Roth Conversions - McQuarrie study

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lazynovice
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

cbeck wrote: Thu Jun 17, 2021 9:15 pm
lazynovice wrote: Thu Jun 17, 2021 7:59 pm
cbeck wrote: Thu Jun 17, 2021 7:11 pm ….
Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money….

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
I think the first point is because you aren’t replacing? You are paying the taxes you owe. Your Roth is bigger but your after tax account is smaller by the same amount. And you lose the opportunity cost of the after tax investment. He discusses that as one of the things people miss.

He says right in the paper that conversions at 0% are a no-brainer.
So, I have $1000 in my after-tax account on which I will be obliged to pay tax on the income and gains it generates out to the horizon. Since I am in the X% tax bracket, X% of my TIRA is the identical amount of $1000 which actually belongs to Uncle Sam including the entirety of the income and gains it generates in the future assuming for the moment that my tax bracket never changes. After the conversion Uncle Sam's chunk of what had been my TIRA has disappeared with no remaining tax obligation and now the income and gains of the $1000 from my after-tax account are entirely exempt from any taxes forever there in my Roth. What opportunity cost have I lost?
If you are converting 1,000 in the 22% bracket, you sent $220 to the federal government that you 1) paid at least some capital gains tax on (sales price less cost) and 2) you no longer have to invest in taxable. It’s gone. And you have to take the lost returns into account on that- if it was in cash you were already experiencing opportunity cost of holding the money out of the market. If it would have been in stocks, then a lot of opportunity cost. The money to pay the taxes has to come from somewhere. You aren’t transferring the tax money into a Roth.

And after tax accounts get a step up in basis at death. Which is not even discussed in the article since he ignores estate issues pretty much.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
cbeck
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Re: Roth Conversions - McQuarrie study

Post by cbeck »

lazynovice wrote: Thu Jun 17, 2021 9:54 pm
cbeck wrote: Thu Jun 17, 2021 9:15 pm
lazynovice wrote: Thu Jun 17, 2021 7:59 pm
cbeck wrote: Thu Jun 17, 2021 7:11 pm ….
Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money….

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
I think the first point is because you aren’t replacing? You are paying the taxes you owe. Your Roth is bigger but your after tax account is smaller by the same amount. And you lose the opportunity cost of the after tax investment. He discusses that as one of the things people miss.

He says right in the paper that conversions at 0% are a no-brainer.
So, I have $1000 in my after-tax account on which I will be obliged to pay tax on the income and gains it generates out to the horizon. Since I am in the X% tax bracket, X% of my TIRA is the identical amount of $1000 which actually belongs to Uncle Sam including the entirety of the income and gains it generates in the future assuming for the moment that my tax bracket never changes. After the conversion Uncle Sam's chunk of what had been my TIRA has disappeared with no remaining tax obligation and now the income and gains of the $1000 from my after-tax account are entirely exempt from any taxes forever there in my Roth. What opportunity cost have I lost?
If you are converting 1,000 in the 22% bracket, you sent $220 to the federal government that you 1) paid at least some capital gains tax on (sales price less cost) and 2) you no longer have to invest in taxable. It’s gone. And you have to take the lost returns into account on that- if it was in cash you were already experiencing opportunity cost of holding the money out of the market. If it would have been in stocks, then a lot of opportunity cost. The money to pay the taxes has to come from somewhere. You aren’t transferring the tax money into a Roth.

And after tax accounts get a step up in basis at death. Which is not even discussed in the article since he ignores estate issues pretty much.
We seem to be talking at cross purposes. I am converting a TIRA of Y dollars on which I am going to pay tax at my marginal rate of X%. X% of Y dollars comes out to $1000 tax due in this case. While it may be true that that I have paid tax on that $1000 in the past, that's irrelevant. If that $1000 is a securities position with a long-term capital gain, then the capital gains tax on the unrealized gain already belongs to the government, because I will have to pay it sometime in the future, unless the gain itself disappears. So, by liquidating the position to raise cash to pay tax on the Roth conversion I have not created any new tax liability, but only brought it forward. So, that is irrelevant also. Maybe the $1000 was always in cash in which my decision to keep it there is unrelated to the decision to do the Roth conversion. So, that's irrelevant. So, either I am going to be liable for income and cg taxes on whatever after-tax investment I make with the $1000 in cash or I can replace the $1000 in my TIRA which already belongs to the government along will all the income and gains it will ever produce. So, after the conversion I no long hold the government's money in my TIRA, but that is not a loss, since that sum and its future growth have always belonged to the government. But now my after-tax $1000 is no longer exposed to any tax, but sits entirely safel in my Roth. Nothing is lost. How much is gained depends on how long the Roth lives.
lazynovice
Posts: 1864
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

cbeck wrote: Thu Jun 17, 2021 10:16 pm
lazynovice wrote: Thu Jun 17, 2021 9:54 pm
cbeck wrote: Thu Jun 17, 2021 9:15 pm
lazynovice wrote: Thu Jun 17, 2021 7:59 pm
cbeck wrote: Thu Jun 17, 2021 7:11 pm ….
Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money….

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
I think the first point is because you aren’t replacing? You are paying the taxes you owe. Your Roth is bigger but your after tax account is smaller by the same amount. And you lose the opportunity cost of the after tax investment. He discusses that as one of the things people miss.

He says right in the paper that conversions at 0% are a no-brainer.
So, I have $1000 in my after-tax account on which I will be obliged to pay tax on the income and gains it generates out to the horizon. Since I am in the X% tax bracket, X% of my TIRA is the identical amount of $1000 which actually belongs to Uncle Sam including the entirety of the income and gains it generates in the future assuming for the moment that my tax bracket never changes. After the conversion Uncle Sam's chunk of what had been my TIRA has disappeared with no remaining tax obligation and now the income and gains of the $1000 from my after-tax account are entirely exempt from any taxes forever there in my Roth. What opportunity cost have I lost?
If you are converting 1,000 in the 22% bracket, you sent $220 to the federal government that you 1) paid at least some capital gains tax on (sales price less cost) and 2) you no longer have to invest in taxable. It’s gone. And you have to take the lost returns into account on that- if it was in cash you were already experiencing opportunity cost of holding the money out of the market. If it would have been in stocks, then a lot of opportunity cost. The money to pay the taxes has to come from somewhere. You aren’t transferring the tax money into a Roth.

And after tax accounts get a step up in basis at death. Which is not even discussed in the article since he ignores estate issues pretty much.
We seem to be talking at cross purposes. I am converting a TIRA of Y dollars on which I am going to pay tax at my marginal rate of X%. X% of Y dollars comes out to $1000 tax due in this case. While it may be true that that I have paid tax on that $1000 in the past, that's irrelevant. If that $1000 is a securities position with a long-term capital gain, then the capital gains tax on the unrealized gain already belongs to the government, because I will have to pay it sometime in the future, unless the gain itself disappears. So, by liquidating the position to raise cash to pay tax on the Roth conversion I have not created any new tax liability, but only brought it forward. So, that is irrelevant also. Maybe the $1000 was always in cash in which my decision to keep it there is unrelated to the decision to do the Roth conversion. So, that's irrelevant. So, either I am going to be liable for income and cg taxes on whatever after-tax investment I make with the $1000 in cash or I can replace the $1000 in my TIRA which already belongs to the government along will all the income and gains it will ever produce. So, after the conversion I no long hold the government's money in my TIRA, but that is not a loss, since that sum and its future growth have always belonged to the government. But now my after-tax $1000 is no longer exposed to any tax, but sits entirely safel in my Roth. Nothing is lost. How much is gained depends on how long the Roth lives.
You have lost the time value of money on the taxes paid. This is covered in the study as one of the biggest issues not considered.

And no there is no guarantee you ever have to pay the CG tax. You could die. Your spouse gets the step up in basis and uses that to pay the taxes on the RMD when due.


I’d encourage you to read it but if you don’t want to, it is great that you don’t mind paying taxes sooner rather than later. It gives you peace of mind to lock your taxes in now and not think about it later.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
RetiredAL
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Re: Roth Conversions - McQuarrie study

Post by RetiredAL »

Tdubs wrote: Thu Jun 17, 2021 9:22 pm Disappointed he didn't include a scenario where one of the spouses dies a decade or so before the other and tax rates shift from MFJ to single.
The survivor! This is why I've been converting.
McQ
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Re: Roth Conversions - McQuarrie study

Post by McQ »

Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
cbeck
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Re: Roth Conversions - McQuarrie study

Post by cbeck »

lazynovice wrote: Thu Jun 17, 2021 10:22 pm
cbeck wrote: Thu Jun 17, 2021 10:16 pm
lazynovice wrote: Thu Jun 17, 2021 9:54 pm
cbeck wrote: Thu Jun 17, 2021 9:15 pm
lazynovice wrote: Thu Jun 17, 2021 7:59 pm

I think the first point is because you aren’t replacing? You are paying the taxes you owe. Your Roth is bigger but your after tax account is smaller by the same amount. And you lose the opportunity cost of the after tax investment. He discusses that as one of the things people miss.

He says right in the paper that conversions at 0% are a no-brainer.
So, I have $1000 in my after-tax account on which I will be obliged to pay tax on the income and gains it generates out to the horizon. Since I am in the X% tax bracket, X% of my TIRA is the identical amount of $1000 which actually belongs to Uncle Sam including the entirety of the income and gains it generates in the future assuming for the moment that my tax bracket never changes. After the conversion Uncle Sam's chunk of what had been my TIRA has disappeared with no remaining tax obligation and now the income and gains of the $1000 from my after-tax account are entirely exempt from any taxes forever there in my Roth. What opportunity cost have I lost?
If you are converting 1,000 in the 22% bracket, you sent $220 to the federal government that you 1) paid at least some capital gains tax on (sales price less cost) and 2) you no longer have to invest in taxable. It’s gone. And you have to take the lost returns into account on that- if it was in cash you were already experiencing opportunity cost of holding the money out of the market. If it would have been in stocks, then a lot of opportunity cost. The money to pay the taxes has to come from somewhere. You aren’t transferring the tax money into a Roth.

And after tax accounts get a step up in basis at death. Which is not even discussed in the article since he ignores estate issues pretty much.
We seem to be talking at cross purposes. I am converting a TIRA of Y dollars on which I am going to pay tax at my marginal rate of X%. X% of Y dollars comes out to $1000 tax due in this case. While it may be true that that I have paid tax on that $1000 in the past, that's irrelevant. If that $1000 is a securities position with a long-term capital gain, then the capital gains tax on the unrealized gain already belongs to the government, because I will have to pay it sometime in the future, unless the gain itself disappears. So, by liquidating the position to raise cash to pay tax on the Roth conversion I have not created any new tax liability, but only brought it forward. So, that is irrelevant also. Maybe the $1000 was always in cash in which my decision to keep it there is unrelated to the decision to do the Roth conversion. So, that's irrelevant. So, either I am going to be liable for income and cg taxes on whatever after-tax investment I make with the $1000 in cash or I can replace the $1000 in my TIRA which already belongs to the government along will all the income and gains it will ever produce. So, after the conversion I no long hold the government's money in my TIRA, but that is not a loss, since that sum and its future growth have always belonged to the government. But now my after-tax $1000 is no longer exposed to any tax, but sits entirely safel in my Roth. Nothing is lost. How much is gained depends on how long the Roth lives.
You have lost the time value of money on the taxes paid. This is covered in the study as one of the biggest issues not considered.

And no there is no guarantee you ever have to pay the CG tax. You could die. Your spouse gets the step up in basis and uses that to pay the taxes on the RMD when due.


I’d encourage you to read it but if you don’t want to, it is great that you don’t mind paying taxes sooner rather than later. It gives you peace of mind to lock your taxes in now and not think about it later.
I think you are missing the specifics of this situation for which the time value of money does not come into play. Assume that my after-tax $1000 is in cash. I have an equivalent $1000 in the TIRA which belongs to the government including all of its future growth because of the assumption that my tax bracket will not change which also implies than any conversions I do will be within the limits of my tax bracket.

Under that assumption all the taxes I every pay on any conversion or distribution from the TIRA are taken from the $1000 that the government has always owned along with its entire growth. The future earnings of that lump in the TIRA will always belong to the government, not to me. I can pay the taxes due from the conversion now using the $1000 in the TIRA or I can pay it at any time in the future using that $1000 plus all the growth it has generated. So, at all times that $1000 sum in the TIRA is already gone and not available to me whether or not I ever convert. So, the only effect of the conversion is to protect the future growth of my after-tax $1000 from any taxation.

To use a concrete example, let's assume that my tax bracket is and always will be 10%. My TIRA holds $10,000 and I have $1000 after-tax in cash. Also assume that the cumulative future growth of the same $1000 investment will be $500 taxed as income after some period and that this is the same for the after-tax account and the TIRA.

Image

In the real world case where the Roth grows tax-free for decades the difference would be much more, particularly if the conversion happens during the low-tax period after retiring and before the RMDs and SS at age 70.
Tdubs
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

RetiredAL wrote: Thu Jun 17, 2021 10:31 pm
Tdubs wrote: Thu Jun 17, 2021 9:22 pm Disappointed he didn't include a scenario where one of the spouses dies a decade or so before the other and tax rates shift from MFJ to single.
The survivor! This is why I've been converting.
Yes, and when I run this scenario on I-ORP with one spouse passing away in their early 80s, it recommends much more in conversions than when both spouses live into their 90s.
cas
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Re: Roth Conversions - McQuarrie study

Post by cas »

cbeck wrote: Thu Jun 17, 2021 7:11 pm Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money.
Vanguard published a white paper a few years back that discusses this (with graphics): A “BETR” approach to Roth conversions, p 4 - 5 in the "Paying Roth conversion taxes from a taxable account gives you a head start" section.

Related to previous discussion, Vanguard's paper does include a footnote that
The BETRs for Scenarios 2 and 3 assume that you do not incur additional tax liability when liquidating assets in a taxable
account to pay the conversion taxes. If, however, liquidating those assets creates a realized taxable gain, the BETRs would
be higher.
So one does have to look at one's individual cash flow situation. However, the assumption that nothing is liquidated might not be an unreasonable assumption in the case of a large taxable account. If there is a large enough taxable account that distributions (dividends, possibly capital gains distributions from tax inefficient investments in Vanguard's Scenario 3) are causing annoying tax effects***, then often much/all of the tax on the Roth conversion can be paid via the annual distributions from the taxable account. (i.e. It is not always the case that something in taxable needs to be liquidated to pay the tax on the Roth conversion.)

***examples of annoying tax effects from taxable account distributions. Most of these also become more pronounced for a widow/widower.
-dividends are the final straw pushing MAGI over IRMAA thresholds
-NIIT
-Kitces' "bump zone" effects
-dividends are the final straw pushing MAGI over ACA "cliff" etc.,
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Re: Roth Conversions - McQuarrie study

Post by LadyGeek »

As noted earlier in the thread:
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also....
I confirm that McQ is Edward McQuarrie. Welcome!
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Exchme
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Re: Roth Conversions - McQuarrie study

Post by Exchme »

McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
Thanks for joining in person! At the link, I see an executive summary and a link to the paper on SSRN, but I can't see a link to the spreadsheet?
Tdubs
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
Thanks for doing this. It's great to have authors field questions on BH. I look forward to reading your revision to include a widow/er situation. Having run a lot of scenarios on I-ORP and being disappointed at the limited Roth conversion bounce I get, I have to say your general conclusion about the slow-to-realize, modest benefits of a conversion makes sense.

I'd also be curious to know if Rob and Sue were less affluent and on the border between the 12% and 22% brackets (one of the largest bracket jumps) whether that would alter much your conclusions about the slow payoff rate for a conversion.
Last edited by Tdubs on Fri Jun 18, 2021 8:55 am, edited 2 times in total.
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

Exchme wrote: Fri Jun 18, 2021 7:19 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
Thanks for joining in person! At the link, I see an executive summary and a link to the paper on SSRN, but I can't see a link to the spreadsheet?
Link is in the second paragraph of the blog (http://www.edwardfmcquarrie.com/?p=573) where is says, "An example of the spreadsheets I used to explore conversion outcomes is here."
Chip
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Re: Roth Conversions - McQuarrie study

Post by Chip »

McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly.
Thanks very much for participating! I agree that the behavioral finance issues you mention often seem to be allowed to overwhelm the math involved. At least in some/many of the discussions here. It also seems that the personal circumstances of the various individuals contributing to these discussions often substantially color their views of the "correct" path to take. Me included.

One thing that struck me in your analysis was your early conclusion that the high earning couple would expand their lifestyle to the point that they would retire at 65 with little to nothing in taxable accounts. While we are a self-selecting group, it appears to me that we have many "super-savers" here, with savings rates in excess of 30% of gross income. Many appear to have retired well before age 65 with substantial taxable savings. That situation would appear to be much more favorable to conversions due to the combination of more time between conversion and ultimate withdrawal, lack of IRMAA concerns before age 63, and many years with no social security income.

So in addition to the items you mentioned for your future revision, would you also consider the early retiree case?
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Re: Roth Conversions - McQuarrie study

Post by privateID »

This has been an interesting timely thread for me. I am 55 years old and plan to retire in 5 years. I have been considering converting to the top of the 22% tax bracket from now till 70, so this conversation has certainly given me some things to think about. In my calculations, converting to the top of 12% bracket does have a decent payoff. That means no conversions for the next 5 years while working and doing conversions from age 60 to 70 if I can cover expenses from taxable. I would no question be in the 22% bracket at RMD/SS time if I don't convert/withdraw to the top of the 12% bracket from 60 to 70. Depending on the assumptions I make, most notably returns, converting up to the top of the 22% tax bracket would make sense as I may be in the 22%/25% bracket at 70. However, this conversation has certainly given me something to think about concerning converting to the top of the 22% bracket. I have only skimmed the study but do plan to read it. Just wanted to say thank you.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

Chip wrote: Fri Jun 18, 2021 8:20 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly.
Thanks very much for participating! I agree that the behavioral finance issues you mention often seem to be allowed to overwhelm the math involved. At least in some/many of the discussions here. It also seems that the personal circumstances of the various individuals contributing to these discussions often substantially color their views of the "correct" path to take. Me included.

One thing that struck me in your analysis was your early conclusion that the high earning couple would expand their lifestyle to the point that they would retire at 65 with little to nothing in taxable accounts. While we are a self-selecting group, it appears to me that we have many "super-savers" here, with savings rates in excess of 30% of gross income. Many appear to have retired well before age 65 with substantial taxable savings. That situation would appear to be much more favorable to conversions due to the combination of more time between conversion and ultimate withdrawal, lack of IRMAA concerns before age 63, and many years with no social security income.

So in addition to the items you mentioned for your future revision, would you also consider the early retiree case?
+1 Selfishly, would like confirmation.

I think the conclusion still holds and is addressed briefly in the paper. Early retirees have more years and after tax resources to convert in the 0% bracket. And are more likely to live to the payback period for higher brackets.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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Re: Roth Conversions - McQuarrie study

Post by WoodSpinner »

McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics."
Edward,

Welcome to our Forum! I really appreciate the Opportunity to discuss a paper and it’s findings with the author directly. Many thanks for the opportunity.

I am on year 4 of a Roth conversion strategy and the resulting taxes are my largest expense. Given that, I do have a vested interest in the subject and want to make sure my plans are well thought out.

My first step is a deeper reading of the paper and review of your spreadsheet. The first pass confirmed that we are likely to benefit from aggressive conversions. Will come back with additional questions.

Would you be willing to opine on our strategy if we provide the appropriate background?

Thanks

WoodSpinner
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Re: Roth Conversions - McQuarrie study

Post by jeffyscott »

lazynovice wrote: Thu Jun 17, 2021 8:09 pm
Mr.BB wrote: Thu Jun 17, 2021 8:04 pm I don't think he addressed the fact that when you add in a couple's SS income (taxed at 85%) and some people will also have pensions plus their RMD can really push them into a higher tax bracket; not just their yearly RMD.
I thought so at first but on page 5:

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
But when Rob or Sue dies, then what about the survivor's tax rate?

Not that I am even thinking about the 24% tax bracket in this situation, but certainly filling the 12% bracket makes sense? The pension, alone, guarantees that all RMDs will be taxed at at least 12% (and nearly all at 22% for the sole survivor). If I understand the table and the note correctly, a balance of $1,775,000 to enter the 22% bracket would be reduced by $1,365,000 to about $400K. Being somewhat similar to Rob and Sue, this closely matches my goal of reducing TIRA balances to about $500K.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Roth Conversions - McQuarrie study

Post by smitcat »

lazynovice wrote: Thu Jun 17, 2021 8:01 pm
GerryL wrote: Thu Jun 17, 2021 7:30 pm A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
"And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes"
There are folks that have had their own business and when sold they have sufficient after tax funds without signifcant current capital gains to pay the taxes.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

smitcat wrote: Fri Jun 18, 2021 10:44 am
lazynovice wrote: Thu Jun 17, 2021 8:01 pm
GerryL wrote: Thu Jun 17, 2021 7:30 pm A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
"And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes"
There are folks that have had their own business and when sold they have sufficient after tax funds without signifcant current capital gains to pay the taxes.
True, in year one of sale. But assuming they don’t suboptimally sit on a pile of cash earning next to nothing, they will need to sell in year two, three and beyond?
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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Re: Roth Conversions - McQuarrie study

Post by sc9182 »

smitcat wrote: Fri Jun 18, 2021 10:44 am
lazynovice wrote: Thu Jun 17, 2021 8:01 pm
GerryL wrote: Thu Jun 17, 2021 7:30 pm A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
"And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes"
There are folks that have had their own business and when sold they have sufficient after tax funds without signifcant current capital gains to pay the taxes.
Equally could be cases - oft worried - one spouse pre-deceased other - resulting in step-up basis. Or waived off accumulated depreciation (if rental/RE business), or that either or both spouses carry some life insurance (tax-free payout, mostly) - leading to overall low effective tax rate .. or what if long lost rich Aunt Debbie writes 4-5 of millions inheritance to you — now all the math is really messed up !!

You can’t include every single possibility in X number of pages, or Y number of Tabs in a spreadsheet.

Then again - if one is single/widowed, retired living in CA/NY as oft mentioned - chose to do Geo-tax-arbitrage., or choose to pay more taxes. Life is full of choices - make good ones
Last edited by sc9182 on Fri Jun 18, 2021 11:13 am, edited 1 time in total.
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Re: Roth Conversions - McQuarrie study

Post by smitcat »

lazynovice wrote: Fri Jun 18, 2021 11:02 am
smitcat wrote: Fri Jun 18, 2021 10:44 am
lazynovice wrote: Thu Jun 17, 2021 8:01 pm
GerryL wrote: Thu Jun 17, 2021 7:30 pm A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
"And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes"
There are folks that have had their own business and when sold they have sufficient after tax funds without signifcant current capital gains to pay the taxes.
True, in year one of sale. But assuming they don’t suboptimally sit on a pile of cash earning next to nothing, they will need to sell in year two, three and beyond?
What better reason to retire early then the sale of a business?
Earnings after a few years do not typically end up with large tax consequences.
Or maybe when you get an inheritance, or a large pension payout?
How many years would someone really need to do significant Roth conversions?
Last edited by smitcat on Fri Jun 18, 2021 11:17 am, edited 1 time in total.
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Re: Roth Conversions - McQuarrie study

Post by smitcat »

sc9182 wrote: Fri Jun 18, 2021 11:07 am
smitcat wrote: Fri Jun 18, 2021 10:44 am
lazynovice wrote: Thu Jun 17, 2021 8:01 pm
GerryL wrote: Thu Jun 17, 2021 7:30 pm A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
"And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes"
There are folks that have had their own business and when sold they have sufficient after tax funds without signifcant current capital gains to pay the taxes.
Equally could be cases - oft worried - one spouse pre-deceased other - resulting in step-up basis. Or waived off accumulated depreciation (if rental/RE business), or that either or both spouses carry some life insurance (tax-free payout, mostly) - leading to overall low effective tax rate ..

You can’t include every single possibility in X number of pages, or Y number of Tabs in a spreadsheet.

Then again - if one is single/widowed, retired living in CA/NY as oft mentioned - chose to do Geo-tax-arbitrage., or choose to pay more taxes. Life is full of choices - make good ones
"You can’t include every single possibility in X number of pages, or Y number of Tabs in a spreadsheet."
No yiou cannot.
But you can run numerous scenarios with the most likely future variables and your numbers.
Record each run in a chart and see which variables affect your results (+/-) and how much they affect them.
This becomes your personal guide for potential choices along the way.
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Re: Roth Conversions - McQuarrie study

Post by McQ »

Exchme wrote: Fri Jun 18, 2021 7:19 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
Thanks for joining in person! At the link, I see an executive summary and a link to the paper on SSRN, but I can't see a link to the spreadsheet?
The second occurrence of the word 'here should be underlined and a live link to the spreadsheet--that's what I see when I browse my site.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

smitcat wrote: Fri Jun 18, 2021 11:10 am
lazynovice wrote: Fri Jun 18, 2021 11:02 am
smitcat wrote: Fri Jun 18, 2021 10:44 am
lazynovice wrote: Thu Jun 17, 2021 8:01 pm
GerryL wrote: Thu Jun 17, 2021 7:30 pm A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
"And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes"
There are folks that have had their own business and when sold they have sufficient after tax funds without signifcant current capital gains to pay the taxes.
True, in year one of sale. But assuming they don’t suboptimally sit on a pile of cash earning next to nothing, they will need to sell in year two, three and beyond?
What better reason to retire early then the sale of a business?
Earnings after a few years do not typically end up with large tax consequences.
Or maybe when you get an inheritance, or a large pension payout?
How many years would someone really need to do significant Roth conversions?
-Not sure I understand the first question.
-Not large consequences but still need to take into account the CG taxes and their impact on the ending portfolio value which are negative. A 15% CG tax (on gains only) might make sense to pay up to a certain ordinary tax rate (15%?)
-You have to do the math to compare the advantages of investing the inheritance or pension after tax versus paying 22% or greater taxes on a conversion. If most if the investment is in index type investment with low dividend yields that are mostly qualified and the surviving spouse gets a step up in basis…
-It is not my intention to EVER do a large Roth conversion. I currently intend to do about ten years of small ones to stay in the lower brackets.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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Re: Roth Conversions - McQuarrie study

Post by The Stone Wall »

The scenario that significantly affected my pre-tax balance was access to both a 403b and a 457 that could both be maximized (as a single filer) along with an employer match. In essence, my portfolio looks like a former MFJ couple after a spouse passes. I'm looking forward to the discussions in this thread.
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Re: Roth Conversions - McQuarrie study

Post by jeffyscott »

McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics."
Yep, I have gone with this one: If a conversion today will be taxed at a rate lower than future RMDs, it is likely to be beneficial.
Though modified to some extent, in that I am ony assuming this for conversions in the 12% bracket vs. future marginal rate of 22% on RMDs, if we were to do no conversions. I'd not convert at 22% to avoid potential for RMDs to be taxed at 24%.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
I assume this is simply because this typically means paying 0, 10, or 12% now vs. 22% (or more) later, so the the differential is at least 10%. The 12 to 22% jump is the biggest one, the next closest is the 8% gap between 24 and 32% (which are not brackets of concern to me).

Maybe a new consensus could be something like: If a conversion today will be taxed at a rate at least 10 pecentage points lower than future RMDs, it is likely to be beneficial. :?:
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

McQ wrote: Fri Jun 18, 2021 11:39 am
Exchme wrote: Fri Jun 18, 2021 7:19 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
Thanks for joining in person! At the link, I see an executive summary and a link to the paper on SSRN, but I can't see a link to the spreadsheet?
The second occurrence of the word 'here should be underlined and a live link to the spreadsheet--that's what I see when I browse my site.
Thanks for supplying your spreadsheet. I started tinkering with it to modify the base case--for example, change the initial balance in column C, SS income, tax rates, etc. What inputs do I need change that I might overlook? Do any need to be changed in the hidden columns?
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

jeffyscott wrote: Fri Jun 18, 2021 10:32 am
lazynovice wrote: Thu Jun 17, 2021 8:09 pm
Mr.BB wrote: Thu Jun 17, 2021 8:04 pm I don't think he addressed the fact that when you add in a couple's SS income (taxed at 85%) and some people will also have pensions plus their RMD can really push them into a higher tax bracket; not just their yearly RMD.
I thought so at first but on page 5:

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
But when Rob or Sue dies, then what about the survivor's tax rate?

Not that I am even thinking about the 24% tax bracket in this situation, but certainly filling the 12% bracket makes sense? The pension, alone, guarantees that all RMDs will be taxed at at least 12% (and nearly all at 22% for the sole survivor). If I understand the table and the note correctly, a balance of $1,775,000 to enter the 22% bracket would be reduced by $1,365,000 to about $400K. Being somewhat similar to Rob and Sue, this closely matches my goal of reducing TIRA balances to about $500K.
You will get a better answer from the study’s author.

I am currently planning to fill the 12% which will be the 15%. That may change this weekend after I rethink. Right now, I agree. Fill 12%.

There is much gnashing of teeth on the forum about survivor’s going to single brackets. Sometimes I see the point of it, but sometimes it seems solvable if you pay attention to net portfolio value and NOT just the taxes. These solutions do not apply to everyone but some apply to some-

1) Surviving spouse can cut expenses- your medical premiums, food, gas, hobbies, clothes etc. go away. Your % reduction is highly individual.
2) Surviving spouse can sell assets like your car and downsize the home. Downsizing the home can result in utilities and maintenance expense reductions.
3) Surviving spouse can draw survivor’s benefits beginning at 60 delaying own SS until 70.
4) Surviving spouse can take an increase in their SS benefit to the higher rate of the two if it is higher.
5) You can keep inexpensive term life policies purchased in working years to be invested after tax to pay taxes on RMDs. I would not suggest buying new policies at higher rates offered to those over a certain age.
6) Surviving spouse may remarry moving back into the MFJ.
7) Withdrawals from tira can be made to offset medical expenses in the final illness of both spouses essentially tax free.
8) A much younger spouse can use their own age to pull RMDs on your IRA kicking the can down the road a bit further
9) Qualified charitable donations are also an option available to the survivor

It is a lot more complicated to me than just- my spouse is moving into the higher tax bracket and is going to pay more taxes therefore I will pay more now.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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Re: Roth Conversions - McQuarrie study

Post by sureshoe »

Prokofiev wrote: Thu Jun 17, 2021 2:22 pm The article is also correct that for high-worth individuals, the amount saved by conversions is a relatively small % of
total worth and not likely to move the needle on retiree wealth. True. But if I can save $100k in taxes, I'll take it - even if
it only represents 1-5% of my total portfolio.
This.

Heck, unless you're insanely, filthy rich - when is $100k NOT going to be a LOT of money? You could change a person's life by giving that to them rather than the government.

Even at lower numbers, 5% of your net worth is always going to be a large number. Imagine your net worth is only $500k, cutting a check for $25k would be a big deal.
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Re: Roth Conversions - McQuarrie study

Post by JPM »

Suppose Dr X converted $200,000 in 2010 and the another $200,000 in 2011 from t401k to Roth 401k. Pays the $35,000 tax each year from taxable. S&P was c1300 then. If her Roth was invested in low cost S&P 500 per BH recommendations, her investment roughly tripled to date to $1,200,000. Tax on distributions would be zero. The $70,000 paid in taxes from taxable would not have tripled over the intervening period due to tax drag in the taxable account. Though it may now be possible to use ETFs to reduce tax drag.

In theory her decision to convert in 2010 was a poor one for the reasons pointed out here, but in practice it worked out well for her due to being able to pay the conversion income tax from taxable and the unexpected tripling of the S&P 500 over the following ten or eleven years. Had the taxes been paid out of the account at the time of conversion, present value would be reduced by 3 x $70,000, still more if the tax on the distribution to pay the tax on the conversion had to come out of the account as well.

Theoretical models predict the future only to the degree that their assumptions about the future turn out to have been accurate. A key to successful practice of any profession is knowing which general theory applies to each particular situation you are faced with as a practitioner.
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Re: Roth Conversions - McQuarrie study

Post by hulburt1 »

thank
smitcat
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Re: Roth Conversions - McQuarrie study

Post by smitcat »

lazynovice wrote: Fri Jun 18, 2021 11:53 am
smitcat wrote: Fri Jun 18, 2021 11:10 am
lazynovice wrote: Fri Jun 18, 2021 11:02 am
smitcat wrote: Fri Jun 18, 2021 10:44 am
lazynovice wrote: Thu Jun 17, 2021 8:01 pm

Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
"And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes"
There are folks that have had their own business and when sold they have sufficient after tax funds without signifcant current capital gains to pay the taxes.
True, in year one of sale. But assuming they don’t suboptimally sit on a pile of cash earning next to nothing, they will need to sell in year two, three and beyond?
What better reason to retire early then the sale of a business?
Earnings after a few years do not typically end up with large tax consequences.
Or maybe when you get an inheritance, or a large pension payout?
How many years would someone really need to do significant Roth conversions?
-Not sure I understand the first question.
-Not large consequences but still need to take into account the CG taxes and their impact on the ending portfolio value which are negative. A 15% CG tax (on gains only) might make sense to pay up to a certain ordinary tax rate (15%?)
-You have to do the math to compare the advantages of investing the inheritance or pension after tax versus paying 22% or greater taxes on a conversion. If most if the investment is in index type investment with low dividend yields that are mostly qualified and the surviving spouse gets a step up in basis…
-It is not my intention to EVER do a large Roth conversion. I currently intend to do about ten years of small ones to stay in the lower brackets.
"-Not sure I understand the first question."
Upon the sale of a small business or inheritance ,or pension payout, etc) many owners find it a great time to retire.

"-Not large consequences but still need to take into account the CG taxes and their impact on the ending portfolio value which are negative. A 15% CG tax (on gains only) might make sense to pay up to a certain ordinary tax rate (15%?)"
That is true with varied sized accounts and where they are held as well as when you need to access them.

"-It is not my intention to EVER do a large Roth conversion. I currently intend to do about ten years of small ones to stay in the lower brackets."
Sounds like that makes perfect sense for you numbers and plan.
Could it also be possible that others have different numbers and a different plan that has other solutions?

"-You have to do the math to compare the advantages of investing the inheritance or pension after tax versus paying 22% or greater taxes on a conversion. If most if the investment is in index type investment with low dividend yields that are mostly qualified and the surviving spouse gets a step up in basis…"
Yes that exactly - one of the keys would be to forecast the next heirs tax rate as well.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

smitcat wrote: Fri Jun 18, 2021 12:42 pm ….
"-It is not my intention to EVER do a large Roth conversion. I currently intend to do about ten years of small ones to stay in the lower brackets."
Sounds like that makes perfect sense for you numbers and plan.
Could it also be possible that others have different numbers and a different plan that has other solutions?
I haven’t ever said otherwise. Don’t confuse me with someone else. The post you quoted was full of “Do you want to? And Ifs.”
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Re: Roth Conversions - McQuarrie study

Post by sureshoe »

Everyone makes some good observations. I think the big takeaway is that people have been sold on "Roths are better than tax deferred", and that's a dangerous blanket statement. When I was younger I heard that quite a bit: get your money into a Roth, IT IS TAX FREE. Here is Ramsey giving very bad advice to a national audience: https://www.youtube.com/watch?v=HPWQ_zlKeyU

His reasoning is "If you have $1.7, you're going to owe $400k taxes! You should pay the taxes now." Oof.

I had heard a lot of that in younger years and figured I should be getting as much as possible into Roth. Thankfully I was never 100% Roth, but I did put more of my 401k in it than I would like. I did a conversion in my early 30s I don't regret, but probably didn't help much.

Anyway, as others noted - they do give lip service to high earners using it as a tax avoidance strategy and converting in low tax rate years.
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Re: Roth Conversions - McQuarrie study

Post by jeffyscott »

lazynovice wrote: Fri Jun 18, 2021 12:12 pm
jeffyscott wrote: Fri Jun 18, 2021 10:32 am
lazynovice wrote: Thu Jun 17, 2021 8:09 pm
Mr.BB wrote: Thu Jun 17, 2021 8:04 pm I don't think he addressed the fact that when you add in a couple's SS income (taxed at 85%) and some people will also have pensions plus their RMD can really push them into a higher tax bracket; not just their yearly RMD.
I thought so at first but on page 5:

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
But when Rob or Sue dies, then what about the survivor's tax rate?

Not that I am even thinking about the 24% tax bracket in this situation, but certainly filling the 12% bracket makes sense? The pension, alone, guarantees that all RMDs will be taxed at at least 12% (and nearly all at 22% for the sole survivor). If I understand the table and the note correctly, a balance of $1,775,000 to enter the 22% bracket would be reduced by $1,365,000 to about $400K. Being somewhat similar to Rob and Sue, this closely matches my goal of reducing TIRA balances to about $500K.
You will get a better answer from the study’s author.

I am currently planning to fill the 12% which will be the 15%. That may change this weekend after I rethink. Right now, I agree. Fill 12%.

There is much gnashing of teeth on the forum about survivor’s going to single brackets. Sometimes I see the point of it, but sometimes it seems solvable if you pay attention to net portfolio value and NOT just the taxes. These solutions do not apply to everyone but some apply to some-

1) Surviving spouse can cut expenses- your medical premiums, food, gas, hobbies, clothes etc. go away. Your % reduction is highly individual.
2) Surviving spouse can sell assets like your car and downsize the home. Downsizing the home can result in utilities and maintenance expense reductions.
3) Surviving spouse can draw survivor’s benefits beginning at 60 delaying own SS until 70.
4) Surviving spouse can take an increase in their SS benefit to the higher rate of the two if it is higher.
5) You can keep inexpensive term life policies purchased in working years to be invested after tax to pay taxes on RMDs. I would not suggest buying new policies at higher rates offered to those over a certain age.
6) Surviving spouse may remarry moving back into the MFJ.
7) Withdrawals from tira can be made to offset medical expenses in the final illness of both spouses essentially tax free.
8) A much younger spouse can use their own age to pull RMDs on your IRA kicking the can down the road a bit further
9) Qualified charitable donations are also an option available to the survivor

It is a lot more complicated to me than just- my spouse is moving into the higher tax bracket and is going to pay more taxes therefore I will pay more now.
I don't think that I would actually convert based soley on the potential tax rate on a sole survivor. I see it as just an added bonus reason to do so, but only at 12%. With both of us alive, the 12% bracket will likely be filled by pensions and SS, once we start collecting SS, so it is fairly certain RMDs will all be subject to 22% tax.

As the author highlighted here, the study did find that "conversions in the 0% bracket and neighboring brackets pay off early and sizably".

My basic assumption is that converting at 12% makes sense, as long as the TIRA balance is large enough that RMDs will likely be taxed at 22%. I'm not actually even looking at the single tax rates, beyond having determined that it would be highly unlikely for a sole survivor to go beyond 24% in our case. And, since I am not willing to assume that tax rates will revert or otherwise increase for our income level, it was easy to reject the idea of converting at 22% to potentially avoid 24%, just because the differential is so small.
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Re: Roth Conversions - McQuarrie study

Post by McQ »

lazynovice wrote: Fri Jun 18, 2021 8:49 am
Chip wrote: Fri Jun 18, 2021 8:20 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly.
Thanks very much for participating! I agree that the behavioral finance issues you mention often seem to be allowed to overwhelm the math involved. At least in some/many of the discussions here. It also seems that the personal circumstances of the various individuals contributing to these discussions often substantially color their views of the "correct" path to take. Me included.

One thing that struck me in your analysis was your early conclusion that the high earning couple would expand their lifestyle to the point that they would retire at 65 with little to nothing in taxable accounts. While we are a self-selecting group, it appears to me that we have many "super-savers" here, with savings rates in excess of 30% of gross income. Many appear to have retired well before age 65 with substantial taxable savings. That situation would appear to be much more favorable to conversions due to the combination of more time between conversion and ultimate withdrawal, lack of IRMAA concerns before age 63, and many years with no social security income.

So in addition to the items you mentioned for your future revision, would you also consider the early retiree case?
+1 Selfishly, would like confirmation.

I think the conclusion still holds and is addressed briefly in the paper. Early retirees have more years and after tax resources to convert in the 0% bracket. And are more likely to live to the payback period for higher brackets.
Chip: certainly seems reasonable that Bogleheads would attract super savers. But it does not seem reasonable, in the general case, that anyone other than a Boglehead would have both maxed out their 401(k) and piled up hundreds of thousands of dollars in taxable funds + saved kid's college + lived in a nice house (e.g., 30% savings rate, where I assumed 15% was the max reasonable). Nonetheless, if you do have years of living expenses in your taxable account, then you can convert at 0%/10%/12%, year after year. That was absolutely the best Roth conversion outcome I could find among all examined. But don't convert so much that age 72 income falls out of the 22% bracket.
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Re: Roth Conversions - McQuarrie study

Post by McQ »

jeffyscott wrote: Fri Jun 18, 2021 12:04 pm
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics."
Yep, I have gone with this one: If a conversion today will be taxed at a rate lower than future RMDs, it is likely to be beneficial.
Though modified to some extent, in that I am ony assuming this for conversions in the 12% bracket vs. future marginal rate of 22% on RMDs, if we were to do no conversions. I'd not convert at 22% to avoid potential for RMDs to be taxed at 24%.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
I assume this is simply because this typically means paying 0, 10, or 12% now vs. 22% (or more) later, so the the differential is at least 10%. The 12 to 22% jump is the biggest one, the next closest is the 8% gap between 24 and 32% (which are not brackets of concern to me).

Maybe a new consensus could be something like: If a conversion today will be taxed at a rate at least 10 pecentage points lower than future RMDs, it is likely to be beneficial. :?:
Actually, subtleties of exponential math combined with the difference between marginal and average tax rates make it impossible to build a simple rule of thumb around the arithmetic difference in present vs. future tax rate. Larger gaps do favor Roth conversions, of course; but nothing succeeds like converting in the 0%/10%/12% bracket to prevent RMDs taxed at 22% and above.
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Re: Roth Conversions - McQuarrie study

Post by McQ »

Tdubs wrote: Fri Jun 18, 2021 12:09 pm
McQ wrote: Fri Jun 18, 2021 11:39 am
Exchme wrote: Fri Jun 18, 2021 7:19 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
Thanks for joining in person! At the link, I see an executive summary and a link to the paper on SSRN, but I can't see a link to the spreadsheet?
The second occurrence of the word 'here should be underlined and a live link to the spreadsheet--that's what I see when I browse my site.
Thanks for supplying your spreadsheet. I started tinkering with it to modify the base case--for example, change the initial balance in column C, SS income, tax rates, etc. What inputs do I need change that I might overlook? Do any need to be changed in the hidden columns?
You'll need to pore over the Appendix while hovering a mouse over spreadsheet cells. Hidden cells simply contain projected income tax and IRMAA boundaries, which you can use to compute tax
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Re: Roth Conversions - McQuarrie study

Post by McQ »

WoodSpinner wrote: Fri Jun 18, 2021 10:21 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics."
Edward,

Welcome to our Forum! I really appreciate the Opportunity to discuss a paper and it’s findings with the author directly. Many thanks for the opportunity.

I am on year 4 of a Roth conversion strategy and the resulting taxes are my largest expense. Given that, I do have a vested interest in the subject and want to make sure my plans are well thought out.

My first step is a deeper reading of the paper and review of your spreadsheet. The first pass confirmed that we are likely to benefit from aggressive conversions. Will come back with additional questions.

Would you be willing to opine on our strategy if we provide the appropriate background?

Thanks

WoodSpinner
Woodspinner, here I have to be careful. I'm neither qualified nor licensed to give financial advice to individuals. Nor should you share too many financial details in a public forum. Best, probably, if you adapt the spreadsheet to your needs, and summarize for the forum why aggressive conversions still make sense to you--especially if for a reason other than those in the paper, i.e., a reason other than that you have the opportunity to convert at 0%. Then I can comment, particularly if you point to remaining puzzlements / issues / quandaries.
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

McQ wrote: Fri Jun 18, 2021 1:30 pm
Tdubs wrote: Fri Jun 18, 2021 12:09 pm
McQ wrote: Fri Jun 18, 2021 11:39 am
Exchme wrote: Fri Jun 18, 2021 7:19 am
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics." It took me about six attempts before I had a spreadsheet that passed muster Early attempts failed to maintain an exact counterfactual to the conversion. Try it; but you'll need the paper appendix open on a large screen monitor also.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
On reviewing the discussion thus far, let me acknowledge the following limitations:
1. Indeed, I did not examine the situation of the widow/er subject to future single tax rates. On tap for the revision. FYI: 90% of the taxpayers who were in my target income range are married filing joint, per the IRS SOI.
2. Bequests: in another revision, I will emphasize that conversions are particularly suitable when you have no need for some of the money in traditional accounts. I mean no need at all, true surplus. Rationale: a bequest adds ten years to your life expectancy (SECURE act), and the longer the compounding period, the more successful the Roth conversion. But, start to tap that conversion annually in your 80s to supplement income, and the payoff blows up (=it wasn't really surplus).
3. It is a long paper, it has footnotes, and footnotes to the tables, and appendices, and appendix tables, and footnotes to the appendix tables. Sorry; the topic is complicated and I am a life-long academic. I ask you not to dismiss what you have not read.
PS: thank you, lazynovice
It is late here in California; replies will begin by about noon Pacific time Friday.
Thanks for joining in person! At the link, I see an executive summary and a link to the paper on SSRN, but I can't see a link to the spreadsheet?
The second occurrence of the word 'here should be underlined and a live link to the spreadsheet--that's what I see when I browse my site.
Thanks for supplying your spreadsheet. I started tinkering with it to modify the base case--for example, change the initial balance in column C, SS income, tax rates, etc. What inputs do I need change that I might overlook? Do any need to be changed in the hidden columns?
You'll need to pore over the Appendix while hovering a mouse over spreadsheet cells. Hidden cells simply contain projected income tax and IRMAA boundaries, which you can use to compute tax
Thanks.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

McQ wrote: Fri Jun 18, 2021 1:28 pm
jeffyscott wrote: Fri Jun 18, 2021 12:04 pm
McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here, happy to answer questions directly. An example of the spreadsheet I used to compare outcomes can be downloaded here: http://www.edwardfmcquarrie.com/?p=573. If you don't think my conclusions apply to your particular case, the spreadsheet allows you to confirm that mismatch. But if you haven't set up a spreadsheet to evaluate your Roth conversion, then you may have fallen prey to what my behavioral finance colleagues call "misleading heuristics."
Yep, I have gone with this one: If a conversion today will be taxed at a rate lower than future RMDs, it is likely to be beneficial.
Though modified to some extent, in that I am ony assuming this for conversions in the 12% bracket vs. future marginal rate of 22% on RMDs, if we were to do no conversions. I'd not convert at 22% to avoid potential for RMDs to be taxed at 24%.
Next, I want to reiterate a key conclusion: "A Roth conversion, within the parameters examined, always pays off, but always slowly, and always in small amounts." The exception is conversions in the 0% bracket and neighboring brackets, which pay off early and sizably.
I assume this is simply because this typically means paying 0, 10, or 12% now vs. 22% (or more) later, so the the differential is at least 10%. The 12 to 22% jump is the biggest one, the next closest is the 8% gap between 24 and 32% (which are not brackets of concern to me).

Maybe a new consensus could be something like: If a conversion today will be taxed at a rate at least 10 pecentage points lower than future RMDs, it is likely to be beneficial. :?:
Actually, subtleties of exponential math combined with the difference between marginal and average tax rates make it impossible to build a simple rule of thumb around the arithmetic difference in present vs. future tax rate. Larger gaps do favor Roth conversions, of course; but nothing succeeds like converting in the 0%/10%/12% bracket to prevent RMDs taxed at 22% and above.
I think most on the forum will generally agree that conversions make sense for most of us up to the 12%.

The 22% is where there is a clash. It seems the more pension income you have, the higher your deferred balance the greater the age difference between spouses, and the more pessimistic you are about future rates, the more likely you are to convert at 22%.

The general question for you is how sensitive each of those variables are to the decision. For whom does it make sense to convert at 22%?
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Re: Roth Conversions - McQuarrie study

Post by FiveK »

lazynovice wrote: Fri Jun 18, 2021 2:03 pmFor whom does it make sense to convert at 22%?
For starters, anyone who expects future distributions would be taxed at marginal rates higher than 22%.
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Re: Roth Conversions - McQuarrie study

Post by sc9182 »

FiveK wrote: Fri Jun 18, 2021 2:23 pm
lazynovice wrote: Fri Jun 18, 2021 2:03 pmFor whom does it make sense to convert at 22%?
For starters, anyone who expects future distributions would be taxed at marginal rates higher than 22%.
Someone is one life event away, or one/two divorces away, big medical condition, or disability, or GFC type 50% or worse crash or two away — from falling significantly in tax bracket(s) or amount of tax paid. We all hope/plan, but markets/life deliver. Even if we imagine 22% possible future tax bracket — it may not happen thus so. So, pre-paying at 22% and locking the potential savings may not materialize.

With that said - always good to have Plan A, plan B and such !! Modeling each scenario helps - thanks for the excel Calculator Prof. McQ !
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Re: Roth Conversions - McQuarrie study

Post by FiveK »

sc9182 wrote: Fri Jun 18, 2021 2:39 pm
FiveK wrote: Fri Jun 18, 2021 2:23 pm
lazynovice wrote: Fri Jun 18, 2021 2:03 pmFor whom does it make sense to convert at 22%?
For starters, anyone who expects future distributions would be taxed at marginal rates higher than 22%.
Someone is one life event away, or one/two divorces away, big medical condition, or disability, or GFC type 50% or worse crash or two away — from falling significantly in tax bracket(s) or amount of tax paid. We all hope/plan, but markets/life deliver. Even if we imagine 22% possible future tax bracket — it may not happen thus so. So, pre-paying at 22% and locking the potential savings may not materialize.
Agreed, no guarantees. But if one does "expect" higher future rates, then it "makes sense" to convert at 22%. As noted, expectations may or may not become reality.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

FiveK wrote: Fri Jun 18, 2021 2:23 pm
lazynovice wrote: Fri Jun 18, 2021 2:03 pmFor whom does it make sense to convert at 22%?
For starters, anyone who expects future distributions would be taxed at marginal rates higher than 22%.
Not exactly per the study? Look at Table 7. Converting at 22% at a 22% rate during RMDs the money has to be untouched for 17 years- case #2. So the advice should be amended to “if you can leave it in the Roth for quite awhile post conversion.”
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Re: Roth Conversions - McQuarrie study

Post by ncbill »

Tdubs wrote: Thu Jun 17, 2021 9:22 pm Disappointed he didn't include a scenario where one of the spouses dies a decade or so before the other and tax rates shift from MFJ to single.
Yep, that's why I'm hedging by doing Roth conversions from my tax-deferred accounts while I'm currently not working & DW is diverting nearly all their salary (including over 50 "catch-up") to their tax-deferred retirement...once they retire they'll convert to Roth from their tax-deferred accounts...all well before age 65.
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Re: Roth Conversions - McQuarrie study

Post by FiveK »

lazynovice wrote: Fri Jun 18, 2021 2:50 pm
FiveK wrote: Fri Jun 18, 2021 2:23 pm
lazynovice wrote: Fri Jun 18, 2021 2:03 pmFor whom does it make sense to convert at 22%?
For starters, anyone who expects future distributions would be taxed at marginal rates higher than 22%.
Not exactly per the study? Look at Table 7. Converting at 22% at a 22% rate during RMDs the money has to be untouched for 17 years- case #2. So the advice should be amended to “if you can leave it in the Roth for quite awhile post conversion.”
If I convert $1000 to Roth and pay 22% tax from the conversion, that leaves $780. If that increases in value by 10% in one year, I have $858 to spend.
If I wait one year and that $1000 grows to $1100, and I convert or withdraw at 24%, I have $836 to spend.

No need to wait 17 years.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

FiveK wrote: Fri Jun 18, 2021 2:57 pm
lazynovice wrote: Fri Jun 18, 2021 2:50 pm
FiveK wrote: Fri Jun 18, 2021 2:23 pm
lazynovice wrote: Fri Jun 18, 2021 2:03 pmFor whom does it make sense to convert at 22%?
For starters, anyone who expects future distributions would be taxed at marginal rates higher than 22%.
Not exactly per the study? Look at Table 7. Converting at 22% at a 22% rate during RMDs the money has to be untouched for 17 years- case #2. So the advice should be amended to “if you can leave it in the Roth for quite awhile post conversion.”
If I convert $1000 to Roth and pay 22% tax from the conversion, that leaves $780. If that increases in value by 10% in one year, I have $858 to spend.
If I wait one year and that $1000 grows to $1100, and I convert or withdraw at 24%, I have $836 to spend.

No need to wait 17 years.
I’d like to see McQ’s answer to that. I think he is telling us something more nuanced than that.Not that I disagree with your math, but the rate of growth versus the tax rate change are both factors he looked at. And the conclusion was that the outcome had different sensitivities to both.
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Re: Roth Conversions - McQuarrie study

Post by hulburt1 »

I'm 68 single with 1.1m Ira and 220000 Roth. I can easily live at 12%. But once SS kicks in and RMD at 72 I will be at top 22%. I live very nice at 25000 a year. Running all my no. (10000 pension, RMD 40000, SS 26000 and a part time job 10000) My job go's right to state and Fed. tax's. But I do not pay tax on my Ira with draw or what I put in Roth that's tax is covered by my job. Should I stay at 12% or run it up to about $80000 and put more In Roth and Take home more. Thanks :confused
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Re: Roth Conversions - McQuarrie study

Post by LadyGeek »

^^^ Please start a new thread in the Personal Finance (Not Investing) forum so we can focus on your situation.
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