Roth Conversion (with spreadsheet!)

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marcopolo
Posts: 4481
Joined: Sat Dec 03, 2016 10:22 am

Re: Roth Conversion (with spreadsheet!)

Post by marcopolo »

smitcat wrote: Tue Jul 20, 2021 9:24 am
marcopolo wrote: Tue Jul 20, 2021 2:30 am
Free to Choose wrote: Mon Jul 19, 2021 9:57 pm
NancyABQ wrote: Mon Jul 19, 2021 9:42 pm
marcopolo wrote: Mon Jul 19, 2021 9:31 pm

I-ORP would be essentially useless in his [her] case, maybe even harmful, for evaluating Roth Conversions.
I did play with I-ORP, but I did not find it very useful for my case. Amongst other things, the inability to accurately reflect the AA in TIRA vs. Taxable/Roth matters a lot. I think I-ORP told me I could be spending about $160K instead of my current target of $100K.

I can easily increase my spending in the spreadsheet by increasing the amount withdrawn from the taxable account (or possibly inherited IRA) in the pre-RMD years. My playing around so far seems to confirm that I don't spend enough relative to my portfolio size, but I've never been big on budgets -- maybe I spend more than I think I do :)

I was thinking of refining the spreadsheet to differentiate between spendable money and taxable income, but so far I have just been eyeballing that.
i-ORP does provide different rate of returns for each account. Isn't that the same as asset allocation for you? I think so.

I would also feel a little uneasy spending so much more money than what I think is reasonable or comfortable. I would consider looking at the VPW spreadsheet and some others sources for withdrawal values. If my essential living expenses were covered by guaranteed income (Social Security, Pension, Annuity, etc) and less than 2% of my investment portfolio, I would be more comfortable spending at the higher of the withdrawals values.
All that accomplishes is I-ORP pushing dollars from the low return account to the higher return account, either through spending or Roth Conversions. That is what it is designed to do. It is trying to maximize spending. It does so by capturing the highest returns. Unfortunately, it does not care about your overall AA, so happily takes on more risk to achieve those higher returns. In many cases, the improved spending people see, and attribute to Roth Conversions, actually comes from taking on more risk by transferring dollars from fixed income in TDA to equities in Roth, and increasing their overall equity allocation.

"All that accomplishes is I-ORP pushing dollars from the low return account to the higher return account, either through spending or Roth Conversions. That is what it is designed to do"
You have described this IORP issue well in many posts so hopefully folks start to understand this issue better.
The work around has also been described but it has many limits - In IORP just set each account to the same AA and leave it that way to run the Roth conversion analysis.
We have a better track record using the RPM tool and Pralana for evaluating Roth's - but if the IORP is contrained to the exact same fixed AA's in all acoounts and still comes out ahead it is likely a good sign that pursuing more anyalsis is well worth the time.
I feel like a broken record sometimes, but still see people continue to push I-ORP for this purpose.
That work around improves things somewhat, but still greatly overstates the case for Roth Conversions. if one is 60/40 AA, that will make the TDA appear to grow significantly faster than it really would at 100% FI, making larger Roth Conversion appear appropriate when they aren't.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
NancyABQ
Posts: 393
Joined: Thu Aug 18, 2016 3:37 pm

Re: Roth Conversion (with spreadsheet!)

Post by NancyABQ »

marcopolo wrote: Tue Jul 20, 2021 12:44 pm I feel like a broken record sometimes, but still see people continue to push I-ORP for this purpose.
That work around improves things somewhat, but still greatly overstates the case for Roth Conversions. if one is 60/40 AA, that will make the TDA appear to grow significantly faster than it really would at 100% FI, making larger Roth Conversion appear appropriate when they aren't.
FWIW, I understand your point, which is why I am not using I-ORP for serious modelling of Roth Conversions :)
Topic Author
NancyABQ
Posts: 393
Joined: Thu Aug 18, 2016 3:37 pm

Re: Roth Conversion (with spreadsheet!)

Post by NancyABQ »

Okay, one more update of my spreadsheet here: https://docs.google.com/spreadsheets/d/ ... sp=sharing

This one includes:
1) Modelling of an Inherited IRA -- both RMDs and additional distributions
2) Modelling of non-taxable withdrawals of Roth and HSA (plus HSA contributions)
3) More accurate federal tax calculations. It assumes all Capital Gains/Qual Div will be taxed at 15%, and calculates the marginal bracket as the bracket where additional ordinary income falls.

Other assumptions
4) Taxable withdrawals are 100% taxable at 15%, which will overestimate taxes
5) Uses current tax brackets throughout, rather than following current tax law that would revert to higher brackets after 2025
6) I'm treating taxable and Roth as 100% equities, and TIRA (and inherited IRA) as 20/80. At some point the TDA's will be 100% fixed and some fixed income will need to go into taxable or Roth.

For my particular case, I can get a pretty flat tax curve with modest Roth conversions in the years between 59 and 63, then a few extra withdrawals from the Inherited IRA after 65. 22-24% marginal rate and IRMAA tiers 2-4 depending on how I tweak things.

I am pretty happy with it for my situation, but if anybody sees any bugs or has enhancement suggestions, let me know!

I played around with Retiree Portfolio Model (RPM) and got it to load into LibreOffice and apparently work correctly, but I find it a bit frustrating (and overwhelming) to use. So many entries to make and I wasn't sure I had them all correct! It's clearly way more sophisticated, but maybe too much for my needs.
ChrisC
Posts: 1029
Joined: Tue Jun 19, 2012 9:10 am
Location: North Carolina

Re: Roth Conversion (with spreadsheet!)

Post by ChrisC »

NancyABQ wrote: Tue Jul 20, 2021 10:36 am Okay, this made me check. The policy is too old for them to allow online access, so I had to call them directly.
Coverage is $250/day, waiting period 30 days, lifetime max ~$456,000 (approx 5 years). Various details about Nursing Home vs. Home Health Care, etc.
Sounds pretty darn good for $413/year!
Don't want to side-track this thread, but that's a fabulous policy. I suspect it was and continues to be subsidized by the employer. Just as a point of reference, I consider my policy a fairly decent one; I pay $2K/year, with a 90 day waiting period, lifetime max over 5 years at $560K (with an inflation adjustment). And I've had several increases since I purchased it in 2003. My policy is employer sponsored (Federal Government) but not employer subsidized. Keep that policy, especially if the premiums have no real possibility of escalating under the deal your employer struck with the insurer.
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Roth Conversion (with spreadsheet!)

Post by smitcat »

sc9182 wrote: Tue Jul 20, 2021 12:08 pm
smitcat wrote: Tue Jul 20, 2021 11:40 am
I have asked these questions before and received no answers which would support the stategy.
Here is a link to one such post...

viewtopic.php?f=2&t=351369&p=6068863#p6068863
Since this Poster excited about Roth., let me ask for counterfactual. If Roth conversion likley to provide barely slight advantage “over longer term” (Prof. McQ thread) — how is someone going to ensure Roth’s long term survival - to effectuate its break-even-point/success. Or if unable to achieve longer longevity (sorry), what action one going to take to reduce short-term Roth’s conversion-loss due to early demise of Roth holder !? Got an idear ?

Do note: many “large” and long-term Roth conversions are likely to involve some tax-realization towards paying conversion taxes — most often done from brokerage (likely with some embedded cap gains). Hence, upon the initial years of Roth conversion (s) — it’s likely Roth conversion would lose against free step-up basis of Brokerage monies used (with embedded cap gains) to pay for conversion-taxes. If such cap-gains not realized until death — likely, they would get free step-up upon early demise of the Brokerage/Roth holder. Alas, the Recently realized cap-gains negated put Roth “net” portfolio value to be lower than that of {TDA + Brokerage (with some embedded cap gains)}

I am OK with Roth, and especially like MBR (excess savings/investing go here prior to Brokerage). But Roth conversions at marginal rates higher than 22-24% (and/or considering some NIIT, IRMAA tier points), are less likely to assure conversions' success. Then again -- very specific (a Few BHers) individual cases -- larger/extended Roth conversions could make sense. But do crunch numbers ..
"Hence, suggestion of limited amount of life-insurance (not costlier varieties) to juice up “net” kitty at inheritance (and bettering average tax rate especially prior to their TDA balances conversions window)."

Which life insurance do you have or do you suggest?
What is the cost per XXX for a 60 year old for that insurance?
Are there limitations based on current health for that insurance?
Does the insurance have a fixed payout or is it adjusted for inflation?
Please describe how this would work....
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