchief wrote:
Sat May 30, 2020 5:18 pm
Johnsson wrote:
Sat May 30, 2020 4:44 pm
FIREchief wrote:
Sat May 30, 2020 12:19 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Is "pre-tax" money in traditional IRA/401k?
About 40% IRA, 60% 401k. I plan to roll into the IRA next year. No backdoor Roth without aggravation.
Without know your other income situation (pensions, SS, etc.), I would say at first glance it doesn't look like you have enough qualified pre-tax assets to argue for aggressive Roth conversions. I would think that maximizing ACA subsidies until you're fully on Medicare, and then performing Roth conversions to the beginning of the first IRMAA tier, would be reasonable. You don't want to pay taxes to convert all tIRA assets to Roth, because those funds might eventually be withdrawn tax free if you have significant deductible medical expenses.
That is essentially the conclusion I came to for our situation after a bunch of different ways of analyzing it.

But, each situation is different, so there may be other factors at play here not already presented.
Once in a while you get shown the light, in the strangest of places if you look at it right.

curmudgeon
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by curmudgeon » Sat May 30, 2020 6:05 pm

Johnsson wrote:
Sat May 30, 2020 9:47 am
Playing with https://www.i-orp.com/Inflate/extended.html (one of the best tools out there imho) I find there's not a big difference with overall spending (3K per year max, in our situation) whether doing conversions early or late or not at all.

Options I've been thinking about...
1. Convert early (costing more for health ins., estimated at a $20k annual cost times 6 years over ACA subsidized ins.), starting in 2021,
2. Convert starting at 65 (after ACA subsidies), or
3. Not convert, or
4. Something else?

Our situation...
Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
I think it's typically the case that Roth conversions only have effects at the margins; $100k difference over the course of an extended retirement is somewhat meaningful, but certainly not life-changing. If you are looking at legacy considerations, the potential benefits can be a bit more significant; if you still have a large pre-tax balance when a single survivor reaches their 90's, they can end up having to take quite large RMDs and hit the top tax (and IRMAA) brackets on money that they aren't actually going to use. Having a substantial Roth balance can also be nice if you'd like to be able to make a large, one-time expenditure without creating a major tax event of cap gains or ira withdrawal.

Taxation of SS benefits, IRMAA, and state income taxes add more wrinkles. Legislative uncertainty, whether tax rates, SS/medicare changes, wealth taxes, etc are significant unknowns.

My wife and I are in somewhat similar situation, though several years ahead of you. I've been choosing the "bird in hand" (ACA subsidy) for now, but doing Roth conversions to take us up to the "ACA cliff". Some of this is situation-specific; we are satisfied with the local Kaiser bronze HSA plan which is almost completely subsidized in premiums in our specific market and lets us do another $9k of Roth conversions by contributing $9k to our HSAs. In many ACA situations, you may start losing a chunk of premium subsidy as you move your MAGI up from ~$50k to the cliff at $68k, which acts like a 10% marginal tax effect.

My personal plan, at present, is to Roth convert up to just below the ACA cliff until medicare (I'll actually give up a couple of months of subsidy the year I turn 65). We will then crank up the Roth conversions (may well have moved closer to our kids/grandkids in a no-income-tax state by that point) from 65 to 70. During the big conversion years, we won't fret too much about IRMAA and SS taxation (lower earner starts SS at age 67). At 70, when the larger SS benefit kicks in, we will probably cut back on conversions, but will probably do at least as much as the RMD would be starting at 72. Goal is to Roth convert the tIRA down to around $500k, at which point RMDs plus dividends/interest from remaining taxable should be low enough to minimize tax on the SS benefits. I fully expect to revisit the plan every few years to account for life and legislation changes.

smitcat
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by smitcat » Sat May 30, 2020 6:45 pm

Johnsson wrote:
Sat May 30, 2020 10:13 am
HomeStretch wrote:
Sat May 30, 2020 9:56 am
Our plan in 2 years is to obtain healthcare coverage through the ACA exchange with subsidy. This means we will need to limit our Roth conversions until Medicare eligibility at age 65. I would rather have the savings from the known subsidy than the estimated tax savings from my prediction about future tax rates.

That said, it’s a decision that can change annually after re-assessing ACA subsidies, tax rates, growth in tax deferred balances, etc.
With current tax law, we would be only need to pay ~$190k in 25% taxes on the conversions (the rest at 15% or below) if we start early and ~$700k in 22 & 25% taxes if we convert starting at 65. Quite a difference, allowing us to recoup several years worth of the extra healthcare cost we'd incur by not doing ACA).
We came to the same conclusion but ours is a bit more complicated because we are not the same age. We did very similar calculations and came away with Roth converting a majority of our funds over a number of years and forgoing the ACA benefits. FWIW the results become more detailed and evident when utilizing the RPM calculator but it does take quite a bit more time to load, run, and understand the outputs.

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by J295 » Sat May 30, 2020 7:36 pm

Very interesting conversation. We have been simply staying below the cliff without doing any sort of deep dive on conversion versus ACA. In fact, we have had self-employment income since my transition seven years ago at age 53 so both my spouse and I i’ve actually increased traditional plans through our solo 401(k) plans.


OP. Is there any benefit to taking large conversions in one or two years, and then obtaining the ACA subsidies for the balance of years?

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by celia » Sat May 30, 2020 8:04 pm

Johnsson wrote:
Sat May 30, 2020 9:47 am
What other factors or plans should we consider...? :confused

Our situation...

Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
OP, It looks like you are not diversified in "types of accounts" (ie, no Roths). Why not get one started (for each of you, if married), if only to start the 5-year clock? Say, somewhere in 3 or 4 years, you've done significant conversions but to control your taxes/tax bracket, you want to withdraw from Roth, it would certainly help if you have had a Roth for 5 years.

Another thing to consider is to stop funding tax-deferred so much. The simplest thing is to just stop contributing, but you could convert the same amount of contributions this year to end up being taxed the same as if you hadn't contributed at all.

If you haven't yet planned on converting during a bull market, you should seriously consider it. Look at $100K of assets at the beginning of the year. If those shares were to fall to half of their January value, you could convert twice as many shares and pay taxes on the $100K conversion. When those shares return to their January value in a year or two, it will be as though you only paid half price on the conversion tax for those shares. Work out your numbers now and write down what you would do if given such "an opportunity". The point of writing it down now is to overcome the possible panic when in the middle of that situation. Instead of panicking, you will be smiling when you know you are, in effect, paying "half price" on the conversions taxes. What a deal!

I also can't tell if you are already on an ACA plan now or are getting ready to start it when you retire. If not on it yet, can you delay it by buying private insurance for a year or two? There are more choices than just ACA and Medicare.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 8:05 pm

marcopolo wrote:
Sat May 30, 2020 5:04 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
I have read many similar postings with many people on the fence as to whether or not to convert early (before 65) or starting at 65. I'm hoping you can assess my new plan.

My plan has been ACA subsidies until 65. However, I now believe it's likely, with the recent trillions allocated by our gov't for subsidies (even with very low interest rates), that tax rates will increase after 2025 beyond what's currently planned, if not before (I don't want to debate this possibility, and get this posting shut-down). Playing with https://www.i-orp.com/Inflate/extended.html (one of the best tools out there imho) I find there's not a big difference with overall spending (3K per year max, in our situation) whether doing conversions early or late or not at all.

Options I've been thinking about...

1. Convert early (costing more for health ins., estimated at a $20k annual cost times 6 years over ACA subsidized ins.), starting in 2021,
2. Convert starting at 65 (after ACA subsidies), or
3. Not convert, or
4. Something else?

Note: We turn 65 in 2026, when taxes are currently scheduled to increase.

What other factors or plans should we consider...? :confused

Our situation...

Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Overall AA: ~60/40

Thank you!! :sharebeer
interesting that you came to this conclusion.

I have been running this excersize for a couple of years, and have asked here before as well.

I really want to do Roth Conversions, but I just could not see how the numbers work to make that advantageous.

We have a similar amount in tax-deferred, a bit more in taxable, and some already in Roth.

We do not plan to convert all of the pre-deferred to Roth as I would want to be able to fill lower tax brackets later.

Having run numerous simulations, here was the conclusion we came to. The cost of forgoing subsidies is roughly an additional 10% below the cliff, very high at the cliff, which keeps it effectively at or above 10% unless you convert really large amounts. So, we use 10% as what has to be overcome. So, unless you think your marginal tax bracket is going to be at least 10% higher when you withdraw later than where you are currently, you are better off taking the subsidy.

One aside on I-Orp. you mention that your taxable has equities, you did not mention what is in tax-deferred account, or any Roth you may already have. When you ran I-orp, how did you set up those accounts? If you tell i-orp you have bonds (lower return) in tax-deferred, and equities (higher return) in Roth, it will show you that you come out ahead doing aggressive Roth Conversions because it moves all you tax deferred bonds into Roth equities, seeking higher spendable dollars (which is its goal), but that is NOT what most people actually do, because it drastically increases your risk. Just want to make sure the analysis you did is telling you what you think it is saying.

Good luck to you.
Thank you. I set all accounts in I-orp to a consistent 60/40, to hopefully avoid bias.

When I allow for unlimited conversions it does them. Allowing them to start as soon as we retire allows them to be spread over 11 years, reducing taxes owed/paid. There are still funds in the IRA at 70 when we start SS for RMDs. It converts enough to balance the taxes, resulting in a constant 15% marginal rate. Starting at 65 it attempts to squeeze them into 5 years, bumping up the marginal tax bracket by 10% to 25, not converting as much as when starting at 59. Keeping it at 25% for the remaining years.

When I don't do conversions the residual (that I've set to 2500 because it keeps spending about where we expect to be) ends up in taxable. With conversions the residual ends up in the Roth. Not knowing what will happen with taxes in the future, the Roth seems to be a safer option.
Last edited by Johnsson on Sat May 30, 2020 8:27 pm, edited 1 time in total.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

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FrugalInvestor
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by FrugalInvestor » Sat May 30, 2020 8:12 pm

marcopolo wrote:
Sat May 30, 2020 5:38 pm
FIREchief wrote:
Sat May 30, 2020 5:18 pm
Johnsson wrote:
Sat May 30, 2020 4:44 pm
FIREchief wrote:
Sat May 30, 2020 12:19 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Is "pre-tax" money in traditional IRA/401k?
About 40% IRA, 60% 401k. I plan to roll into the IRA next year. No backdoor Roth without aggravation.
Without know your other income situation (pensions, SS, etc.), I would say at first glance it doesn't look like you have enough qualified pre-tax assets to argue for aggressive Roth conversions. I would think that maximizing ACA subsidies until you're fully on Medicare, and then performing Roth conversions to the beginning of the first IRMAA tier, would be reasonable. You don't want to pay taxes to convert all tIRA assets to Roth, because those funds might eventually be withdrawn tax free if you have significant deductible medical expenses.
That is essentially the conclusion I came to for our situation after a bunch of different ways of analyzing it.

But, each situation is different, so there may be other factors at play here not already presented.
This has also been my strategy, although this year we sold a piece of land which took us over 4x FPL so I will go ahead and convert up the first IRMAA cutoff for 2020. I had done some conversions prior to ACA and this will be my first one since.

I can't claim to have done in-depth analysis but have thought about it and experimented with different options and this seems to be a reasonable course of action for my situation.
Last edited by FrugalInvestor on Sat May 30, 2020 9:34 pm, edited 1 time in total.
Have a plan, stay the course, and simplify, and while you're at it, Ignore the Noise!

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Johnsson
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 8:39 pm

celia wrote:
Sat May 30, 2020 8:04 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
What other factors or plans should we consider...? :confused

Our situation...

Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
OP, It looks like you are not diversified in "types of accounts" (ie, no Roths). Why not get one started (for each of you, if married), if only to start the 5-year clock? Say, somewhere in 3 or 4 years, you've done significant conversions but to control your taxes/tax bracket, you want to withdraw from Roth, it would certainly help if you have had a Roth for 5 years.

Another thing to consider is to stop funding tax-deferred so much. The simplest thing is to just stop contributing, but you could convert the same amount of contributions this year to end up being taxed the same as if you hadn't contributed at all.

If you haven't yet planned on converting during a bull market, you should seriously consider it. Look at $100K of assets at the beginning of the year. If those shares were to fall to half of their January value, you could convert twice as many shares and pay taxes on the $100K conversion. When those shares return to their January value in a year or two, it will be as though you only paid half price on the conversion tax for those shares. Work out your numbers now and write down what you would do if given such "an opportunity". The point of writing it down now is to overcome the possible panic when in the middle of that situation. Instead of panicking, you will be smiling when you know you are, in effect, paying "half price" on the conversions taxes. What a deal!

I also can't tell if you are already on an ACA plan now or are getting ready to start it when you retire. If not on it yet, can you delay it by buying private insurance for a year or two? There are more choices than just ACA and Medicare.
Thank you! We opened Roths ($500 each) in 2018 to start the clock, so we'll have 3 years in when we retire. I need to ask about Cobra costs and alternate insurance. I have rough numbers but need better detail.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sat May 30, 2020 9:00 pm

FIREchief wrote:
Sat May 30, 2020 5:18 pm
Johnsson wrote:
Sat May 30, 2020 4:44 pm
FIREchief wrote:
Sat May 30, 2020 12:19 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Is "pre-tax" money in traditional IRA/401k?
About 40% IRA, 60% 401k. I plan to roll into the IRA next year. No backdoor Roth without aggravation.
Without know your other income situation (pensions, SS, etc.), I would say at first glance it doesn't look like you have enough qualified pre-tax assets to argue for aggressive Roth conversions. I would think that maximizing ACA subsidies until you're fully on Medicare, and then performing Roth conversions to the beginning of the first IRMAA tier, would be reasonable. You don't want to pay taxes to convert all tIRA assets to Roth, because those funds might eventually be withdrawn tax free if you have significant deductible medical expenses.
We have no pensions. Opensocialsecurity suggests Wife at 62 and me at 70. For longevity insurance we both plan to start at 70... Me at $36k, DW at 40k. We will be able to live nicely on SS.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

marcopolo
Posts: 3067
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by marcopolo » Sat May 30, 2020 11:08 pm

Johnsson wrote:
Sat May 30, 2020 8:05 pm
marcopolo wrote:
Sat May 30, 2020 5:04 pm
Johnsson wrote:
Sat May 30, 2020 9:47 am
I have read many similar postings with many people on the fence as to whether or not to convert early (before 65) or starting at 65. I'm hoping you can assess my new plan.

My plan has been ACA subsidies until 65. However, I now believe it's likely, with the recent trillions allocated by our gov't for subsidies (even with very low interest rates), that tax rates will increase after 2025 beyond what's currently planned, if not before (I don't want to debate this possibility, and get this posting shut-down). Playing with https://www.i-orp.com/Inflate/extended.html (one of the best tools out there imho) I find there's not a big difference with overall spending (3K per year max, in our situation) whether doing conversions early or late or not at all.

Options I've been thinking about...

1. Convert early (costing more for health ins., estimated at a $20k annual cost times 6 years over ACA subsidized ins.), starting in 2021,
2. Convert starting at 65 (after ACA subsidies), or
3. Not convert, or
4. Something else?

Note: We turn 65 in 2026, when taxes are currently scheduled to increase.

What other factors or plans should we consider...? :confused

Our situation...

Age 58
Retiring In January or February 2021 at age 59
Expected Accounts at retirement...
Pre-Tax: $1850k
Taxable (equities): $839k
Taxable CDs: $200k
Overall AA: ~60/40

Thank you!! :sharebeer
interesting that you came to this conclusion.

I have been running this excersize for a couple of years, and have asked here before as well.

I really want to do Roth Conversions, but I just could not see how the numbers work to make that advantageous.

We have a similar amount in tax-deferred, a bit more in taxable, and some already in Roth.

We do not plan to convert all of the pre-deferred to Roth as I would want to be able to fill lower tax brackets later.

Having run numerous simulations, here was the conclusion we came to. The cost of forgoing subsidies is roughly an additional 10% below the cliff, very high at the cliff, which keeps it effectively at or above 10% unless you convert really large amounts. So, we use 10% as what has to be overcome. So, unless you think your marginal tax bracket is going to be at least 10% higher when you withdraw later than where you are currently, you are better off taking the subsidy.

One aside on I-Orp. you mention that your taxable has equities, you did not mention what is in tax-deferred account, or any Roth you may already have. When you ran I-orp, how did you set up those accounts? If you tell i-orp you have bonds (lower return) in tax-deferred, and equities (higher return) in Roth, it will show you that you come out ahead doing aggressive Roth Conversions because it moves all you tax deferred bonds into Roth equities, seeking higher spendable dollars (which is its goal), but that is NOT what most people actually do, because it drastically increases your risk. Just want to make sure the analysis you did is telling you what you think it is saying.

Good luck to you.
Thank you. I set all accounts in I-orp to a consistent 60/40, to hopefully avoid bias.

When I allow for unlimited conversions it does them. Allowing them to start as soon as we retire allows them to be spread over 11 years, reducing taxes owed/paid. There are still funds in the IRA at 70 when we start SS for RMDs. It converts enough to balance the taxes, resulting in a constant 15% marginal rate. Starting at 65 it attempts to squeeze them into 5 years, bumping up the marginal tax bracket by 10% to 25, not converting as much as when starting at 59. Keeping it at 25% for the remaining years.

When I don't do conversions the residual (that I've set to 2500 because it keeps spending about where we expect to be) ends up in taxable. With conversions the residual ends up in the Roth. Not knowing what will happen with taxes in the future, the Roth seems to be a safer option.
Sounds like you have done a pretty thorough analysis, and it may be better in your situation.
One somewhat minor point, the RMD age is now 72, so if you waited, it would give you one or two more years (depending on birthdate) to do the conversions.

Good luck.
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: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sun May 31, 2020 6:35 am

Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Chip » Sun May 31, 2020 7:17 am

Johnsson wrote:
Sun May 31, 2020 6:35 am
Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
I've only used i-orp a tiny bit, but if I remember correctly the default strategy is to empty the tIRA by age 92. Are you using this default or something else?

The reason I ask is that if the tIRA is not emptied a different calculation might be appropriate. For example, the heirs to our tIRAs are charities, with a tax rate of zero. With each conversion I have to decide whether it is likely we will spend the converted dollars or if we are merely paying taxes with the result that a charity will receive less money.

We also don't have long term care insurance. LTC expenses could be a significant medical deduction, allowing large amounts of the tIRAs to be withdrawn at little tax cost.

Even if you have non-charity beneficiaries on your tIRA, their tax rate comes into play if the tIRA isn't emptied by you. If their tax rate is higher than yours then aggressive conversions are probably warranted. Otherwise, maybe not.

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by smitcat » Sun May 31, 2020 8:09 am

Chip wrote:
Sun May 31, 2020 7:17 am
Johnsson wrote:
Sun May 31, 2020 6:35 am
Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
I've only used i-orp a tiny bit, but if I remember correctly the default strategy is to empty the tIRA by age 92. Are you using this default or something else?

The reason I ask is that if the tIRA is not emptied a different calculation might be appropriate. For example, the heirs to our tIRAs are charities, with a tax rate of zero. With each conversion I have to decide whether it is likely we will spend the converted dollars or if we are merely paying taxes with the result that a charity will receive less money.

We also don't have long term care insurance. LTC expenses could be a significant medical deduction, allowing large amounts of the tIRAs to be withdrawn at little tax cost.

Even if you have non-charity beneficiaries on your tIRA, their tax rate comes into play if the tIRA isn't emptied by you. If their tax rate is higher than yours then aggressive conversions are probably warranted. Otherwise, maybe not.

"Even if you have non-charity beneficiaries on your tIRA, their tax rate comes into play if the tIRA isn't emptied by you. If their tax rate is higher than yours then aggressive conversions are probably warranted. Otherwise, maybe not."
This is an important point especially since the OP is 'reserving' $2.5 million in todays dollars which will grow and potentially fall prey to this point.

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by retiredjg » Sun May 31, 2020 8:11 am

Johnsson wrote:
Sun May 31, 2020 6:35 am
Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
How much you pay in taxes is not the right thing to look at. How much money is left in your pocket is what to look at. Here's an example.

Let's say you have $10k to invest into Roth IRA or 401k at a tax rate of 25%. After paying the $2.5k in taxes, $7.5k gets into Roth and doubles before retirement. When you retire, you have have $15k in the Roth IRA and you paid $2.5k in taxes to achieve that.

Let's say you took that same $10k and put it into traditional 401k instead and it doubles in value to $20k. In retirement you pay tax at a lower rate of 15%. So when you convert that to Roth, you pay $3k in taxes and are left with $17k in Roth IRA.

In example 2, you pay more in taxes but end up with more money.


This example is not intended to show anything other than the amount of taxes you pay may not be the right number to use to make your decisions. Does I-Orp tell you how many dollars end up in your pocket? If yes, that is what you should be looking at.

Delaying taxes almost always causes you to pay more dollars in tax. But you could still end up with more money.

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by smitcat » Sun May 31, 2020 8:22 am

retiredjg wrote:
Sun May 31, 2020 8:11 am
Johnsson wrote:
Sun May 31, 2020 6:35 am
Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
How much you pay in taxes is not the right thing to look at. How much money is left in your pocket is what to look at. Here's an example.

Let's say you have $10k to invest into Roth IRA or 401k at a tax rate of 25%. After paying the $2.5k in taxes, $7.5k gets into Roth and doubles before retirement. When you retire, you have have $15k in the Roth IRA and you paid $2.5k in taxes to achieve that.

Let's say you took that same $10k and put it into traditional 401k instead and it doubles in value to $20k. In retirement you pay tax at a lower rate of 15%. So when you convert that to Roth, you pay $3k in taxes and are left with $17k in Roth IRA.

In example 2, you pay more in taxes but end up with more money.


This example is not intended to show anything other than the amount of taxes you pay may not be the right number to use to make your decisions. Does I-Orp tell you how many dollars end up in your pocket? If yes, that is what you should be looking at.

Delaying taxes almost always causes you to pay more dollars in tax. But you could still end up with more money.
"How much you pay in taxes is not the right thing to look at. How much money is left in your pocket is what to look at"
Exactly.
"Does I-Orp tell you how many dollars end up in your pocket?"
The OP states he is setting a 'remainder' value of $2.5 million in todays dollars and then IORP will tell him what amount he can spend after all taxes each year in retirement - so yes the IORP tells you how much ends up in your pocket which is 'spendable' after tax.
As a confirmation and comparison the RPM will give additional details and data but with a much higher effort in setup, run and understanding - all of which we think are well worth the time for this excellent tool.

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sun May 31, 2020 9:35 am

Chip wrote:
Sun May 31, 2020 7:17 am
Johnsson wrote:
Sun May 31, 2020 6:35 am
Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
I've only used i-orp a tiny bit, but if I remember correctly the default strategy is to empty the tIRA by age 92. Are you using this default or something else?

The reason I ask is that if the tIRA is not emptied a different calculation might be appropriate. For example, the heirs to our tIRAs are charities, with a tax rate of zero. With each conversion I have to decide whether it is likely we will spend the converted dollars or if we are merely paying taxes with the result that a charity will receive less money.

We also don't have long term care insurance. LTC expenses could be a significant medical deduction, allowing large amounts of the tIRAs to be withdrawn at little tax cost.

Even if you have non-charity beneficiaries on your tIRA, their tax rate comes into play if the tIRA isn't emptied by you. If their tax rate is higher than yours then aggressive conversions are probably warranted. Otherwise, maybe not.
By default I-Orp maximizes spending and levels out taxes... spending the entire portfolio by the end age (we set to 100).

We have I-Orp set to end with $2.5mm, which results in annual spending of ~$92k (which is a 20% higher than I plan to be) and RMDs/QCDs chewing into the $900k remainder/pretax account starting at age 72 (after converting $900k to Roth). I hope then remainder is sufficient to take care of LTC needs. Maybe we should be converting more. Dunno.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sun May 31, 2020 9:37 am

Duplicate
Last edited by Johnsson on Sun May 31, 2020 9:56 am, edited 1 time in total.
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sun May 31, 2020 9:54 am

retiredjg wrote:
Sun May 31, 2020 8:11 am
Johnsson wrote:
Sun May 31, 2020 6:35 am
Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
How much you pay in taxes is not the right thing to look at. How much money is left in your pocket is what to look at. Here's an example.

Let's say you have $10k to invest into Roth IRA or 401k at a tax rate of 25%. After paying the $2.5k in taxes, $7.5k gets into Roth and doubles before retirement. When you retire, you have have $15k in the Roth IRA and you paid $2.5k in taxes to achieve that.

Let's say you took that same $10k and put it into traditional 401k instead and it doubles in value to $20k. In retirement you pay tax at a lower rate of 15%. So when you convert that to Roth, you pay $3k in taxes and are left with $17k in Roth IRA.

In example 2, you pay more in taxes but end up with more money.


This example is not intended to show anything other than the amount of taxes you pay may not be the right number to use to make your decisions. Does I-Orp tell you how many dollars end up in your pocket? If yes, that is what you should be looking at.

Delaying taxes almost always causes you to pay more dollars in tax. But you could still end up with more money.
I love these responses!! I like alternate points of view. They make me think outside of my tiny little box!!

I-Orp does a pretty good job of summarizing. Looking at only 2 options (each with an expected residual at the end of $2.5mm)...

1. Minimize income and conversions below the ACA limit until 65, then do unlimited conversions, as they make sense (I-Orp self-limits while leveling taxes).

2. Ignore any income limits AND plan to spend an extra $20k each year for insurance (in addition to what ACA costs would be) until Medicare, and do unlimited conversions.

The results of the I-Orp runs are...

1. (ACA option)- Annual spending (after taxes), $92k, Total expenditures(the sum of all annual spending in real (non inflated) dollars over all of retirement) , $3.883mm

2. (no ACA) - Annual spending, $91k, Total expenditures, $3.93mm

To me, they they are basically the same. I'm not sure why the one with higher annual spending has a lower total. Maybe rounding errors?
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by Johnsson » Sun May 31, 2020 10:13 am

One benefit/consideration I hadn't mentioned is ACA options for us are all local. If we're travelling, reimbursement may be a hassle. If we purchase our own insurance we can make sure it's a national plan.

To be honest, I'm still on the fence. That's why I wrote this post. I need to consider all points of view. Each option, ACA or not has it's pluses and minuses. Maybe something in the middle would be best, as has been mentioned (e.g. using cobra for the 1st year).

I have played with RPM (using I-Orp results for input) and have seen similar results. I really need to invest more time with RPM to make sure I'm doing it right.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

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WoodSpinner
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by WoodSpinner » Sun May 31, 2020 10:26 am

OP,

Not sure if I-orp has changed much since I played with it a few years ago. At the time, it did not handle the tax situation very cleanly (state taxes, SS taxation, NIT, IRMAA etc.). I found that building my own analysis spreadsheet with correct tax calculations was more helpful.

Wondering what your GOALS are for this money?

WoodSpinner

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FrugalInvestor
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by FrugalInvestor » Sun May 31, 2020 10:30 am

Johnsson wrote:
Sun May 31, 2020 10:13 am
One benefit/consideration I hadn't mentioned is ACA options for us are all local. If we're travelling, reimbursement may be a hassle. If we purchase our own insurance we can make sure it's a national plan.

To be honest, I'm still on the fence. That's why I wrote this post. I need to consider all points of view. Each option, ACA or not has it's pluses and minuses. Maybe something in the middle would be best, as has been mentioned (e.g. using cobra for the 1st year).

I have played with RPM (using I-Orp results for input) and have seen similar results. I really need to invest more time with RPM to make sure I'm doing it right.
What insurance are you considering that provides a national plan? Is the plan(s) up to ACA standards? For us (actually just my wife at this point) covering pre-existing conditions and having other ACA required features trumps a national network (emergency coverage is provided with ACA coverage).
Have a plan, stay the course, and simplify, and while you're at it, Ignore the Noise!

retiredjg
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by retiredjg » Sun May 31, 2020 10:41 am

Johnsson wrote:
Sun May 31, 2020 9:54 am
2. Ignore any income limits AND plan to spend an extra $20k each year for insurance (in addition to what ACA costs would be) until Medicare, and do unlimited conversions.
Unlimited conversions starting at age 65 could bring both IRMAA and NIIT into play. Do you know if I-ORP considers that?

smitcat
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by smitcat » Sun May 31, 2020 11:47 am

retiredjg wrote:
Sun May 31, 2020 10:41 am
Johnsson wrote:
Sun May 31, 2020 9:54 am
2. Ignore any income limits AND plan to spend an extra $20k each year for insurance (in addition to what ACA costs would be) until Medicare, and do unlimited conversions.
Unlimited conversions starting at age 65 could bring both IRMAA and NIIT into play. Do you know if I-ORP considers that?
It does in both in both columnar and chart format but I also take a year or two and check it with some tax software - it always has been very accurate.

smitcat
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by smitcat » Sun May 31, 2020 11:48 am

WoodSpinner wrote:
Sun May 31, 2020 10:26 am
OP,

Not sure if I-orp has changed much since I played with it a few years ago. At the time, it did not handle the tax situation very cleanly (state taxes, SS taxation, NIT, IRMAA etc.). I found that building my own analysis spreadsheet with correct tax calculations was more helpful.

Wondering what your GOALS are for this money?

WoodSpinner
The newer versions of the extended IORP do these calculations.

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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by FrugalInvestor » Sun May 31, 2020 11:54 am

After reading these responses I need to go back and spend some time with i-orp again. It's been a few years.
Have a plan, stay the course, and simplify, and while you're at it, Ignore the Noise!

smitcat
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by smitcat » Sun May 31, 2020 12:01 pm

Johnsson wrote:
Sun May 31, 2020 9:54 am
retiredjg wrote:
Sun May 31, 2020 8:11 am
Johnsson wrote:
Sun May 31, 2020 6:35 am
Delaying conversions (according to I-Orp) will COST about $115,000 in extra taxes paid, before the age of 75.
How much you pay in taxes is not the right thing to look at. How much money is left in your pocket is what to look at. Here's an example.

Let's say you have $10k to invest into Roth IRA or 401k at a tax rate of 25%. After paying the $2.5k in taxes, $7.5k gets into Roth and doubles before retirement. When you retire, you have have $15k in the Roth IRA and you paid $2.5k in taxes to achieve that.

Let's say you took that same $10k and put it into traditional 401k instead and it doubles in value to $20k. In retirement you pay tax at a lower rate of 15%. So when you convert that to Roth, you pay $3k in taxes and are left with $17k in Roth IRA.

In example 2, you pay more in taxes but end up with more money.


This example is not intended to show anything other than the amount of taxes you pay may not be the right number to use to make your decisions. Does I-Orp tell you how many dollars end up in your pocket? If yes, that is what you should be looking at.

Delaying taxes almost always causes you to pay more dollars in tax. But you could still end up with more money.
I love these responses!! I like alternate points of view. They make me think outside of my tiny little box!!

I-Orp does a pretty good job of summarizing. Looking at only 2 options (each with an expected residual at the end of $2.5mm)...

1. Minimize income and conversions below the ACA limit until 65, then do unlimited conversions, as they make sense (I-Orp self-limits while leveling taxes).

2. Ignore any income limits AND plan to spend an extra $20k each year for insurance (in addition to what ACA costs would be) until Medicare, and do unlimited conversions.

The results of the I-Orp runs are...

1. (ACA option)- Annual spending (after taxes), $92k, Total expenditures(the sum of all annual spending in real (non inflated) dollars over all of retirement) , $3.883mm

2. (no ACA) - Annual spending, $91k, Total expenditures, $3.93mm

To me, they they are basically the same. I'm not sure why the one with higher annual spending has a lower total. Maybe rounding errors?
Those are the exact same ways we look at the most likely baseline cases that we would like to occurr.
We also vary a number of the best guess inputs to see the 'upsides' and 'downsides' of Roth conversions in case they happen , here are a few:
- vary demise date of one spouse
- vary portfolio earnings both up and down
- vary SS elections dates

When looking at the spectrum of results there are a few things that come to light in our application:
1. the downside instances of Roth conversions is very low
2. downsides of Roth conversions have less of a range off of baseline
3. the upside instances of Roth conversions are high
4. positive affects of Roth conversions have a large range positive off of baseline

retiredjg
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Re: Forget ACA subsidies and Max out Roth conversions early?

Post by retiredjg » Sun May 31, 2020 12:24 pm

smitcat wrote:
Sun May 31, 2020 11:47 am
retiredjg wrote:
Sun May 31, 2020 10:41 am
Johnsson wrote:
Sun May 31, 2020 9:54 am
2. Ignore any income limits AND plan to spend an extra $20k each year for insurance (in addition to what ACA costs would be) until Medicare, and do unlimited conversions.
Unlimited conversions starting at age 65 could bring both IRMAA and NIIT into play. Do you know if I-ORP considers that?
It does in both in both columnar and chart format but I also take a year or two and check it with some tax software - it always has been very accurate.
Thanks for the information. That is comforting. :happy

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