Roth conversions plans via RPM -- help me compare

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Topic Author
DebiT
Posts: 467
Joined: Sat Dec 28, 2013 1:45 pm

Roth conversions plans via RPM -- help me compare

Post by DebiT »

I am doing a "deep dive" into Roth conversion planning via RPM, and am learning a lot. I'm going to describe in English what I'm seeing in numbers, and see what people think.

I have 4 potential plans, but have already discarded one, for reasons I'll describe. I'm 63, on widow's survivor SS until 70, with about 2/3 of my portfolio in my 401K. As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life. My primary goal is more money for me, there seems to be more than enough, so secondary goal is tax efficiency and perhaps reducing tax bills for heirs, who are high earners.

It's interesting that all 4 plans end up at end of life (age 100 because family longevity) with similar total tax weighted ending portfolios
*********************************
EDITS are adding marginal tax bracket info for do nothing, and for each plan

EDIT -- I should note that if I do nothing then I am at 22% for my entire life, and likely to touch into the 24% bracket in my mid 70's.

A. Fill 22% bracket and stop at 72. EDIT -- this has me touching into the 22% bracket by just a bit until my late 80's . More specifically, I fill 22% bracket until 72, after that with no more Roth conversions I touch into 22% space by <5% until age 87

B. Fill 24% for 5 years (tax laws change), then 12% until age 72. EDIT This keeps me in the 12% bracket forever after 72. More specifically, after 72 with no more Roth conversions I am in to the 12% space at about 35% - 40%

C. Fill 24% for 5 years, then 22%, stop age 72. EDIT This lands me at 12% forever after age 72. More specifically, after 72 with no more Roth conversions I touch into the 12% space by 5% or less until age 87, then am in 10% space for rest of life

D. Fill 24% for 5 years and stop Roth conversions completely.. EDIT: This has me with 0 taxes from 68-71, and then 12% after that.
*****************************************
Plain English results:

Option c gives the very lowest End of Life EOL 401K balance. In order, they are c, then b, then d, with a range of $70K lowest to highest

Tax bracket wise, they are all similar after age 72, but option c goes down to 10% after age 88.
From age 68-72, option d is 0%, b is 12/15% (current/new rates), c is 22/25

So since EOL totals are remarkably similar, EOL 401k balances aren't amazingly different, it seems I should pick my strategy based on my comfort level for taxes. It seems therefore I would narrow down to b or d.

What say you?
Last edited by DebiT on Thu Jun 17, 2021 2:36 pm, edited 4 times in total.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
marcopolo
Posts: 4502
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Wed Jun 16, 2021 4:41 pm I am doing a "deep dive" into Roth conversion planning via RPM, and am learning a lot. I'm going to describe in English what I'm seeing in numbers, and see what people think.

I have 4 potential plans, but have already discarded one, for reasons I'll describe. I'm 63, on widow's survivor SS until 70, with about 2/3 of my portfolio in my 401K. As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life. My primary goal is more money for me, there seems to be more than enough, so secondary goal is tax efficiency and perhaps reducing tax bills for heirs, who are high earners.

It's interesting that all 4 plans end up at end of life (age 100 because family longevity) with similar total tax weighted ending portfolios

A. Fill 22% bracket and stop at 72. This is no longer being considered, because it has the highest remaining 401K balance by far, and the longest periods in the 22/25% tax bracket.

B. Fill 24% for 5 years (tax laws change), then 12% until age 72

C. Fill 24% for 5 years, then 22%, stop age 72

D. Fill 24% for 5 years and stop Roth conversions completely.

Plain English results:

Option c gives the very lowest End of Life EOL 401K balance. In order, they are c, then b, then d, with a range of $70K lowest to highest

Tax bracket wise, they are all similar after age 72, but option c goes down to 10% after age 88.
From age 68-72, option d is 0%, b is 12/15% (current/new rates), c is 22/25

So since EOL totals are remarkably similar, EOL 401k balances aren't amazingly different, it seems I should pick my strategy based on my comfort level for taxes. It seems therefore I would narrow down to b or d.

What say you?
What is your concern that is driving the EoL 401k balance to be critical factor?

Typically, one would want to maximize after-tax spendable dollars. That is usually accomplished by maintaing as flat as possible marginal tax rate.

It usually does not make sense to Roth convert at 24%, or even 22%, if one expects to be withdrawing at 0, 10, 12, or 15% marginal rate later.
Once in a while you get shown the light, in the strangest of places if you look at it right.
The Stone Wall
Posts: 120
Joined: Thu Mar 22, 2018 1:18 pm

Re: Roth conversions plans via RPM -- help me compare

Post by The Stone Wall »

Your statement "As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life." tells me that your results are somewhat meaningless. A model is only as good as the input.
Topic Author
DebiT
Posts: 467
Joined: Sat Dec 28, 2013 1:45 pm

Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

The Stone Wall wrote: Wed Jun 16, 2021 6:05 pm Your statement "As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life." tells me that your results are somewhat meaningless. A model is only as good as the input.
The problem is that Retiree Portfolio Manager, like other Roth conversion tools, is very sensitive to the AA settings. The general consensus is that setting all accounts to the same AA is the best way around that.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Topic Author
DebiT
Posts: 467
Joined: Sat Dec 28, 2013 1:45 pm

Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

marcopolo wrote: Wed Jun 16, 2021 5:51 pm
DebiT wrote: Wed Jun 16, 2021 4:41 pm I am doing a "deep dive" into Roth conversion planning via RPM, and am learning a lot. I'm going to describe in English what I'm seeing in numbers, and see what people think.

I have 4 potential plans, but have already discarded one, for reasons I'll describe. I'm 63, on widow's survivor SS until 70, with about 2/3 of my portfolio in my 401K. As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life. My primary goal is more money for me, there seems to be more than enough, so secondary goal is tax efficiency and perhaps reducing tax bills for heirs, who are high earners.

It's interesting that all 4 plans end up at end of life (age 100 because family longevity) with similar total tax weighted ending portfolios

A. Fill 22% bracket and stop at 72. This is no longer being considered, because it has the highest remaining 401K balance by far, and the longest periods in the 22/25% tax bracket.

B. Fill 24% for 5 years (tax laws change), then 12% until age 72

C. Fill 24% for 5 years, then 22%, stop age 72

D. Fill 24% for 5 years and stop Roth conversions completely.

Plain English results:

Option c gives the very lowest End of Life EOL 401K balance. In order, they are c, then b, then d, with a range of $70K lowest to highest

Tax bracket wise, they are all similar after age 72, but option c goes down to 10% after age 88.
From age 68-72, option d is 0%, b is 12/15% (current/new rates), c is 22/25

So since EOL totals are remarkably similar, EOL 401k balances aren't amazingly different, it seems I should pick my strategy based on my comfort level for taxes. It seems therefore I would narrow down to b or d.

What say you?
What is your concern that is driving the EoL 401k balance to be critical factor?

Typically, one would want to maximize after-tax spendable dollars. That is usually accomplished by maintaing as flat as possible marginal tax rate.

It usually does not make sense to Roth convert at 24%, or even 22%, if one expects to be withdrawing at 0, 10, 12, or 15% marginal rate later.
Regardless of whether or how I do Roth conversions, I’m good on spendable dollars. In other threads others have said that the next metric is reducing tax problems for heirs, hence the EOL tax deferred balance metric.

Coming up with a Roth plan has a lot of moving parts, it turns out. Luckily my total portfolio is large (sad reasons, but what can you do). I thought completely minimizing taxes would be the priority, but in other threads many have pointed out that the main metric is portfolio size, and that tax deferred dollars aren’t worth as much as Roth dollars.

So I’m looking at many moving parts here, trying to come up with a reasonable plan, so as to be a good steward of this money, have a good life, and make sure that eating cat food is not my final fate.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
marcopolo
Posts: 4502
Joined: Sat Dec 03, 2016 10:22 am

Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Wed Jun 16, 2021 6:50 pm
marcopolo wrote: Wed Jun 16, 2021 5:51 pm
DebiT wrote: Wed Jun 16, 2021 4:41 pm I am doing a "deep dive" into Roth conversion planning via RPM, and am learning a lot. I'm going to describe in English what I'm seeing in numbers, and see what people think.

I have 4 potential plans, but have already discarded one, for reasons I'll describe. I'm 63, on widow's survivor SS until 70, with about 2/3 of my portfolio in my 401K. As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life. My primary goal is more money for me, there seems to be more than enough, so secondary goal is tax efficiency and perhaps reducing tax bills for heirs, who are high earners.

It's interesting that all 4 plans end up at end of life (age 100 because family longevity) with similar total tax weighted ending portfolios

A. Fill 22% bracket and stop at 72. This is no longer being considered, because it has the highest remaining 401K balance by far, and the longest periods in the 22/25% tax bracket.

B. Fill 24% for 5 years (tax laws change), then 12% until age 72

C. Fill 24% for 5 years, then 22%, stop age 72

D. Fill 24% for 5 years and stop Roth conversions completely.

Plain English results:

Option c gives the very lowest End of Life EOL 401K balance. In order, they are c, then b, then d, with a range of $70K lowest to highest

Tax bracket wise, they are all similar after age 72, but option c goes down to 10% after age 88.
From age 68-72, option d is 0%, b is 12/15% (current/new rates), c is 22/25

So since EOL totals are remarkably similar, EOL 401k balances aren't amazingly different, it seems I should pick my strategy based on my comfort level for taxes. It seems therefore I would narrow down to b or d.

What say you?
What is your concern that is driving the EoL 401k balance to be critical factor?

Typically, one would want to maximize after-tax spendable dollars. That is usually accomplished by maintaing as flat as possible marginal tax rate.

It usually does not make sense to Roth convert at 24%, or even 22%, if one expects to be withdrawing at 0, 10, 12, or 15% marginal rate later.
Regardless of whether or how I do Roth conversions, I’m good on spendable dollars. In other threads others have said that the next metric is reducing tax problems for heirs, hence the EOL tax deferred balance metric.

Coming up with a Roth plan has a lot of moving parts, it turns out. Luckily my total portfolio is large (sad reasons, but what can you do). I thought completely minimizing taxes would be the priority, but in other threads many have pointed out that the main metric is portfolio size, and that tax deferred dollars aren’t worth as much as Roth dollars.

So I’m looking at many moving parts here, trying to come up with a reasonable plan, so as to be a good steward of this money, have a good life, and make sure that eating cat food is not my final fate.
It really does not matter how much you have or what you plan to do with it when evaluating the benefits of Roth conversions. The only thing that matters financially, is the relative marginal tax rates when you do the conversion vs. when the money would be withdrawn otherwise. Some of that may depend on account sizes.

The conversion rate is fairly easy to know, most of the complexity, and uncertainty, comes in estimating what it might be when otherwise withdrawn. For example, if passing down to heirs, if their tax rates are also low, then it still would not pay off to convert at higher tax rates now.

Some posters here will discuss the dollar amount in taxes paid and claim that paying a smaller amount in taxes now is somehow better than paying a larger dollar amount later. That is a misunderstanding on how the math works. What really matters is the marginal rates.
Once in a while you get shown the light, in the strangest of places if you look at it right.
The Stone Wall
Posts: 120
Joined: Thu Mar 22, 2018 1:18 pm

Re: Roth conversions plans via RPM -- help me compare

Post by The Stone Wall »

DebiT wrote: Wed Jun 16, 2021 6:45 pm
The Stone Wall wrote: Wed Jun 16, 2021 6:05 pm Your statement "As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life." tells me that your results are somewhat meaningless. A model is only as good as the input.
The problem is that Retiree Portfolio Manager, like other Roth conversion tools, is very sensitive to the AA settings. The general consensus is that setting all accounts to the same AA is the best way around that.
There are optimizer programs like I-ORP that are sensitive to the AA settings. Fundamentally, RPM is a spreadsheet (a very complicated and extensive one) but not an optimizer. RPM does calculations through a series of formulas to show a result (a model run). I like RPM because I can control the inputs (for example a Roth conversion in year 5 of some weird number......you get to choose the number not the optimizer). Why run RPM for a scenario you don't really want to study?
MJS
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Re: Roth conversions plans via RPM -- help me compare

Post by MJS »

Does RPM include IRMAA? The extra ~$4600 in taxes each year from IRMAA3 made the 24% bracket less attractive to me than staying below IRMAA0 or even IRMAA1.
Topic Author
DebiT
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Joined: Sat Dec 28, 2013 1:45 pm

Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

The Stone Wall wrote: Wed Jun 16, 2021 8:52 pm
DebiT wrote: Wed Jun 16, 2021 6:45 pm
The Stone Wall wrote: Wed Jun 16, 2021 6:05 pm Your statement "As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life." tells me that your results are somewhat meaningless. A model is only as good as the input.
The problem is that Retiree Portfolio Manager, like other Roth conversion tools, is very sensitive to the AA settings. The general consensus is that setting all accounts to the same AA is the best way around that.
There are optimizer programs like I-ORP that are sensitive to the AA settings. Fundamentally, RPM is a spreadsheet (a very complicated and extensive one) but not an optimizer. RPM does calculations through a series of formulas to show a result (a model run). I like RPM because I can control the inputs (for example a Roth conversion in year 5 of some weird number......you get to choose the number not the optimizer). Why run RPM for a scenario you don't really want to study?
Mainly because the AA per account is very hard to model. Year 1 of Roth conversions will have my 401K at about the same as it now, but as Roth grows each account's AA will be quite different. Since they will change every year as I'm making conversions, I don't see how to do it.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Topic Author
DebiT
Posts: 467
Joined: Sat Dec 28, 2013 1:45 pm

Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

MJS wrote: Wed Jun 16, 2021 9:06 pm Does RPM include IRMAA? The extra ~$4600 in taxes each year from IRMAA3 made the 24% bracket less attractive to me than staying below IRMAA0 or even IRMAA1.
Yes it does. That gets figured into the total results, which I why I'm trying to look at total portfolio values, rather than simply avoiding IRMAA.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
HomeStretch
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Re: Roth conversions plans via RPM -- help me compare

Post by HomeStretch »

Roth conversions are a year-by-year decision. Options B - D are the same for the 1st five years (i.e., convert enough to fill the 24% tax bracket). Consider converting in year 1 to fill the 24% bracket, then update your projections annually to see if it makes sense to convert at 24% for year 2. Rinse and repeat.

Are you holding your bond allocation in your tax deferred accounts to slow the expected growth?
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

The Stone Wall wrote: Wed Jun 16, 2021 8:52 pm
DebiT wrote: Wed Jun 16, 2021 6:45 pm
The Stone Wall wrote: Wed Jun 16, 2021 6:05 pm Your statement "As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life." tells me that your results are somewhat meaningless. A model is only as good as the input.
The problem is that Retiree Portfolio Manager, like other Roth conversion tools, is very sensitive to the AA settings. The general consensus is that setting all accounts to the same AA is the best way around that.
There are optimizer programs like I-ORP that are sensitive to the AA settings. Fundamentally, RPM is a spreadsheet (a very complicated and extensive one) but not an optimizer. RPM does calculations through a series of formulas to show a result (a model run). I like RPM because I can control the inputs (for example a Roth conversion in year 5 of some weird number......you get to choose the number not the optimizer). Why run RPM for a scenario you don't really want to study?
I-ORP does NOT handle Roth Conversions in the presence of accounts with differing AA.
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Wed Jun 16, 2021 9:23 pm
The Stone Wall wrote: Wed Jun 16, 2021 8:52 pm
DebiT wrote: Wed Jun 16, 2021 6:45 pm
The Stone Wall wrote: Wed Jun 16, 2021 6:05 pm Your statement "As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life." tells me that your results are somewhat meaningless. A model is only as good as the input.
The problem is that Retiree Portfolio Manager, like other Roth conversion tools, is very sensitive to the AA settings. The general consensus is that setting all accounts to the same AA is the best way around that.
There are optimizer programs like I-ORP that are sensitive to the AA settings. Fundamentally, RPM is a spreadsheet (a very complicated and extensive one) but not an optimizer. RPM does calculations through a series of formulas to show a result (a model run). I like RPM because I can control the inputs (for example a Roth conversion in year 5 of some weird number......you get to choose the number not the optimizer). Why run RPM for a scenario you don't really want to study?
Mainly because the AA per account is very hard to model. Year 1 of Roth conversions will have my 401K at about the same as it now, but as Roth grows each account's AA will be quite different. Since they will change every year as I'm making conversions, I don't see how to do it.

I have adopted a more casual attitude towards Roth Conversions. But, a few years ago I spent some time trying to do this multi-year assessment. What I ended up doing is writing my own script that used RPM as a single year analysis. The script then used the output to create the inputs for the next year's analysis. The account values and AA on each account was updated each year to reflect what I would actually do, which is to maintain a global AA across all my accounts, but in a tax efficient way in each account.

After a lot of analysis, I came to the conclusion that if I kept my fixed income allocation in my tax-deferred accounts, especially with current low yields, the I could keep a lid on the growth there, and modest Roth Conversions were sufficient to keep RMDs to reasonable levels. Since then, the impact of ACA Tax credit rules reinforced my decision for us to do limited Roth Conversions.

But, I am more concerned about my spending needs than legacy tax issues.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

HomeStretch wrote: Wed Jun 16, 2021 9:26 pm Roth conversions are a year-by-year decision. Options B - D are the same for the 1st five years (i.e., convert enough to fill the 24% tax bracket). Consider converting in year 1 to fill the 24% bracket, then update your projections annually to see if it makes sense to convert at 24% for year 2. Rinse and repeat.

Are you holding your bond allocation in your tax deferred accounts to slow the expected growth?
Yes, and I will continue to tweak my per account AA in that manner
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Barsoom
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Re: Roth conversions plans via RPM -- help me compare

Post by Barsoom »

DebiT wrote: Wed Jun 16, 2021 9:23 pmMainly because the AA per account is very hard to model. Year 1 of Roth conversions will have my 401K at about the same as it now, but as Roth grows each account's AA will be quite different. Since they will change every year as I'm making conversions, I don't see how to do it.
I'm not sure how this might help, but RPM allows you to make a one-time AA change at a desired point in the future. Perhaps you can use the second AA feature at some point in the future to make an adjustment after the Roth conversions are done?

-B
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

marcopolo wrote: Wed Jun 16, 2021 7:23 pm
It really does not matter how much you have or what you plan to do with it when evaluating the benefits of Roth conversions. The only thing that matters financially, is the relative marginal tax rates when you do the conversion vs. when the money would be withdrawn otherwise. Some of that may depend on account sizes.

The conversion rate is fairly easy to know, most of the complexity, and uncertainty, comes in estimating what it might be when otherwise withdrawn. For example, if passing down to heirs, if their tax rates are also low, then it still would not pay off to convert at higher tax rates now.

Some posters here will discuss the dollar amount in taxes paid and claim that paying a smaller amount in taxes now is somehow better than paying a larger dollar amount later. That is a misunderstanding on how the math works. What really matters is the marginal rates.
I must be getting tired, because I have tried to reply to this twice, and it keeps getting lost. So here goes.

First, let me please clarify that my main priority is my own spending, not legacy. I feel confident that my total portfolio is large enough to comfortably fund my residual expenses, so now my concern is to manage it in the best way possible, rather than waste money paying more taxes than I need to. Because I am only 63, and because the tax deferred portion is 2/3 of my portfolio, I have time to do something about this. But because of my widow's survivor's benefits, it won't be in a low low bracket.

In preparation for replying, I edited my original post to include the marginal rates that each plan lands me at. What I need help with is determining, now or 5 years from now, what the best course of action is, and how to "know how to know that", if that makes sense.

If I do nothing, I am in the 22% bracket from age 72 til death, with a family history of longevity.

I think that it makes sense to fill the 24% bracket for the next 5 years. Does that seem correct?

If you have time and could re-read my edited original post, I would appreciate any further comments you might make. I think I am close to learning how to evaluate all this, and I really appreciate any help you can give in getting me the rest of the way there.

Incidentally, my understanding of RPM is that it incorporates IRMAA expenses into the overall living expenses, so for now, I am not letting the IRMAA charges drive this decision. On an absolute level, they are small dollars compared with the rest. Once I figure all this out, I can take another look at that if need be.

Again, thank you all so much.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
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2pedals
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Re: Roth conversions plans via RPM -- help me compare

Post by 2pedals »

I don't think the optimizer/planner Roth conversion tools like RPM and i-orp are adequate enough to help for planning if leaving money for is heirs important. The heirs tax status (marginal tax rates) 0-10 years after the inheritance will most likely be biggest influence, not your individual/married projections. We have done some partial Roth conversions at ages 59, 60 and 61 and Mega Roth conversions before that. RPM, i-orp and Pralana Gold all show that any optimization would result in less than 1% savings for typical married death ages projections. If I do very aggressive Roth conversions, die next year, my wife stays single and she lives to 100, the savings might be about 5% of the total end portfolio.
Last edited by 2pedals on Wed Jun 16, 2021 11:33 pm, edited 1 time in total.
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Wed Jun 16, 2021 10:36 pm
marcopolo wrote: Wed Jun 16, 2021 7:23 pm
It really does not matter how much you have or what you plan to do with it when evaluating the benefits of Roth conversions. The only thing that matters financially, is the relative marginal tax rates when you do the conversion vs. when the money would be withdrawn otherwise. Some of that may depend on account sizes.

The conversion rate is fairly easy to know, most of the complexity, and uncertainty, comes in estimating what it might be when otherwise withdrawn. For example, if passing down to heirs, if their tax rates are also low, then it still would not pay off to convert at higher tax rates now.

Some posters here will discuss the dollar amount in taxes paid and claim that paying a smaller amount in taxes now is somehow better than paying a larger dollar amount later. That is a misunderstanding on how the math works. What really matters is the marginal rates.
I must be getting tired, because I have tried to reply to this twice, and it keeps getting lost. So here goes.

First, let me please clarify that my main priority is my own spending, not legacy. I feel confident that my total portfolio is large enough to comfortably fund my residual expenses, so now my concern is to manage it in the best way possible, rather than waste money paying more taxes than I need to. Because I am only 63, and because the tax deferred portion is 2/3 of my portfolio, I have time to do something about this. But because of my widow's survivor's benefits, it won't be in a low low bracket.

In preparation for replying, I edited my original post to include the marginal rates that each plan lands me at. What I need help with is determining, now or 5 years from now, what the best course of action is, and how to "know how to know that", if that makes sense.

If I do nothing, I am in the 22% bracket from age 72 til death, with a family history of longevity.

I think that it makes sense to fill the 24% bracket for the next 5 years. Does that seem correct?

If you have time and could re-read my edited original post, I would appreciate any further comments you might make. I think I am close to learning how to evaluate all this, and I really appreciate any help you can give in getting me the rest of the way there.

Incidentally, my understanding of RPM is that it incorporates IRMAA expenses into the overall living expenses, so for now, I am not letting the IRMAA charges drive this decision. On an absolute level, they are small dollars compared with the rest. Once I figure all this out, I can take another look at that if need be.

Again, thank you all so much.

Thanks for adding the updated information, that is very helpful.

Just to re-iterate again, the "optimal" solution is one that results in a flat marginal tax rate throughout the rest of the life of the portfolio.

This would eliminate (d) as an option in my mind. Your are leaving low-tax rate conversions on the table between ages 68-71, you would be better off converting less in earlier years so you could convert more in these years at a lower rate.

For (b) and (c), it would depend on where in the 12% bracket you are left later in life. Ideally you would want to be at the top of the 12% bracket later.
If you have room in the 12% bracket later, then you converted too much earlier at a higher tax-cost.

If (a) has you just in the 22% bracket later in life for a few years, that seems close to optimal, maybe i am mis-understanding what you mean here.

The "convert at 24% and be in the 22% bracket later" scenario is a tougher call. On the face of it it does not make sense because you are paying 24% now when you could pay a lower (22% rate) later. If that were strictly true, i would not convert in the 24% bracket. But, with the rates currently set to revert to 25%, the 24% conversions now pays off slightly. So, you have to make some guesses as to what the tax rate is likely to be later.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

Thank you for this response. I'm going to study it and my results, and post back some time tomorrow.

I really appreciate this , and all the help on this forum. I have learned so much over the years, at every phase of my financial life. The confidence that brought me helped so very much when my husband died. The one thing I didn't have to worry about was how to make big financial decisions. I either already knew, or knew where to go to learn. This forum is so valuable. It's on my list of good causes I support.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
markcoop
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Re: Roth conversions plans via RPM -- help me compare

Post by markcoop »

marcopolo wrote: Wed Jun 16, 2021 11:30 pm Just to re-iterate again, the "optimal" solution is one that results in a flat marginal tax rate throughout the rest of the life of the portfolio.

This would eliminate (d) as an option in my mind. Your are leaving low-tax rate conversions on the table between ages 68-71, you would be better off converting less in earlier years so you could convert more in these years at a lower rate.

For (b) and (c), it would depend on where in the 12% bracket you are left later in life. Ideally you would want to be at the top of the 12% bracket later.
If you have room in the 12% bracket later, then you converted too much earlier at a higher tax-cost.

If (a) has you just in the 22% bracket later in life for a few years, that seems close to optimal, maybe i am mis-understanding what you mean here.

The "convert at 24% and be in the 22% bracket later" scenario is a tougher call. On the face of it it does not make sense because you are paying 24% now when you could pay a lower (22% rate) later. If that were strictly true, i would not convert in the 24% bracket. But, with the rates currently set to revert to 25%, the 24% conversions now pays off slightly. So, you have to make some guesses as to what the tax rate is likely to be later.
I agree with your statement about marginal tax rates, but aren't the marginal tax rates more complicated because of the way SS is taxed. If doing conversions at 22% and withdrawals at 12%, isn't the 12% more like 22.2% given the heat map in the Wiki? Also, hard to ignore that the tax rates are set to change in a couple of years since 22%, 22.2% and 24% are all so close and all just under what will be the 25% bracket.

My gut here would be one year to the top of the 24% bracket and then 22% till 72 would probably get there (didn't see you run that one).
Mark
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

markcoop wrote: Thu Jun 17, 2021 12:12 am
marcopolo wrote: Wed Jun 16, 2021 11:30 pm Just to re-iterate again, the "optimal" solution is one that results in a flat marginal tax rate throughout the rest of the life of the portfolio.

This would eliminate (d) as an option in my mind. Your are leaving low-tax rate conversions on the table between ages 68-71, you would be better off converting less in earlier years so you could convert more in these years at a lower rate.

For (b) and (c), it would depend on where in the 12% bracket you are left later in life. Ideally you would want to be at the top of the 12% bracket later.
If you have room in the 12% bracket later, then you converted too much earlier at a higher tax-cost.

If (a) has you just in the 22% bracket later in life for a few years, that seems close to optimal, maybe i am mis-understanding what you mean here.

The "convert at 24% and be in the 22% bracket later" scenario is a tougher call. On the face of it it does not make sense because you are paying 24% now when you could pay a lower (22% rate) later. If that were strictly true, i would not convert in the 24% bracket. But, with the rates currently set to revert to 25%, the 24% conversions now pays off slightly. So, you have to make some guesses as to what the tax rate is likely to be later.
I agree with your statement about marginal tax rates, but aren't the marginal tax rates more complicated because of the way SS is taxed. If doing conversions at 22% and withdrawals at 12%, isn't the 12% more like 22.2% given the heat map in the Wiki? Also, hard to ignore that the tax rates are set to change in a couple of years since 22%, 22.2% and 24% are all so close and all just under what will be the 25% bracket.

My gut here would be one year to the top of the 24% bracket and then 22% till 72 would probably get there (didn't see you run that one).
One's marginal tax rates should include all things that affect the amount of taxes paid, that could include SS sec taxation, IRMAA, loss of tax credits (like ACA), etc. It really is the amount of extra taxes paid on an incremental dollar of income, regardless of what triggered the tax.
Once in a while you get shown the light, in the strangest of places if you look at it right.
The Stone Wall
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Re: Roth conversions plans via RPM -- help me compare

Post by The Stone Wall »

Barsoom wrote: Wed Jun 16, 2021 10:15 pm
DebiT wrote: Wed Jun 16, 2021 9:23 pmMainly because the AA per account is very hard to model. Year 1 of Roth conversions will have my 401K at about the same as it now, but as Roth grows each account's AA will be quite different. Since they will change every year as I'm making conversions, I don't see how to do it.
I'm not sure how this might help, but RPM allows you to make a one-time AA change at a desired point in the future. Perhaps you can use the second AA feature at some point in the future to make an adjustment after the Roth conversions are done?

-B
I take advantage of this feature. I fundamentally believe that Roth and Taxable should be modeled as 100% stocks for my case in RPM. These accounts will ultimately go to my children untouched as like you, my 401K has enough funds to support my retirement. From 62-72, I set the IRA to an AA of 50/50 which gives me a rough total AA of 60/40. At 72, I change the IRA AA to 30/70 to indicate that I'm done with Roth conversions and it is time to slow down the IRA accumulation. Generally speaking, this again places my overall AA at 60/40. As MarcoPolo suggests, I also try to make my taxes uniform throughout retirement. Between 62 and 70, I only spend out of the IRA by setting my IRA withdrawal in RPM such that it covers my living expenses and taxes. This model scenario reflects very accurately what I am doing in real life.

Let's be a bit realistic here, slight errors in our estimated return for stocks and bonds swamps any minor tweaking we do with a few thousand dollars of Roth conversions in any of these models. The key is to do something.
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celia
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Re: Roth conversions plans via RPM -- help me compare

Post by celia »

DebiT wrote: Wed Jun 16, 2021 6:45 pm
The Stone Wall wrote: Wed Jun 16, 2021 6:05 pm Your statement "As stated in other posts, for the purposes of using RPM, I have used my overall AA of 35/65 on every account in RPM. That won't be true in real life." tells me that your results are somewhat meaningless. A model is only as good as the input.
The problem is that Retiree Portfolio Manager, like other Roth conversion tools, is very sensitive to the AA settings. The general consensus is that setting all accounts to the same AA is the best way around that.
I agree with "The Stone Wall" 100%. You are modeling someone else's portfolio and it is nothing like yours. If RPM can't handle different AA in various accounts, then don't use it as a tool. (The bad news is that I don't know of any tool that will optimize things when you want to vary things each year, like doing a big Roth conversion one year. And we aren't guaranteed that the stock market won't grow consistently every year. Instead, in a 50% "down" bear market, we could convert twice as many shares for the same tax. All of a sudden, you've done two years worth of conversions in one year.)

To illustrate why this is meaningless for you, your tax-deferred account is probably growing / will grow much faster than the conservative portfolio you are modeling. Over the long run, this growth will push you into higher tax brackets that a heavy-bond portfolio will avoid.

Save what you've done so far and use it as a learning experience you may want to refer to as you model things manually. In fact, I'd like to see feedback on how you see things differently after a manual attempt. The way I would do it is mentioned in this thread while following my links there. The first one will help you determine if you need to do Roth conversions. The second link will show an example of how to determine how much you should convert each year. About half way down the first page, we start discussing paying taxes out of the tax-deferred account, for those, like you, who have the majority/all of their portfolio in tax-deferred.

If you want to share your portfolio size and the AA of each type of account, you will get much better replies. We need to know the general portfolio size to get a feel for how much you need to convert since tax brackets are dependent on how much income (Roth conversions) you do each year.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

Thank you, Celia. I am going to try out that spreadsheet next. It was always my intention to move between the various tools. Each of them has a different emphasis. I know the allocations being different makes a difference. What going to be tricky at first is they are going to change by account year by year, while I keep the portfolio 35/65.

If I do aggressive Roth’s, which is looking likely, then according to RPM (and I will run this through your spreadsheet next), I will exhaust the taxable account somewhere between age 70 and 74. So at that point I will have basically 2 accounts, 1 Roth and 1 401k/IRA. Obviously at that point my residual living expenses after SS will come out of the Roth.

Thanks for your responses. All of this helps me get a handle on things. I’ll obviously do something by the end of this tax year. My hope is to have an overall plan by then for going forward. Obviously every year it will need to be examined due to market variations, life and who knows what else. Still I hope to have a basic strategy by then.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
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DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

marcopolo wrote: Wed Jun 16, 2021 7:23 pm

It really does not matter how much you have or what you plan to do with it when evaluating the benefits of Roth conversions. The only thing that matters financially, is the relative marginal tax rates when you do the conversion vs. when the money would be withdrawn otherwise. Some of that may depend on account sizes.

The conversion rate is fairly easy to know, most of the complexity, and uncertainty, comes in estimating what it might be when otherwise withdrawn. For example, if passing down to heirs, if their tax rates are also low, then it still would not pay off to convert at higher tax rates now.

Some posters here will discuss the dollar amount in taxes paid and claim that paying a smaller amount in taxes now is somehow better than paying a larger dollar amount later. That is a misunderstanding on how the math works. What really matters is the marginal rates.
I have edited my original post again with the marginal rate info, and hope that it will provide some clarity. I still feel confused, because what I don't understand is why doesn't the total amount of taxes paid over my life demonstrate the most effective tax plan?

In your later reply, you said that the most optimal plan would be an even marginal rate throughout the life of the plan. I must be missing something, since the most even would be do nothing and stay at 22% bracket, soon to be 25% bracket per current law. Surely that isn't optimal?

Again, my priorities are having enough to spend, then not paying more taxes than necessary. Heirs and their tax situation are not my priority.

If you can help my brain get over the marginal rate vs absolute amount of tax paid conundrum, it will be a sign of real progress (at least I think so).
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Thu Jun 17, 2021 2:57 pm
marcopolo wrote: Wed Jun 16, 2021 7:23 pm

It really does not matter how much you have or what you plan to do with it when evaluating the benefits of Roth conversions. The only thing that matters financially, is the relative marginal tax rates when you do the conversion vs. when the money would be withdrawn otherwise. Some of that may depend on account sizes.

The conversion rate is fairly easy to know, most of the complexity, and uncertainty, comes in estimating what it might be when otherwise withdrawn. For example, if passing down to heirs, if their tax rates are also low, then it still would not pay off to convert at higher tax rates now.

Some posters here will discuss the dollar amount in taxes paid and claim that paying a smaller amount in taxes now is somehow better than paying a larger dollar amount later. That is a misunderstanding on how the math works. What really matters is the marginal rates.
I have edited my original post again with the marginal rate info, and hope that it will provide some clarity. I still feel confused, because what I don't understand is why doesn't the total amount of taxes paid over my life demonstrate the most effective tax plan?

In your later reply, you said that the most optimal plan would be an even marginal rate throughout the life of the plan. I must be missing something, since the most even would be do nothing and stay at 22% bracket, soon to be 25% bracket per current law. Surely that isn't optimal?

Again, my priorities are having enough to spend, then not paying more taxes than necessary. Heirs and their tax situation are not my priority.

If you can help my brain get over the marginal rate vs absolute amount of tax paid conundrum, it will be a sign of real progress (at least I think so).
First, the fact that the 22% bracket is changing to 25% (assuming it actually happens) would make them NOT even anymore, so converting at 22% to save from having to pay 25% later would be beneficial. But, if it stays at 22%, then it is a wash. What you don't want to do is convert at say 24% and then be in the 22% rate later, because you could have saved that 2% by waiting to take the money out.

As for why absolute dollars is not the right way to think about it, here is a brief discussion of that, with a numerical example to show why you can pay a lot more in taxes in absolute dollars, but still come out ahead, if you are paying at a lower rate.

viewtopic.php?p=5629596#p5629596
Once in a while you get shown the light, in the strangest of places if you look at it right.
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DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

marcopolo wrote: Thu Jun 17, 2021 3:08 pm
DebiT wrote: Thu Jun 17, 2021 2:57 pm
marcopolo wrote: Wed Jun 16, 2021 7:23 pm

It really does not matter how much you have or what you plan to do with it when evaluating the benefits of Roth conversions. The only thing that matters financially, is the relative marginal tax rates when you do the conversion vs. when the money would be withdrawn otherwise. Some of that may depend on account sizes.

The conversion rate is fairly easy to know, most of the complexity, and uncertainty, comes in estimating what it might be when otherwise withdrawn. For example, if passing down to heirs, if their tax rates are also low, then it still would not pay off to convert at higher tax rates now.

Some posters here will discuss the dollar amount in taxes paid and claim that paying a smaller amount in taxes now is somehow better than paying a larger dollar amount later. That is a misunderstanding on how the math works. What really matters is the marginal rates.
I have edited my original post again with the marginal rate info, and hope that it will provide some clarity. I still feel confused, because what I don't understand is why doesn't the total amount of taxes paid over my life demonstrate the most effective tax plan?

In your later reply, you said that the most optimal plan would be an even marginal rate throughout the life of the plan. I must be missing something, since the most even would be do nothing and stay at 22% bracket, soon to be 25% bracket per current law. Surely that isn't optimal?

Again, my priorities are having enough to spend, then not paying more taxes than necessary. Heirs and their tax situation are not my priority.

If you can help my brain get over the marginal rate vs absolute amount of tax paid conundrum, it will be a sign of real progress (at least I think so).
First, the fact that the 22% bracket is changing to 25% (assuming it actually happens) would make them NOT even anymore, so converting at 22% to save from having to pay 25% later would be beneficial. But, if it stays at 22%, then it is a wash. What you don't want to do is convert at say 24% and then be in the 22% rate later, because you could have saved that 2% by waiting to take the money out.

As for why absolute dollars is not the right way to think about it, here is a brief discussion of that, with a numerical example to show why you can pay a lot more in taxes in absolute dollars, but still come out ahead, if you are paying at a lower rate.

viewtopic.php?p=5629596#p5629596
Ok, the link above makes sense if both accounts are growing at the same 4% rate. But if tax deferred AA over time is changing to more and more bonds, and if Roth AA over time is changing to more and more stocks, then wouldn’t money that lands in Roth be more valuable, at least once the AAs are markedly different? That part is still not clear to me.

I imagine at a certain point it becomes impossible to calculate ahead of time. Either way, it seems to me that the best, most certain thing to do is fill the 22% bracket for the next 5 years, at which point I will be turning 69. If rates go up as the current law says they will, then I will have missed out on a bit. But if they don’t for some reason, then if I fill beyond the 22% bracket I would have overpaid, which is worse. Is that the right way to look at it, if the metric is trying to even out marginal tax rates?
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Thu Jun 17, 2021 4:51 pm
marcopolo wrote: Thu Jun 17, 2021 3:08 pm
DebiT wrote: Thu Jun 17, 2021 2:57 pm
marcopolo wrote: Wed Jun 16, 2021 7:23 pm

It really does not matter how much you have or what you plan to do with it when evaluating the benefits of Roth conversions. The only thing that matters financially, is the relative marginal tax rates when you do the conversion vs. when the money would be withdrawn otherwise. Some of that may depend on account sizes.

The conversion rate is fairly easy to know, most of the complexity, and uncertainty, comes in estimating what it might be when otherwise withdrawn. For example, if passing down to heirs, if their tax rates are also low, then it still would not pay off to convert at higher tax rates now.

Some posters here will discuss the dollar amount in taxes paid and claim that paying a smaller amount in taxes now is somehow better than paying a larger dollar amount later. That is a misunderstanding on how the math works. What really matters is the marginal rates.
I have edited my original post again with the marginal rate info, and hope that it will provide some clarity. I still feel confused, because what I don't understand is why doesn't the total amount of taxes paid over my life demonstrate the most effective tax plan?

In your later reply, you said that the most optimal plan would be an even marginal rate throughout the life of the plan. I must be missing something, since the most even would be do nothing and stay at 22% bracket, soon to be 25% bracket per current law. Surely that isn't optimal?

Again, my priorities are having enough to spend, then not paying more taxes than necessary. Heirs and their tax situation are not my priority.

If you can help my brain get over the marginal rate vs absolute amount of tax paid conundrum, it will be a sign of real progress (at least I think so).
First, the fact that the 22% bracket is changing to 25% (assuming it actually happens) would make them NOT even anymore, so converting at 22% to save from having to pay 25% later would be beneficial. But, if it stays at 22%, then it is a wash. What you don't want to do is convert at say 24% and then be in the 22% rate later, because you could have saved that 2% by waiting to take the money out.

As for why absolute dollars is not the right way to think about it, here is a brief discussion of that, with a numerical example to show why you can pay a lot more in taxes in absolute dollars, but still come out ahead, if you are paying at a lower rate.

viewtopic.php?p=5629596#p5629596
Ok, the link above makes sense if both accounts are growing at the same 4% rate. But if tax deferred AA over time is changing to more and more bonds, and if Roth AA over time is changing to more and more stocks, then wouldn’t money that lands in Roth be more valuable, at least once the AAs are markedly different? That part is still not clear to me.

I imagine at a certain point it becomes impossible to calculate ahead of time. Either way, it seems to me that the best, most certain thing to do is fill the 22% bracket for the next 5 years. If rates go up as the current law says they will, then I will have missed out on a bit. But if they don’t for some reason, then I will have overpaid. Is that the right way to look at it, if the metric is trying to even out marginal tax rates?
If you are drifting your AA over time as you do Roth conversions, you will come out ahead, but that is not because of the Roth conversions, but because you took on more risk.

Without knowing your exact situation, based on what you described, converting to the top of the 22% probably makes sense. If rates go up to 25% as scheduled, you will come out ahead. If they stay at 22% you will be roughly the same.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

Everyone has been so helpful with my RPM questions, and several of you have brought up that it's hard to advise without specific information. So here it is. Please let me know if it is not complete. ( In writing all this out, I again realize that 2 years ago, I was part of a reasonably dual high earner marriage, where we were going to work until 70 because of a late start. So Roth's were not a concern. Therefore my entire financial training has had to make a 180 degree turn. No wonder I am confused.)

Age 64 very very soon. Widowed 2 yrs, on survivor SS of 27504 until I take my own full benefit at age 70 of 42910. I use age 100 for life expectancy. My mom is a very healthy if physically slow 90, and her sister died at 93.

Portfolio is invested stock / bonds / cash at 34/60/6 overall, totaling just under $2M

Retirement money is mostly my 401K, a little of his IRA which is now mine. $1,385,00 invested 43/57/0

Taxable account is $603,400, invested per Rick Ferri at 15/66/19. Includes life insurance money which has taken me awhile to realize is part of my total portfolio, not a protected bucket. Taxable account last year generated $11,600 in dividends, $1183 in qualified dividends.

If I make no conversions, RPM estimates an RMD of just under $60K. I would be paying 0 taxes from now until age 72, and from that point on would basically completely fill what is now the 22% bracket, perhaps dipping into the current 24% bracket by tiny amounts in my late 70's.

I think it's reasonable to expect that current tax law will stand, meaning that rates will go up in 2026. My 2 sons are high earners, but I cannot be concerned about legacy, at least not until I get my own situation clarified.

If expenses matter for this, I've been using an extremely high pre-tax expense figure of $82K, which allows for $20K of travel or high end remodeling (if I ever work up the nerve to do any travel at all) and a $4K "fudge factor", on top of exact figures from this long-time Quicken user. Removing those two figures leaves $31K of residual expenses including repairs. This is accurate since I have been living all through Covid on $2k/month and doing pretty much anything I want. A few more theater tickets, etc. will hit the $31. But let's use $82K just for fun.

I should also share that I will feel very strange about reducing or completely using up that taxable account, but I want to do what is wise for the long term.

What I still don't understand is, if RPM is correct and doing no conversions puts me in the 22% bracket for life, if tax rates did not change, why would evening out my marginal rate (therefore not enjoying 8 0 tax years) benefit me?

I look forward to any further direction you all can give me, and again, I so appreciate the time taken to respond so far.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Lee_WSP
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Re: Roth conversions plans via RPM -- help me compare

Post by Lee_WSP »

DebiT wrote: Thu Jun 17, 2021 2:57 pm
I have edited my original post again with the marginal rate info, and hope that it will provide some clarity. I still feel confused, because what I don't understand is why doesn't the total amount of taxes paid over my life demonstrate the most effective tax plan?
If the tax rate is the same, the person who paid more absolute total tax made more money and thus has more money. That’s simplist way I can think of phrasing it.
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Thu Jun 17, 2021 10:11 pm Everyone has been so helpful with my RPM questions, and several of you have brought up that it's hard to advise without specific information. So here it is. Please let me know if it is not complete. ( In writing all this out, I again realize that 2 years ago, I was part of a reasonably dual high earner marriage, where we were going to work until 70 because of a late start. So Roth's were not a concern. Therefore my entire financial training has had to make a 180 degree turn. No wonder I am confused.)

Age 64 very very soon. Widowed 2 yrs, on survivor SS of 27504 until I take my own full benefit at age 70 of 42910. I use age 100 for life expectancy. My mom is a very healthy if physically slow 90, and her sister died at 93.

Portfolio is invested stock / bonds / cash at 34/60/6 overall, totaling just under $2M

Retirement money is mostly my 401K, a little of his IRA which is now mine. $1,385,00 invested 43/57/0

Taxable account is $603,400, invested per Rick Ferri at 15/66/19. Includes life insurance money which has taken me awhile to realize is part of my total portfolio, not a protected bucket. Taxable account last year generated $11,600 in dividends, $1183 in qualified dividends.

If I make no conversions, RPM estimates an RMD of just under $60K. I would be paying 0 taxes from now until age 72, and from that point on would basically completely fill what is now the 22% bracket, perhaps dipping into the current 24% bracket by tiny amounts in my late 70's.

I think it's reasonable to expect that current tax law will stand, meaning that rates will go up in 2026. My 2 sons are high earners, but I cannot be concerned about legacy, at least not until I get my own situation clarified.

If expenses matter for this, I've been using an extremely high pre-tax expense figure of $82K, which allows for $20K of travel or high end remodeling (if I ever work up the nerve to do any travel at all) and a $4K "fudge factor", on top of exact figures from this long-time Quicken user. Removing those two figures leaves $31K of residual expenses including repairs. This is accurate since I have been living all through Covid on $2k/month and doing pretty much anything I want. A few more theater tickets, etc. will hit the $31. But let's use $82K just for fun.

I should also share that I will feel very strange about reducing or completely using up that taxable account, but I want to do what is wise for the long term.

What I still don't understand is, if RPM is correct and doing no conversions puts me in the 22% bracket for life, if tax rates did not change, why would evening out my marginal rate (therefore not enjoying 8 0 tax years) benefit me?

I look forward to any further direction you all can give me, and again, I so appreciate the time taken to respond so far.

Since you will be a single filer, your SS + RMD will put you near the top of the 22% bracket.

The reason you do not benefit from the 8 years of 0% tax rate is because when that higher income hits, each marginal dollar coming out as RMD is taxed st 22%. In those 8 lower income years, you could withdraw some of that money at 10 and 12%. This will then reduce the size of you RMDs as well.

Another thing I might suggest is to change how you balance you AA across accounts. Right now you have a lot of equities in your tIRA, and a lot of bonds and cash in your taxable account. You would probably be better served by keeping as much of desired equity allocation as possible in your Roth and taxable accounts. The tIRA should hold mostly bonds and cash, and only enough equities as needed to meet you over all desired AA. This will slow the growth of your tIRA, with more growth taking place in taxable and Roth accounts. This will lower you RMDs, so less is being taxed at the higher marginal rate.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Imadeit
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Re: Roth conversions plans via RPM -- help me compare

Post by Imadeit »

Debit- I’ve been following your thread because I’m in a similar circumstance. Widowed, age 62, total retirement portfolio $1.6m, $80k emergency cash, $1.3m deferred tax Ira, $150k after tax account, $150k Roth, survivor SS $19k, $17k pension, paid off house in California, delay my SS until age 70, Health insurance paid, planning to live to 100, AA 50/50, total spending including taxes $85k. I recently did a Roth conversion of $70k this year since I can without penalty of IRMAA. All stock Total market for both Roth and after tax account. Ira split between stock and bonds to keep my total AA 50/50.

What feels right to me without doing all the calculations is to allow my after tax account and Roth account to grow without withdrawals. Use my IRA account for withdrawals now and also do yearly Roth conversions that keep in me in the 24% bracket but just under IRMAA penalty box up to $111k yearly income.

This feels right for me because I lower my eventual RMD at 70 when my $42k SS kicks in. My Roth and after tax account will grow with all stocks and will be either no tax (Roth) or long term capital gains if I do decide to withdraw. Assuming my money lasts, My heirs will inherit a stepped up basis from my after tax account and Roth (tax free).

Anyways, that’s what I’m planning at the moment that feels right to me.
Imadeit
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Re: Roth conversions plans via RPM -- help me compare

Post by Imadeit »

Debit- I’ve been following your thread because I’m in a similar circumstance. Widowed, age 62, total retirement portfolio $1.6m, $80k emergency cash, $1.3m deferred tax Ira, $150k after tax account, $150k Roth, survivor SS $19k, $17k pension, paid off house in California, delay my SS until age 70, Health insurance paid, planning to live to 100, AA 50/50, total spending including taxes $85k. I recently did a Roth conversion of $70k this year since I can without penalty of IRMAA. All stock Total market for both Roth and after tax account. Ira split between stock and bonds to keep my total AA 50/50.

What feels right to me without doing all the calculations is to allow my after tax account and Roth account to grow without withdrawals. Use my IRA account for withdrawals now and also do yearly Roth conversions that keep in me in the 24% bracket but just under IRMAA penalty box up to $111k yearly income.

This feels right for me because I lower my eventual RMD at 70 when my $42k SS kicks in. My Roth and after tax account will grow with all stocks and will be either no tax (Roth) or long term capital gains if I do decide to withdraw. Assuming my money lasts, My heirs will inherit a stepped up basis from my after tax account and Roth (tax free).

Anyways, that’s what I’m planning at the moment that feels right to me.

Edit- I will withdraw from my after tax account to pay for Roth conversion taxes.
Topic Author
DebiT
Posts: 467
Joined: Sat Dec 28, 2013 1:45 pm

Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

marcopolo wrote: Fri Jun 18, 2021 12:32 am


Since you will be a single filer, your SS + RMD will put you near the top of the 22% bracket.

The reason you do not benefit from the 8 years of 0% tax rate is because when that higher income hits, each marginal dollar coming out as RMD is taxed st 22%. In those 8 lower income years, you could withdraw some of that money at 10 and 12%. This will then reduce the size of you RMDs as well.

Another thing I might suggest is to change how you balance you AA across accounts. Right now you have a lot of equities in your tIRA, and a lot of bonds and cash in your taxable account. You would probably be better served by keeping as much of desired equity allocation as possible in your Roth and taxable accounts. The tIRA should hold mostly bonds and cash, and only enough equities as needed to meet you over all desired AA. This will slow the growth of your tIRA, with more growth taking place in taxable and Roth accounts. This will lower you RMDs, so less is being taxed at the higher marginal rate.
It seems I have 3 main tasks before me.
1. Decide on my Roth strategy, with the goal of maximizing my spendable income.
2. Figure out my cash needs from now until age 72 RMD from current cash in taxable account. Simple math, will do later. Has to come from somewhere, wouldn't want to add to tIRA withdrawals
3. Figure out how to redistribute my AA across my accounts especially the large existing accounts. Giant task, let's hold off for now

Without referring to RPM, it seems that I have 2 potential Roth strategies

1. If I believe tax rates will stay the same, then it seems I would convert by filling the 12% bracket, and verify my IRMAA penalty if any is no higher than doing nothing.

2. If I believe tax rates will increase in 2026 as per current law, then fill up the 22% bracket starting now, since reducing the tIRA by definition reduces my RMD. Again need to look at IRMAA penalty compared to doing nothing.

Either strategy requires me calculating what the current likely growth rate of my tIRA is, going forward, at my current AA and later as I manage to change the AA, to make sure my RMD estimates aren't too low. At current 35/65 going forward I doubt it's very high, in fact it's scary low, but the overall AA works in all my tools, so I'll leave it alone.

If the metric is to keep marginal rates as level as possible, it seems that I've simplified my Roth strategy question.

Does all this seem correct?
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Topic Author
DebiT
Posts: 467
Joined: Sat Dec 28, 2013 1:45 pm

Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

Imadeit wrote: Fri Jun 18, 2021 10:11 am Debit- I’ve been following your thread because I’m in a similar circumstance. Widowed, age 62, total retirement portfolio $1.6m, $80k emergency cash, $1.3m deferred tax Ira, $150k after tax account, $150k Roth, survivor SS $19k, $17k pension, paid off house in California, delay my SS until age 70, Health insurance paid, planning to live to 100, AA 50/50, total spending including taxes $85k. I recently did a Roth conversion of $70k this year since I can without penalty of IRMAA. All stock Total market for both Roth and after tax account. Ira split between stock and bonds to keep my total AA 50/50.

What feels right to me without doing all the calculations is to allow my after tax account and Roth account to grow without withdrawals. Use my IRA account for withdrawals now and also do yearly Roth conversions that keep in me in the 24% bracket but just under IRMAA penalty box up to $111k yearly income.

This feels right for me because I lower my eventual RMD at 70 when my $42k SS kicks in. My Roth and after tax account will grow with all stocks and will be either no tax (Roth) or long term capital gains if I do decide to withdraw. Assuming my money lasts, My heirs will inherit a stepped up basis from my after tax account and Roth (tax free).

Anyways, that’s what I’m planning at the moment that feels right to me.

Edit- I will withdraw from my after tax account to pay for Roth conversion taxes.
Thank you, yes, our positions are very similar, except for the pension and the AA. I keep reminding myself that all of this is like having to turn a giant cruise ship around, it's going to take time. All the finances were working like a well-oiled machine, with both of working and saving until retirement, SS and RMD's happening all at the same time.

Now the rules are completely different. What is a blessing is that no matter what I do, I can pay my bills. It's interesting that you use the phrase "what feels right to me". I used to know what felt right in terms of financial planning. At this moment, I don't; my instincts are thrown off. So my brain needs to understand the metrics and the rules; I figure eventually my instincts will catch on and catch up.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
The Stone Wall
Posts: 120
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Re: Roth conversions plans via RPM -- help me compare

Post by The Stone Wall »

Imadeit wrote: Fri Jun 18, 2021 10:11 am Debit- I’ve been following your thread because I’m in a similar circumstance. Widowed, age 62, total retirement portfolio $1.6m, $80k emergency cash, $1.3m deferred tax Ira, $150k after tax account, $150k Roth, survivor SS $19k, $17k pension, paid off house in California, delay my SS until age 70, Health insurance paid, planning to live to 100, AA 50/50, total spending including taxes $85k. I recently did a Roth conversion of $70k this year since I can without penalty of IRMAA. All stock Total market for both Roth and after tax account. Ira split between stock and bonds to keep my total AA 50/50.

What feels right to me without doing all the calculations is to allow my after tax account and Roth account to grow without withdrawals. Use my IRA account for withdrawals now and also do yearly Roth conversions that keep in me in the 24% bracket but just under IRMAA penalty box up to $111k yearly income.

This feels right for me because I lower my eventual RMD at 70 when my $42k SS kicks in. My Roth and after tax account will grow with all stocks and will be either no tax (Roth) or long term capital gains if I do decide to withdraw. Assuming my money lasts, My heirs will inherit a stepped up basis from my after tax account and Roth (tax free).

Anyways, that’s what I’m planning at the moment that feels right to me.

Edit- I will withdraw from my after tax account to pay for Roth conversion taxes.
+1 I think this is a winning strategy. It reduces the pre-tax account and allows the others to grow.
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

Imadeit wrote: Fri Jun 18, 2021 10:11 am Debit- I’ve been following your thread because I’m in a similar circumstance. Widowed, age 62, total retirement portfolio $1.6m, $80k emergency cash, $1.3m deferred tax Ira, $150k after tax account, $150k Roth, survivor SS $19k, $17k pension, paid off house in California, delay my SS until age 70, Health insurance paid, planning to live to 100, AA 50/50, total spending including taxes $85k. I recently did a Roth conversion of $70k this year since I can without penalty of IRMAA. All stock Total market for both Roth and after tax account. Ira split between stock and bonds to keep my total AA 50/50.

What feels right to me without doing all the calculations is to allow my after tax account and Roth account to grow without withdrawals. Use my IRA account for withdrawals now and also do yearly Roth conversions that keep in me in the 24% bracket but just under IRMAA penalty box up to $111k yearly income.

This feels right for me because I lower my eventual RMD at 70 when my $42k SS kicks in. My Roth and after tax account will grow with all stocks and will be either no tax (Roth) or long term capital gains if I do decide to withdraw. Assuming my money lasts, My heirs will inherit a stepped up basis from my after tax account and Roth (tax free).

Anyways, that’s what I’m planning at the moment that feels right to me.

Edit- I will withdraw from my after tax account to pay for Roth conversion taxes.
This is a pretty good approach. One change that could improve things a bit would be to spend some of your taxable account and Roth convert a bit more while maintaining the same taxable income.

As an example, let's say you are pulling $80k from you tIRA,for living expenses, all of that counts as ordinary income, and taxed as such. If instead, you took the same $80k from your taxable account, you might have something like $40k of taxable gains (the rest being return of capital). This would also be taxed at the lower cap gains rate. Then you could Roth convert an additional $40k from the tIRA, and end up with the same taxable income, and lower taxes due.
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Fri Jun 18, 2021 11:34 am
marcopolo wrote: Fri Jun 18, 2021 12:32 am


Since you will be a single filer, your SS + RMD will put you near the top of the 22% bracket.

The reason you do not benefit from the 8 years of 0% tax rate is because when that higher income hits, each marginal dollar coming out as RMD is taxed st 22%. In those 8 lower income years, you could withdraw some of that money at 10 and 12%. This will then reduce the size of you RMDs as well.

Another thing I might suggest is to change how you balance you AA across accounts. Right now you have a lot of equities in your tIRA, and a lot of bonds and cash in your taxable account. You would probably be better served by keeping as much of desired equity allocation as possible in your Roth and taxable accounts. The tIRA should hold mostly bonds and cash, and only enough equities as needed to meet you over all desired AA. This will slow the growth of your tIRA, with more growth taking place in taxable and Roth accounts. This will lower you RMDs, so less is being taxed at the higher marginal rate.
It seems I have 3 main tasks before me.
1. Decide on my Roth strategy, with the goal of maximizing my spendable income.
2. Figure out my cash needs from now until age 72 RMD from current cash in taxable account. Simple math, will do later. Has to come from somewhere, wouldn't want to add to tIRA withdrawals
3. Figure out how to redistribute my AA across my accounts especially the large existing accounts. Giant task, let's hold off for now

Without referring to RPM, it seems that I have 2 potential Roth strategies

1. If I believe tax rates will stay the same, then it seems I would convert by filling the 12% bracket, and verify my IRMAA penalty if any is no higher than doing nothing.

2. If I believe tax rates will increase in 2026 as per current law, then fill up the 22% bracket starting now, since reducing the tIRA by definition reduces my RMD. Again need to look at IRMAA penalty compared to doing nothing.

Either strategy requires me calculating what the current likely growth rate of my tIRA is, going forward, at my current AA and later as I manage to change the AA, to make sure my RMD estimates aren't too low. At current 35/65 going forward I doubt it's very high, in fact it's scary low, but the overall AA works in all my tools, so I'll leave it alone.

If the metric is to keep marginal rates as level as possible, it seems that I've simplified my Roth strategy question.

Does all this seem correct?

I think this is reasonable.

One small tweak I might make (not a huge deal) would be to keep most of the cash and fixed income (identified in item 2) in your tax deferred account. Keep equities in taxable.

If/when you need to tap the cash, you simply sell equities in taxable to raise the needed cash and buy an equivalent amount of equities in the tax deferred account. This will maintain your overall AA, while being more tax efficient.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

Because I am selling equity in one, and buying in another, I'm not affected by market up and down, so it's not the same as truly selling equities. Is that correct?

And, just to verify, how would wash sale rules apply or not?

All new rules. My poor brain.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Fri Jun 18, 2021 3:34 pm Because I am selling equity in one, and buying in another, I'm not affected by market up and down, so it's not the same as truly selling equities. Is that correct?

And, just to verify, how would wash sale rules apply or not?

All new rules. My poor brain.
Yes, you are effectively maintaining same AA, so not like simply selling equities. You do need to watch out for wash sales, but that is only an issue if you sell equities at a loss in taxable account. If that happens, you would want to swap to a similar, but not "subtantialy equal" in tax-deferred account.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Imadeit
Posts: 15
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Re: Roth conversions plans via RPM -- help me compare

Post by Imadeit »

marcopolo wrote: Fri Jun 18, 2021 2:59 pm
Imadeit wrote: Fri Jun 18, 2021 10:11 am Debit- I’ve been following your thread because I’m in a similar circumstance. Widowed, age 62, total retirement portfolio $1.6m, $80k emergency cash, $1.3m deferred tax Ira, $150k after tax account, $150k Roth, survivor SS $19k, $17k pension, paid off house in California, delay my SS until age 70, Health insurance paid, planning to live to 100, AA 50/50, total spending including taxes $85k. I recently did a Roth conversion of $70k this year since I can without penalty of IRMAA. All stock Total market for both Roth and after tax account. Ira split between stock and bonds to keep my total AA 50/50.

What feels right to me without doing all the calculations is to allow my after tax account and Roth account to grow without withdrawals. Use my IRA account for withdrawals now and also do yearly Roth conversions that keep in me in the 24% bracket but just under IRMAA penalty box up to $111k yearly income.

This feels right for me because I lower my eventual RMD at 70 when my $42k SS kicks in. My Roth and after tax account will grow with all stocks and will be either no tax (Roth) or long term capital gains if I do decide to withdraw. Assuming my money lasts, My heirs will inherit a stepped up basis from my after tax account and Roth (tax free).

Anyways, that’s what I’m planning at the moment that feels right to me.

Edit- I will withdraw from my after tax account to pay for Roth conversion taxes.
This is a pretty good approach. One change that could improve things a bit would be to spend some of your taxable account and Roth convert a bit more while maintaining the same taxable income.

As an example, let's say you are pulling $80k from you tIRA,for living expenses, all of that counts as ordinary income, and taxed as such. If instead, you took the same $80k from your taxable account, you might have something like $40k of taxable gains (the rest being return of capital). This would also be taxed at the lower cap gains rate. Then you could Roth convert an additional $40k from the tIRA, and end up with the same taxable income, and lower taxes due.
Thank you for the suggestion. I’ll see what I can squeeze out of my after tax account. Hoping the after tax Account balance can be sustained for continuous future Roth conversion taxes and possibly some growth. Unfortunately I wasted two years without any Roth Conversions and spending withdrawals completely from my after tax account. So my after tax account is half what it could have been. I’m now self directed and appreciate the various options available.
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

This thread is really helping me get the concept of smoothing the marginal brackets over my various financial phases to come. I also am now hyper-aware of the need to change my AA distribution between accounts, for reasons below. I'll be starting a new thread about that, and will post the link here once I do. I posted it in the Personal Investments forum, since it is about asset allocation. It is here
viewtopic.php?f=1&t=351647

So I got to wondering if RPM was correctly estimating my RMDs, since as stated above I had set all my accounts in it to my overall AA of 35/65. I went back and set the tIRA to 40/60 which what it is in real life, and decided to run a couple of other RMD estimater tools . Bottom line is, if my tIRA growth rate is 2% then RMD is likely to be $60K to start. If it is 3%, anywhere from $68-70, and if it's 4% anywhere from $73-$74. Yikes! So I will be pausing my RMD ponderings while I figure out how to shift my AA distributions.

Meanwhile, though, if I do nothing, and my current tIRA of 1,381,800 invested at 40/60 grows at about 3% per RPM, then my initial RMD will be close to $70K. I will then be into the current 24% bracket, soon to be 28%, by at least 10% of my income for nearly if not all my life after 71. So, without running RPM but using the logic in my post above, would my strategy be as follows?

1. Filling 10 or 12% brackets no longer would apply
2. If I believe tax rates will stay the same I would for sure fill the 22% bracket between now and 72
3. If I believe tax rates will go up as current law states I would also experiment with at least partially filling the current 24% bracket and see how that models.

Thanks again, and also for the idea of how to pull cash from taxable account by selling equities and replacing in tIRA.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
marcopolo
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Re: Roth conversions plans via RPM -- help me compare

Post by marcopolo »

DebiT wrote: Fri Jun 18, 2021 6:50 pm This thread is really helping me get the concept of smoothing the marginal brackets over my various financial phases to come. I also am now hyper-aware of the need to change my AA distribution between accounts, for reasons below. I'll be starting a new thread about that, and will post the link here once I do. I posted it in the Personal Investments forum, since it is about asset allocation. It is here
viewtopic.php?f=1&t=351647

So I got to wondering if RPM was correctly estimating my RMDs, since as stated above I had set all my accounts in it to my overall AA of 35/65. I went back and set the tIRA to 40/60 which what it is in real life, and decided to run a couple of other RMD estimater tools . Bottom line is, if my tIRA growth rate is 2% then RMD is likely to be $60K to start. If it is 3%, anywhere from $68-70, and if it's 4% anywhere from $73-$74. Yikes! So I will be pausing my RMD ponderings while I figure out how to shift my AA distributions.

Meanwhile, though, if I do nothing, and my current tIRA of 1,381,800 invested at 40/60 grows at about 3% per RPM, then my initial RMD will be close to $70K. I will then be into the current 24% bracket, soon to be 28%, by at least 10% of my income for nearly if not all my life after 71. So, without running RPM but using the logic in my post above, would my strategy be as follows?

1. Filling 10 or 12% brackets no longer would apply
2. If I believe tax rates will stay the same I would for sure fill the 22% bracket between now and 72
3. If I believe tax rates will go up as current law states I would also experiment with at least partially filling the current 24% bracket and see how that models.

Thanks again, and also for the idea of how to pull cash from taxable account by selling equities and replacing in tIRA.

I think what you are proposing makes sense.
I also commented on your other thread regarding moving allocation around


Good luck to you, and sorry for your loss.
I hope my spouse takes this kind of interest and initiative if I pre-decease her.

.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

My husband was very happy to leave bill paying, planning, and investing to me, and so I learned to be very comfortable with making these decisions. When he died suddenly, I was grateful that at least this part of things, meaning finances small and large, was not a stress to me. Now it is a math problem, but not a stress.

I hope everyone one this board works to have their spouse very involved and/or have a plan for how to make things sustainable if they die first.

I really appreciate yours and everyone else’s inputs on specifics of how to do this. I’ll read the other thread in the morning. I realize there is no need for paid professional input on re-distributing the AA. It’s just a given that it needs to happen. First world problem, I know.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
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Wiggums
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Re: Roth conversions plans via RPM -- help me compare

Post by Wiggums »

DebiT wrote: Fri Jun 18, 2021 10:44 pm
I hope everyone one this board works to have their spouse very involved and/or have a plan for how to make things sustainable if they die first.
This is great advice.
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Re: Roth conversions plans via RPM -- help me compare

Post by celia »

DebiT wrote: Thu Jun 17, 2021 10:11 pm If I make no conversions, RPM estimates an RMD of just under $60K. I would be paying 0 taxes from now until age 72, and from that point on would basically completely fill what is now the 22% bracket, perhaps dipping into the current 24% bracket by tiny amounts in my late 70's.
...

I should also share that I will feel very strange about reducing or completely using up that taxable account, but I want to do what is wise for the long term.

What I still don't understand is, if RPM is correct and doing no conversions puts me in the 22% bracket for life, if tax rates did not change, why would evening out my marginal rate (therefore not enjoying 8 0 tax years) benefit me?
Why would you completely spend down the taxable account while letting the tax-deferred grow? That means when you start using up the tax-deferred, EVERY SINGLE DOLLAR YOU NEED FOR LIVING EXPENSES WILL BE TAXED. And if you do early no Roth conversions, your estimated RMDs of $60K (in your early years, increasing as you age) added to your SS of $43K (at age 70) will give you Taxable income of $60K + 43K - $13K (standard deduction) = $90K, which is in the bottom of the current 24% tax bracket, WITHOUT DOING ANY ROTH CONVERSIONS. At that point, tax brackets would have reverted back to 2017 levels, so you would be at the TOP of the 25% bracket, about to fall into the 28% bracket.

In addition, you would be subject to IRMAA monthly surcharges for the rest of your life. This is a surcharge on your Medicare premiums, meaning you will pay at least $700 a year more than the rest of us for your premiums. (The higher your MAGI, the higher your premiums are.)

Withdrawing from both Taxable (30%) and Tax-deferred (70%) is better for the rest of your life. And I would aim to convert 1/3 or 1/2 of that Tax-deferred account before age 70. Roth conversions could sit in the Roth and not be spent unless you need to withdraw more money without having it impact your taxes. But you will have to have a Roth opened for at least 5 years at the time you withdraw.

Keep in mind that selling something in Taxable accounts for living expenses has only the gains be taxed, not the entire withdrawal, while those gains are also taxed favorably. (This also reduces your future dividends in Taxable.)

Withdrawing (or converting) from Tax-deferred accounts has every single dollar taxed as regular income.

And withdrawing from Roth accounts is tax-free as long as you've had a Roth account for 5 years and are over 59.5 at the time of withdrawal.

Also see my signature line below this post. :D
----------------
OP, Maybe I misunderstood you, but I thought you were using a 35% stock/ 65% bond-cash portfolio for RPM, when your real portfolio is 65% stock/ 35% bond-cash. But your later posts keep referring to 35% stock/ 65% bonds. Please clarify, since this changes a lot.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Roth conversions plans via RPM -- help me compare

Post by Sahara »

DebiT

You have a lot of moving pieces and concepts here. I agree that slowing down and structuring your accounts first is a sound approach.

The overall "which account do I withdraw from" lens may be one you want to explore. Depleting the taxable account poses certain consequences, depleting the pre tax accounts poses other consequences.

A few things that haven't been mentioned are doing QCDs after age 70.5 and mentally accounting for a portion of the pre tax accounts being spent on medical expenses, which may serve to avoid tax on the portion used in that manner.

Instead of "how much overall tax will I pay" I ask "how much will I end up with after taxes are paid?" I do understand the marginal rate is the main driver. The next level would be to evaluate what you end up with in terms of tax liability. Depending on the beneficiary, ending up with 100% Roth may be more valuable than ending up with 100% pre-tax. It appears that's not a driver of your decision so you might just take that out of the equation.

I think that the withdrawal to meet spending needs layer is something you want to frame out overall. Some people use a 3-year cushion account to avoid selling equities in a bad market, others meet this purpose via their asset allocation and I think that's your approach.

In terms of withdrawals, I wanted to illustrate the tax implications. Forgive me if you've done these calculations and I missed that piece of your thread. This is a very simplified illustration of what happens tax-wise when you withdraw from tax-deferred vs taxable at your current Social Security benefit. You could re-calculate with the increased benefit at 70, and then with RMDs at 72 to get a feel for the interplay. The illustration does not account for your dividends. If you don't have tax software, you can play around with your real numbers, cost basis, and a mix of taxable and pre-tax withdrawals here : https://www.mortgagecalculator.org/calc ... ulator.php

#1 Withdraw from Taxable
Income 0
Social Security 27,500
Capital Gains (withdraw 50,000, realized gains 25,000) > Subject to lower capital gains tax bracket of 0%
Distribution from IRA -0-
Standard Deduction 14,250 >>Edited to add this illustration was originally done for an individual over 65, so this would be lower for your situation.
Taxable Income 19,288
Tax 0 12% Income Tax Bracket
Spendable - 77,500

#2 Withdraw from Tax Deferred
Income 0
Social Security 27,500
Capital Gains 0
Distribution from IRA 60,000
Standard Deduction 14,250 >>Edited to add this illustration was originally done for an individual over 65, so this would be lower for your situation.
Taxable Income 69,125
Tax 10,956 22% Income Tax Bracket
Spendable - 76,544
Topic Author
DebiT
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Re: Roth conversions plans via RPM -- help me compare

Post by DebiT »

celia wrote: Sun Jun 20, 2021 12:05 am
DebiT wrote: Thu Jun 17, 2021 10:11 pm If I make no conversions, RPM estimates an RMD of just under $60K. I would be paying 0 taxes from now until age 72, and from that point on would basically completely fill what is now the 22% bracket, perhaps dipping into the current 24% bracket by tiny amounts in my late 70's.
...

I should also share that I will feel very strange about reducing or completely using up that taxable account, but I want to do what is wise for the long term.

What I still don't understand is, if RPM is correct and doing no conversions puts me in the 22% bracket for life, if tax rates did not change, why would evening out my marginal rate (therefore not enjoying 8 0 tax years) benefit me?
Why would you completely spend down the taxable account while letting the tax-deferred grow? That means when you start using up the tax-deferred, EVERY SINGLE DOLLAR YOU NEED FOR LIVING EXPENSES WILL BE TAXED. And if you do early no Roth conversions, your estimated RMDs of $60K (in your early years, increasing as you age) added to your SS of $43K (at age 70) will give you Taxable income of $60K + 43K - $13K (standard deduction) = $90K, which is in the bottom of the current 24% tax bracket, WITHOUT DOING ANY ROTH CONVERSIONS. At that point, tax brackets would have reverted back to 2017 levels, so you would be at the TOP of the 25% bracket, about to fall into the 28% bracket.

In addition, you would be subject to IRMAA monthly surcharges for the rest of your life. This is a surcharge on your Medicare premiums, meaning you will pay at least $700 a year more than the rest of us for your premiums. (The higher your MAGI, the higher your premiums are.)

Withdrawing from both Taxable (30%) and Tax-deferred (70%) is better for the rest of your life. And I would aim to convert 1/3 or 1/2 of that Tax-deferred account before age 70. Roth conversions could sit in the Roth and not be spent unless you need to withdraw more money without having it impact your taxes. But you will have to have a Roth opened for at least 5 years at the time you withdraw.

Keep in mind that selling something in Taxable accounts for living expenses has only the gains be taxed, not the entire withdrawal, while those gains are also taxed favorably. (This also reduces your future dividends in Taxable.)

Withdrawing (or converting) from Tax-deferred accounts has every single dollar taxed as regular income.

And withdrawing from Roth accounts is tax-free as long as you've had a Roth account for 5 years and are over 59.5 at the time of withdrawal.

Also see my signature line below this post. :D
----------------
OP, Maybe I misunderstood you, but I thought you were using a 35% stock/ 65% bond-cash portfolio for RPM, when your real portfolio is 65% stock/ 35% bond-cash. But your later posts keep referring to 35% stock/ 65% bonds. Please clarify, since this changes a lot.
Hi Celia. I have appreciated your detailed replies. My posts have been evolving as I'm learning, and no doubt can create confusion.. So I'll use this reply to update my basics, which I think addresses all the good point you have made.

My total portfolio AA is 35/65 and will remain so . When I posted re RPM, at first I was modelling ending portfolio balances and using 35/65 across the board. Currently I am using RPM more to predict my tax brackets and marginal tax going forward. I have now set RPM to reflect my different account AA's accurately. Because of what I learned in my other thread at viewtopic.php?p=6076837#p6076837, those new account AA's will be tIRA 14/86 and taxable 81/19. Later in the year when I do a Roth conversion, some of that tIRA taxable will go into the Roth.

I will definitely be doing some version of Roth conversions for at least the next 5 years (tax rates) and perhaps until I am 72. That is a given. My questions in posts above were framed "if I do no Roth conversions..." because that is the baseline case, against which I compare my various options. Part of what I'll be needing to figure out is to make sure my current taxable account last for 5 years minimum, including wiggle room for emergencies, since the Roth is brand new and will have a 5 year waiting period. I did convert $500 into it to open it, so the clock has started. Let this be a lesson to others reading to open one early on if you even think you will be using it. I don't have time to re-run my numbers right now as to when that taxable account will run out, but it will under almost every scenario as I remember it. I don't know at this time how much of the total tIRA will get converted. As I model it will be interesting to see that. My basic model is going to be evening out my marginal tax rates over my life, and using my assumption that current tax law will stand resulting in increased rates starting 2026.

I have no problem having no taxable account and making needed withdrawals from the Roth. As mentioned above that may well happen before I am 72. The discomfort I mentioned above it that for the first 2 years of widowhood, that account represented life insurance money, which felt sacred and separate to me. It doesn't now, it's just part of my portfolio.

Once RMD's start at 72, it seems obvious to me that I will be living on the RMD amount and whatever else I need to pay my expenses would come from the Roth account. For bookkeeping purposes I might again have a taxable account with a checking account, but that is way off and very simple to figure out. I definitely would not take out extra money beyond the RMD from the tIRA unless there were no other option. The only exception to this would be if I had major and deductible long term care expenses. This is an item I need to instruct my sons about, especially if I/they would need to roll-over some 401K into the IRA.

Finally, IRMAA surcharges. Again, I'll be needing to take a fresh look at these. My baseline case, using no Roth's, will give me a starting point. I wish RPM would somehow show them as a tax rather than adding them to expenses, but I'll just need to note and compare.

Today my tIRA AA is 43/57. Tomorrow it will be 14/86. This is thanks to all you Bogleheads! According to RPM that will give me 2.3% growth in a tIRA that is currently 1.385M, so something like $32000. Naturally year by year I'll need to look at that, and compare it against my Roth plan.

Tomorrow's task is to accomplish the AA re-distribution, and hope that I have some answers on a specific question on that thread. Then I will return to figuring out my beginning Roth strategy. I'm sure more questions will follow. Thank you all for your help, and Happy Father's Day.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
The Stone Wall
Posts: 120
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Re: Roth conversions plans via RPM -- help me compare

Post by The Stone Wall »

celia wrote: Sun Jun 20, 2021 12:05 am
Why would you completely spend down the taxable account while letting the tax-deferred grow? That means when you start using up the tax-deferred, EVERY SINGLE DOLLAR YOU NEED FOR LIVING EXPENSES WILL BE TAXED. And if you do early no Roth conversions, your estimated RMDs of $60K (in your early years, increasing as you age) added to your SS of $43K (at age 70) will give you Taxable income of $60K + 43K - $13K (standard deduction) = $90K, which is in the bottom of the current 24% tax bracket, WITHOUT DOING ANY ROTH CONVERSIONS. At that point, tax brackets would have reverted back to 2017 levels, so you would be at the TOP of the 25% bracket, about to fall into the 28% bracket.
+1
I know many people will suggest using the taxable account, but it just seems like one should try to minimize the pre-tax. Why spend your taxable account knowing that the 'major problem' is the pre-tax. If you spend out of pre-tax and do Roth conversions, you end up with a more manageable RMD. This would maintain your taxable account giving you a combination of Roth, taxable, and pre-tax in the future.
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Eagle33
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Re: Roth conversions plans via RPM -- help me compare

Post by Eagle33 »

DebiT wrote: Sun Jun 20, 2021 1:49 pm I will definitely be doing some version of Roth conversions for at least the next 5 years (tax rates) and perhaps until I am 72. That is a given. My questions in posts above were framed "if I do no Roth conversions..." because that is the baseline case, against which I compare my various options. Part of what I'll be needing to figure out is to make sure my current taxable account last for 5 years minimum, including wiggle room for emergencies, since the Roth is brand new and will have a 5 year waiting period. I did convert $500 into it to open it, so the clock has started. Let this be a lesson to others reading to open one early on if you even think you will be using it. I don't have time to re-run my numbers right now as to when that taxable account will run out, but it will under almost every scenario as I remember it. I don't know at this time how much of the total tIRA will get converted. As I model it will be interesting to see that. My basic model is going to be evening out my marginal tax rates over my life, and using my assumption that current tax law will stand resulting in increased rates starting 2026.
Congratulations on the progress you have made so far. Keep at it.

Just wanted to point out that since you are over 59.5, then 100% of any contributions and conversions are available to you to withdraw without 10% penalty or taxes. Earnings on those contributions/conversions amount after in your Roth is the only part of your Roth IRA that is still subject to taxes until the 5 years account open clock is completed. Refer to the Treatment of Distributions summary table in the Notes section of wiki Roth IRA topic. So you have some more wiggle room!
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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