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Anyone use tax planning pro to help with Roth Conversions?
Old 07-07-2016, 05:48 PM   #1
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Anyone use tax planning pro to help with Roth Conversions?

I have did enough homework to move away from our financial planner and manage our own investments. What I am now looking into is Roth conversions.

We are 55 and 57 and I have $1.1M in my 401K and my wife has 500K in her IRA. I am trying to figure out how to weigh the various factors of
- expected tax rates now and when we hit 70 1/2
- ACA subsidies/cost sharing that we currently qualify for
- Medicare premiums
- assumptions about returns (and therefore values of 401K/IRA @ 70 1/2)
- benefit to heirs if we don't spend it all

The easy thing to do is to convert up to the top of our tax bracket (currently low but will be going up once our cash reserves run out). The problem with that is taking out that amount doesn't put much of a dent in the RMD problem @ 70 1/2. Should I convert all of it or just a portion?

My head is spinning trying to weight all of the options and come up with a reasonable plan. Is hiring a CPA/tax planning person a good idea to put a plan in place?

Would love to know what others have done or would recommend. It is obviously a nice problem to have!


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Old 07-07-2016, 05:59 PM   #2
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There is a current bogleheads.org thread on this. I think the bottom line is that there are no tax pros capable of figuring this out, but you have enough time in retirement to figure it out yourself. Here is the thread:

https://www.bogleheads.org/forum/vie...ewpost=2969573

For myself, we convert up to the top of the 15% tax bracket for now (actually we go slightly above that limit and recharacterize back), but in the future we will probably convert up to the top of the 25% marginal income tax bracket as we get closer to age 70.5. We are in our 50's now and my spouse still works.

We will also leave some unconverted money in traditional IRAs.
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Old 07-07-2016, 11:52 PM   #3
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I agree that there are not any specialists that focus on this out there that I know of.

I-ORP recommends converting much more than I have ever been comfortable converting... though I concede that give the tax-free status of the Roth it might well be the best move.

I created my own retirement plan in Excel, including a simple tax calculation that gave me insight as to our likely tax bracket once my pension and our SS are online and we convert to the top of the next lower tax bracket (15% in our case).

When we retired, out tax-free funds (Roths and HSAs) were ~4% of our total nestegg. Today they are ~16%. According to my plan, at age 70 they will be ~77% of our total nestegg.

The percentage increase in tax-free funds is a combined result of conversions and growth, while our taxable accounts decline due to withdrawals for living expenses and taxes on Roth conversions at @~10% and tax free accounts decline due to Roth conversions.

Without Roth conversions, I project that we would have spent 9 years in the 25% tax bracket after SS starts... with conversions there are none... so I'm willing to pay ~10% now to avoid paying 25% later.
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Anyone use tax planning pro to help with Roth Conversions?
Old 07-08-2016, 12:57 AM   #4
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Anyone use tax planning pro to help with Roth Conversions?

I struggle with this as, at age 64, I don't have that many years left to convert and I'm right on that line where it's difficult to decide whether to convert to t/o 15% bracket or 25%. I've already done the last two years partially into the 25% bracket as - with DW still working full-time and I working part-time (for another month or so) - we've had very little headroom in the 15% bracket yet I felt I needed to get something going.

Crunching some scenarios it pretty much looks like if the market is lackluster for the next half-dozen years or so, I won't want to have gone above the 15% bracket. But if the portfolio does even reasonably well, I'll wish I had.

The biggest risk inherent in not converting above the 15% bracket (for us) is if one spouse should pass much earlier than the other with the survivor then being pushed into a permanently higher bracket by virtue of filing single.
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Old 07-08-2016, 07:03 AM   #5
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Here are two articles on the subject.

Part 1: ACA Optimization in Early Retirement

Part 2: ACA Optimization and Tax Minimization

My anecdotal evidence from casual conversations is that I have not found a CPA/tax planner/FA who knows as much as I do about income impact to ACA subsidies/cost sharing and Medicare premiums. The problem is I know very little about Roth conversions since it doesn't apply to me.
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Old 07-08-2016, 07:32 AM   #6
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Originally Posted by UpAnchor View Post
...

The biggest risk inherent in not converting above the 15% bracket (for us) is if one spouse should pass much earlier than the other with the survivor then being pushed into a permanently higher bracket by virtue of filing single.
+1. This, along with over 75% of portfolio in tax deferred accounts, will be driving us to begin converting at least to the top of the 25% bracket once we retire.
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Old 07-08-2016, 10:09 AM   #7
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Absolutely. We live in a different tax regime however I have no doubt that there are parallels.

We have used a CPA tax specialist for the past ten years. Our financial advisor happens to be a CPA with at tax background as well.

Our tax specialist has saved us a fair amount of money simply by recommending ways to structure our investments and income to be tax efficient. The benefits of her advice/direction have far outweighed the cost.

We never mind paying for professional advice. We are more focused on the results than we are on the fee.
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Old 07-08-2016, 10:37 AM   #8
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The i-orp tool is a good starting point. There is a new feature that allows you to put-in how much your ACA PTC is expected to be, and a limitation on income to keep the ACA running. And the Roth Conversions checkbox. You can run with it on and then off and see what the difference is.
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Old 07-08-2016, 10:40 AM   #9
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Quote:
Originally Posted by pb4uski View Post
...I-ORP recommends converting much more than I have ever been comfortable converting... though I concede that give the tax-free status of the Roth it might well be the best move...
I-ORP wants me to zero-out our large tax-deferred accounts in about 5 years... tax rate be damned. I can't do it. The rate-of-return assumption required to have us pay RMD tax at 28% is highly unlikely, especially with all our bonds in tax-deferred. So i-ORP is just having us prepay at 25% to avoid 25% later. I know that, even with equal tax rates, experts say there is a small advantage due to tax free growth instead of further growing the tax-deferred balances. But again, the key word is small, confirmed by the small spending differential in i-ORP with/without conversions.

And the kicker... there's a much more plausible downside scenario, which would have us paying most of our RMD tax at 15%. So why would I risk that for such a small upside potential? Can't do it. If the markets are kind, I'll happily deal with the tax consequences, or perhaps increase conversions at that time. If the markets are unkind, I'll be very happy I didn't prepay taxes at 25%. So for now, I stop at the top of the 15% bracket, even though this still leaves pretty large tax-deferred balances at 70. This feels like a more reasonable, balanced approach, that creates some withdrawal flexibility down the road without betting the farm on one potentially "optimal" scenario.

I concede that early passing of one spouse fundamentally changes the math. But our baseline planning is always built around actuarial life expectancy.

When I first started struggling with the Roth question, I contacted several tax consultants in the area and had brief meetings with two of them to discuss a possible engagement. Good conversations, but I left both meetings with the feeling that I had a better understanding of the decision process than they did. Mostly, they just wanted my tax prep business, which is not something I need help with. They both suggested I also discuss with my financial adviser, which of course is me. I think it would be somewhat rare and probably quite expensive to find a single financial professional that can comprehensively cover this issue. It pulls in variables from so many different areas of expertise.
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Old 07-08-2016, 10:54 AM   #10
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I-ORP wants me to zero-out our large tax-deferred accounts in about 5 years... tax rate be damned.
That's the problem with optimization...one dollar more and it becomes "the plan", without including the bird in the hand aspect.

Out of curiosity, when you run the same plan with, and without Roth conversions turned-on, does it really make much difference? The white paper posted on the site concludes that in many cases, it doesn't really make much difference.
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Old 07-08-2016, 11:01 AM   #11
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That's the problem with optimization...one dollar more and it becomes "the plan", without including the bird in the hand aspect.

Out of curiosity, when you run the same plan with, and without Roth conversions turned-on, does it really make much difference? The white paper posted on the site concludes that in many cases, it doesn't really make much difference.
As I said in the post, it's small... about 3.5% additional spend with conversions. However, I'm already converting to the top of 15% bracket, which is part of that benefit. So the incremental impact of converting into the 25% bracket is even smaller than 3.5% in my case.
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Old 07-08-2016, 11:20 AM   #12
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I have a spreadsheet to help me decide how much to convert, but I've made a couple mistakes with it over the years. The nice thing about Roth conversion is that if you do too much, you can recharacterize. In fact I think there's a poster on here who makes multiple conversions into different kinds of investments, and keeps the one(s) that did best, and recharacterizes the others.


If I thought I could find someone who understands all of the factors I would pay for the advice, but I would want to understand all of their calculations, because I know how easy it is to overlook something. I haven't actually gone looking for anyone but I'm just not confident I'll find someone who understands all of the pieces for my situation as opposed to a canned formula that may not fit me.


Just off the top of my head, the factors I can think of are:
- current tax rate
- projected future tax rates
- effect of MRDs on taxable SS income if I don't fully convert
- ACA subsidies
- investment returns
- inflation (if nothing else, the effect on tax brackets)
- my deductions and exemptions
- whether it makes sense to alternate years of conversion and taking the ACA subsidy
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Old 07-08-2016, 01:08 PM   #13
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Some other factors of a high AGI in retirement that concern me are:

Impact on Medicare Part B premiums
Possibility of future SS means testing
Tax increases
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Old 07-08-2016, 01:25 PM   #14
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The biggest risk inherent in not converting above the 15% bracket (for us) is if one spouse should pass much earlier than the other with the survivor then being pushed into a permanently higher bracket by virtue of filing single.
I take that would happen because one leaves the other their tax-deferred assets. There are alternatives to that.
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Old 07-08-2016, 01:51 PM   #15
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Old 07-08-2016, 05:50 PM   #16
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Here are two articles on the subject.

Part 1: ACA Optimization in Early Retirement

Part 2: ACA Optimization and Tax Minimization

My anecdotal evidence from casual conversations is that I have not found a CPA/tax planner/FA who knows as much as I do about income impact to ACA subsidies/cost sharing and Medicare premiums. The problem is I know very little about Roth conversions since it doesn't apply to me.
Articles are well done. Thanks.
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Old 07-10-2016, 08:21 AM   #17
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Articles are well done. Thanks.
If I really did a close read on those, I'd really know how it works. One thing that's obvious...the ACA and federal tax code can't each be looked at independently...they're both links to the US treasury. For me, enough income to stay out of Medicaid is good enough! My simple (but personalized) modeling is aligned with what those blog entries are saying.
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