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Old 11-14-2014, 10:55 AM   #61
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4. The amounts converted in the spreadsheet are what take me to the top of the 15% bracket, based on current finances. Since my calculations seem to indicate that Roth conversions are a terrific idea for me, I will be looking into ways to increase the amount I can convert and still stay at 15%.
5. I don't think the inflation rate is relevant for my situation. I have a COLAed pension and SS is also COLAed. They will put me right at the top of the 15% bracket at age 70, and with the COLAs I should stay there for the rest of my life. So I assumed 25% tax on all RMDs and that I could maneuver the taxable account created from the RMDs to produce qualified dividends taxed at 15%.
Thanks. Sounds like we're aligned on the metric. Just a quick clarification on 4 and 5:

4. For the period from age 61-69, when you are doing conversions, can you give me some idea what percentage of the 15% bracket is available for conversions, based on other income sources? 80%? 50%? 20%?
5. For purposes of computing long-term taxes, I assume you are not leaving the current brackets, std deductions, and exemptions fixed at today's levels. They have to be indexed for inflation. I'm asking what rate you use, since that is a fairly significant assumption in my analysis. Or are you using some other approach, like stating everything in today's dollars?

Lastly, as I said before, my spreadsheet can breakdown the ending portfolio difference (do-nothing vs converting) into these 4 components.

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1. upfront taxes paid at 15%
2. growth impact from upfront taxes paid (4.4% growth assumption)
3. tax savings from lower RMDs at 25%
4. tax savings from lower taxable dividends at 15%
For me at least, #1 and #4 and relatively inconsequential, and offset. Mostly, I'm curious why #2 seems to be so small in your situation vs mine, when we use the same growth assumption. The fact that you are starting conversions at 61 (vs 53 for me), may be all or part of the explanation. And if so, that could make a case for delaying conversions. But I was wondering if you could calculate that breakdown at several ages (75, 80, 85, 90), and (without providing numbers) give me some idea about the growth rate of #2 (cost) vs #3 (benefit) across that time period. Thanks again.
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Old 11-14-2014, 12:05 PM   #62
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Thanks everyone for the thread. Much to think about. I've put together a spreadsheet to fairly closely minic our Fed and state taxes. It's amazing how each moves differently when I make a change.
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Old 11-14-2014, 06:46 PM   #63
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Thanks. Sounds like we're aligned on the metric. Just a quick clarification on 4 and 5:

4. For the period from age 61-69, when you are doing conversions, can you give me some idea what percentage of the 15% bracket is available for conversions, based on other income sources? 80%? 50%? 20%?
5. For purposes of computing long-term taxes, I assume you are not leaving the current brackets, std deductions, and exemptions fixed at today's levels. They have to be indexed for inflation. I'm asking what rate you use, since that is a fairly significant assumption in my analysis. Or are you using some other approach, like stating everything in today's dollars?

Lastly, as I said before, my spreadsheet can breakdown the ending portfolio difference (do-nothing vs converting) into these 4 components.



For me at least, #1 and #4 and relatively inconsequential, and offset. Mostly, I'm curious why #2 seems to be so small in your situation vs mine, when we use the same growth assumption. The fact that you are starting conversions at 61 (vs 53 for me), may be all or part of the explanation. And if so, that could make a case for delaying conversions. But I was wondering if you could calculate that breakdown at several ages (75, 80, 85, 90), and (without providing numbers) give me some idea about the growth rate of #2 (cost) vs #3 (benefit) across that time period. Thanks again.
Would you consider posting your spreadsheet for others to see/use? (obviously without your personal data). I have used Excel quite a bit but frankly I don't think I have the talent or patience to model so many decision parameters as you seem to have done.
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Old 11-14-2014, 08:11 PM   #64
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4. For the period from age 61-69, when you are doing conversions, can you give me some idea what percentage of the 15% bracket is available for conversions, based on other income sources? 80%? 50%? 20%?
I am going to have to politely decline to provide that information. I'm fairly sure posting it, combined with what I posted earlier, would allow a curious onlooker to easily calculate my current income and value of my retirement account. Although I doubt that anyone really cares enough to make the calculations, I prefer not to have that information publicly available.


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5. For purposes of computing long-term taxes, I assume you are not leaving the current brackets, std deductions, and exemptions fixed at today's levels. They have to be indexed for inflation. I'm asking what rate you use, since that is a fairly significant assumption in my analysis. Or are you using some other approach, like stating everything in today's dollars?
It simply doesn't make any difference in my calculations, because of the the COLAed nature of my retirement income and the fact that I will be near the top of the 15% bracket. If the 15% bracket increases $500 because of the effects of inflation, I expect my retirement income to also increase by $500. Similarly, a $1,000 increase in tax bracket would give me a $1,000 COLA, and so forth. I can readily imagine that this is an important factor for your spreadsheet, but not for mine.



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Lastly, as I said before, my spreadsheet can breakdown the ending portfolio difference (do-nothing vs converting) into these 4 components.

1. upfront taxes paid at 15%
2. growth impact from upfront taxes paid (4.4% growth assumption)
3. tax savings from lower RMDs at 25%
4. tax savings from lower taxable dividends at 15%

For me at least, #1 and #4 and relatively inconsequential, and offset. Mostly, I'm curious why #2 seems to be so small in your situation vs mine, when we use the same growth assumption. The fact that you are starting conversions at 61 (vs 53 for me), may be all or part of the explanation. And if so, that could make a case for delaying conversions. But I was wondering if you could calculate that breakdown at several ages (75, 80, 85, 90), and (without providing numbers) give me some idea about the growth rate of #2 (cost) vs #3 (benefit) across that time period. Thanks again.
#3 gradually overwhelms #2. The dollar amount is roughly the same as the difference in portfolio values as the Roth conversion option overtakes the do nothing option. This is what the math says should happen, and my spreadsheet confirms it. $.85 in a Roth is worth less than $1.00 in a tax deferred account only until the tax deferred money is withdrawn as part of an RMD. Then the 25% tax bite makes the Roth a winner. As an example, consider, say, $8,500 in a Roth at age 70 vs. $10,000 tax deferred at age 70. At age 90, the Roth money has compounded by 4.4% per year and is now worth $20,110 with no further taxes due. The tax deferred money has compounded to $23,659 and seems to be winning. But now an RMD mandates a withdrawal of the $23,659 and you pay 25% tax on it, leaving you with only $17,744. You have lost over $2,300 by holding the money in a tax deferred account rather than a Roth.

So to me the discrepancy in our results is likely to stem from differing RMD calculations. My numbers indicate that the RMD tables mandate ever increasing withdrawals that gradually overwhelm the 4.4% tax sheltered growth. You seem to be saying that you can shelter more of the tax deferred money longer than I think the IRS will allow.
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Old 11-15-2014, 12:00 AM   #65
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Would you consider posting your spreadsheet for others to see/use? (obviously without your personal data). I have used Excel quite a bit but frankly I don't think I have the talent or patience to model so many decision parameters as you seem to have done.
Funny, I had almost posted the same request, with all personal data removed of course.
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Old 11-15-2014, 10:40 AM   #66
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At age 70.5, if current laws do not change, one can make a QCD which covers their RMD. One may say, "But I need that money to pay expenses?" That's where all those previous Roth IRA conversions help you. Don't forget that you are allowed to withdraw from a Roth and not pay taxes on those withdrawals.

I do not understand what this is suggesting, and my Google search for QCD is not helping. Please explain this "current law" and QCD. Thanks.
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Old 11-15-2014, 10:49 AM   #67
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I do not understand what this is suggesting, and my Google search for QCD is not helping. Please explain this "current law" and QCD. Thanks.
Qualified Charitable Deduction = QCD. More here

I "get" that it's a tax efficient way to give to a charity, but I'm still trying to get my mind around how it would help a person wind up with more money to spend.
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Old 11-15-2014, 11:33 AM   #68
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#3 gradually overwhelms #2. The dollar amount is roughly the same as the difference in portfolio values as the Roth conversion option overtakes the do nothing option. This is what the math says should happen, and my spreadsheet confirms it. $.85 in a Roth is worth less than $1.00 in a tax deferred account only until the tax deferred money is withdrawn as part of an RMD. Then the 25% tax bite makes the Roth a winner. As an example, consider, say, $8,500 in a Roth at age 70 vs. $10,000 tax deferred at age 70. At age 90, the Roth money has compounded by 4.4% per year and is now worth $20,110 with no further taxes due. The tax deferred money has compounded to $23,659 and seems to be winning. But now an RMD mandates a withdrawal of the $23,659 and you pay 25% tax on it, leaving you with only $17,744. You have lost over $2,300 by holding the money in a tax deferred account rather than a Roth.

So to me the discrepancy in our results is likely to stem from differing RMD calculations. My numbers indicate that the RMD tables mandate ever increasing withdrawals that gradually overwhelm the 4.4% tax sheltered growth. You seem to be saying that you can shelter more of the tax deferred money longer than I think the IRS will allow.
Karluk, thanks again for allowing me to pick your brain. RMD calculations are actually the most straightforward part of this entire analysis. I highly doubt that plays any role in our differing conclusions.

After several more hours of checking everything, I think I may have found the problem. My spreadsheet logic and calculations are correct, but I gave you some incorrect information. The weighted average growth assumption of my portfolio is indeed 4.4%. However, that consists of 4.1% in the tax-deferred accounts (50/50), and 5.4% in the taxable account (virtually all equities). The upfront tax is assumed to be paid from the taxable account, so the growth impact (#2 in my breakdown) is actually being calculated at 5.4%, not 4.4%. When I temporarily substitute 4.4% for the taxable accounts, the results are much more in-line with yours... breakeven at 84, then the net impact grows positive at a very fast rate.

If you might indulge me one more time just to verify this... Could you run a what-if (do-nothing vs convert) using your spreadsheet at 5.4%? If the results are similar to mine (negative result that gets bigger over time), then I think we can put this to rest. If your results are not similar at 5.4%, can you tell me what rate of return assumption is required to produce the no-go conclusion? Thanks.
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Old 11-15-2014, 11:49 AM   #69
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Would you consider posting your spreadsheet for others to see/use? (obviously without your personal data). I have used Excel quite a bit but frankly I don't think I have the talent or patience to model so many decision parameters as you seem to have done.
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Funny, I had almost posted the same request, with all personal data removed of course.
This may not be entirely possible, as this is my main retirement planning spreadsheet, and is thus highly customized for our specific situation. Once I extract personal information, it may not make any sense. The Roth tab in particular is pretty disorganized right now, and not documented very well, such as column headings that only I would understand.

Let me finish validating results with karluk and then I'll give it a try.
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Old 11-16-2014, 08:55 AM   #70
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Could you run a what-if (do-nothing vs convert) using your spreadsheet at 5.4%? If the results are similar to mine (negative result that gets bigger over time), then I think we can put this to rest. If your results are not similar at 5.4%, can you tell me what rate of return assumption is required to produce the no-go conclusion? Thanks.
If you not only took taxes out of a taxable account with the 5.4% growth rate, but also deposited RMDs to the same account, then the extra expected return of your portfolio gives an advantage to the do nothing option that is almost impossible to overcome, even if RMDs were taxed at a much higher rate than 25%. My estimate is the RMD tax rate would have to be around 40% for the tax advantage of Roth conversions to compensate for the lower growth rate.

If I may be permitted a short digression, I think I encountered an assumed growth assumption that caused a bias in favor of early Roth conversions when experimenting with the I-ORP calculator. I entered a higher expected return for the Roth account than the tax deferred account. That's because my Roth account is much more heavily invested in equities than my tax deferred account. I-ORP went absolutely crazy making massive Roth conversions, even putting me into the 28% tax bracket one year. This may have just been typical for how it works, but it occurred to me that it may have figured that I would continue with the higher stock composition of the Roth account, rather than rebalancing to reestablish my preferred asset allocation. As a result, the higher assumed growth inside the Roth provided a powerful incentive to get money into the account, even at a much higher tax rate.

So once I identified a likely cause for finding myself paying 28% on Roth conversions, I gave up on I-ORP. I think it's valid to assume different growth rates for different accounts, but a Roth conversion calculator needs to carefully avoid allowing asset allocation to drift after a Roth conversion in order to produce valid results.
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Old 11-16-2014, 11:43 AM   #71
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I am among those who perceive a tremendous number of moving parts in our computations and approach to this problem. Complicating matters is the temptation to give lower lifetime tax payments a priority even higher than the amounts available to spend after paying taxes.

For those of us whose retirement is not especially early (mine was at age 61.5), most of this seems less important than I initially thought. At first I planned to not claim SS until age 70. Between SS and RMDs, I thought that would create a huge tax hit in my 70's compared with taxes in my 60's. To combat this tax situation I withdrew about twice the sustainable amount from my TSP (~=401K), using that for spending money and taking less from my taxable portfolio. The idea was to draw down my TSP considerably in order to minimize my RMD's once I hit age 70.5.

But earlier this year at age 66, only 4.5 years after retirement, I discovered that I can get divorced spousal SS while still delaying my own (still growing) SS until age 70. So, I am getting SS now, unexpectedly early. I cut back on my TSP withdrawals to a sustainable amount. I have "battened the hatches" and I am mentally ready for RMDs to hit in just 4 more short years. I projected my future TSP annual balances, determined the RMD amounts, and honestly they aren't as much as I feared they might be.

Like I said, too many moving parts! I think each of us has developed our own customized approach that we feel will best address these issues.
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Old 11-16-2014, 12:19 PM   #72
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Qualified Charitable Deduction = QCD. More here

I "get" that it's a tax efficient way to give to a charity, but I'm still trying to get my mind around how it would help a person wind up with more money to spend.
From what I can find on the web, the QCD provision expired at the end of 2013, and has not (yet) been extended by Congress, although there is speculation that it will be.
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Old 11-16-2014, 12:37 PM   #73
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While we each may have developed our own approach, I am sure that some of us are simply wrong, like the music band that stayed on the Titanic while it sank.
I'm trying to learn subtle effects of actions from the discussion so I certainly value all input.
I agree the temptation to not pay much in taxes is present, sort of like the easy spending money in credit cards, but the bill of much higher taxes due to RMD + 85% of SS is the price I don't want to pay (like the final bill in credit card over-spending).

Certainly I think this affects different people to different degrees, mostly based on their tax rate when working, and their actual tax-deferred savings amount.
People who have very little in IRA/401K and no pension, don't even see this issue, they just exist on SS and maybe 5K RMD per yr.
As well someone who has amassed a huge 401K/IRA by age 60 is going to be socked hard regardless of how much is pulled out at 25% (married could only pull out ~ 1.5MM if no other income in 10 yrs, but likely has taxable dividends, so reduced a lot).
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Old 11-16-2014, 12:58 PM   #74
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If you not only took taxes out of a taxable account with the 5.4% growth rate, but also deposited RMDs to the same account, then the extra expected return of your portfolio gives an advantage to the do nothing option that is almost impossible to overcome, even if RMDs were taxed at a much higher rate than 25%. My estimate is the RMD tax rate would have to be around 40% for the tax advantage of Roth conversions to compensate for the lower growth rate.
Thank you for confirming this.

For my situation, holding all other assumptions constant, Roth conversions only make sense for assumed growth rates in the taxable account below 4%. Even then, the breakeven point comes so late in life (early 80s), that I still don't think I would do it. Assumed rates above 4% in the taxable account favor the do-nothing scenario. My current assumption of 5.4% is a clear no-go on conversions.

My portfolio is structured in a very conventional, tax-efficient manner. I hold mainly equities (including international), along with some real estate and muni bonds in the taxable account. This produces tax-advantaged income, with a relatively high long-term expected return. The tax-deferred accounts hold a 50/50 mix of bonds and equities, which produce high levels of interest income, with a relatively lower long-term expected return. In both cases, the conservative growth assumptions include a 1.5% haircut from the expected returns calculated by applying Portfolio Solutions' 30-year market estimates to my specific portfolio mix. I've not done anything which would intentionally bias the Roth conclusion... just using the parameters that naturally result from a rather conventional portfolio structure and AA.

As a legacy planning tool, Roth conversions still have some merit in my situation. If I measure the ending portfolio differences (do-nothing vs convert) on an after-tax basis (i.e. reduce the tax-deferred accounts by the amount of tax still owed - by someone - to the IRS), then the conversion scenario wins. But at this early point in our retirement, our overall preparedness is not so in-the-bag, that our most efficient use of cash is to start prepaying taxes for the kids. In addition, the recent proposals to require RMDs on Roths, and to require non-spousal beneficiaries to take distribution within 5 years, are not an encouraging development for Roth legacy strategies. Of course these proposals are unlikely to pass in the near-term, given the political dysfunction in Washington. But since they are clearly high on the list of revenue-generating ideas, I think it is inevitable they will pass at some point in the next 3-4 decades before any non-RMD'ed Roth account would pass to my heirs.

Unless something dramatic changes, I'm staying on the sidelines, and leaving Uncle Sam's money where I like it best... in my accounts.
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401k's, IRA's and RMD's - tax consequences
Old 11-16-2014, 08:38 PM   #75
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401k's, IRA's and RMD's - tax consequences

This is the holy grail of long term retirement tax planning. An additional wrinkle for me is that my iBonds will begin to mature at age 70, adding even more taxable income to all these other considerations.


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Old 11-16-2014, 11:45 PM   #76
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As a legacy planning tool, Roth conversions still have some merit in my situation. If I measure the ending portfolio differences (do-nothing vs convert) on an after-tax basis (i.e. reduce the tax-deferred accounts by the amount of tax still owed - by someone - to the IRS), then the conversion scenario wins. But at this early point in our retirement, our overall preparedness is not so in-the-bag, that our most efficient use of cash is to start prepaying taxes for the kids.
Isn't comparing the difference on an after-tax basis, the only fair way to compare? Even if you are only considering your lifetime, in order to use funds from the TIRA, you have to pay taxes when you withdraw.
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Old 11-17-2014, 08:33 AM   #77
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Isn't comparing the difference on an after-tax basis, the only fair way to compare? Even if you are only considering your lifetime, in order to use funds from the TIRA, you have to pay taxes when you withdraw.
My model fully comprehends all taxes due during my lifetime, including withdrawals/RMDs from tax-deferred accounts. I do not "accrue" future taxes due after my death, except when my objective is to evaluate Roth conversions as part of a legacy planning strategy. And as I said before, that is a distant secondary objective for us at this early point in retirement.
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Old 11-17-2014, 08:41 AM   #78
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Isn't comparing the difference on an after-tax basis, the only fair way to compare? Even if you are only considering your lifetime, in order to use funds from the TIRA, you have to pay taxes when you withdraw.
I'm interested in getting Cobra's take on this issue, since it's far from clear that he's using the right metric to measure the benefit of early Roth conversions, even if restricted just to his own lifetime, but my take is that it's considerably more complicated than just saying "he's doing it right" or "he's doing it wrong". On the one hand, although his spreadsheet appears to be doing the calculations correctly, it seems clear that his methodology is quite suspect. It seems to share with the I-ORP calculator a tendency to produce long term asset allocation shifts as a result of the Roth conversions that bias the result either for or against Roth conversions. I also agree with your point that, with the assumptions he's making, the money remaining in the tax deferred account does him practically no good at all - he can't withdraw it without triggering rather punitive taxes. Contrast this with what is probably hundreds of thousands of dollars in the Roth IRA that would be available to him with a few clicks of a mouse, and with no tax consquences whatsoever. He's definitely sacrificing a lot of "robustness" in his future choices in order to get the numbers to work for him.

On the other hand, it's just not that clear. Even though we don't have a better estimate than a 25% tax rate on RMDs, it strikes me as quite laughable to try to predict with any accuracy the actual taxes that a 53 year old like Cobra will actually pay on his RMDs a couple of decades from now. It all depends on future changes in the tax law, the exact amount of his other income, and whether he can figure out a way to make some of the RMDs tax deductible. It's defintely within the range of possibilities that his RMD tax rate might be lower than 25%, perhaps much lower. And in any case, Cobra and I both agree that he personally won't see the rewards of early Roth conversions in his balance sheet until he is in his eighties. That's a long time to wait for a bet on early Roth conversions to pay off.
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Old 11-17-2014, 08:50 AM   #79
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If you not only took taxes out of a taxable account with the 5.4% growth rate, but also deposited RMDs to the same account, then the extra expected return of your portfolio gives an advantage to the do nothing option that is almost impossible to overcome, even if RMDs were taxed at a much higher rate than 25%. location to drift after a Roth conversion in order to produce valid results.
In this analysis are you comparing the raw data....i.e. TIRA valued at face value(untaxed) and Roth also at face value (taxed already)? If true and if you were planning on donating all the TIRAs to charity, that might be a fair thing to do but otherwise, it kind of feels lilke apples vs oranges?
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Old 11-17-2014, 09:15 AM   #80
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In this analysis are you comparing the raw data....i.e. TIRA valued at face value(untaxed) and Roth also at face value (taxed already)? If true and if you were planning on donating at the TIRAs to charity, that might be a fair thing to do but otherwise, it kind of feels lilke apples vs oranges?
Yes, that's correct. For each year in retirement, I calculated total portfolio value as the sum of Roth IRA + tax deferred + taxable after paying taxes due that year, but without regard to future tax liability. I agree that it has a vague sense of comparing apples to oranges, but it's hardly a radical way to assess one's net worth at any given point in time. I bet the people who just add up the raw numbers greatly outnumber the ones who make adjustments for future tax liability.
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