Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 05-15-2014, 01:32 PM   #61
Full time employment: Posting here.
 
Join Date: Mar 2008
Posts: 637
If I run the Monte Carlo in ORP, I get a "worse case" number. Is this number, in theory, the safe amount to spend after taxes, and assures my portfolio does not run out, before death based on the numbers and ages we entered?
__________________

__________________
bizlady is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

ORP Monte Carlo
Old 05-16-2014, 06:59 AM   #62
Dryer sheet aficionado
 
Join Date: Nov 2013
Location: Clarksville
Posts: 37
ORP Monte Carlo

Quote:
Originally Posted by bizlady View Post
If I run the Monte Carlo in ORP, I get a "worse case" number. Is this number, in theory, the safe amount to spend after taxes, and assures my portfolio does not run out, before death based on the numbers and ages we entered?
I'm afraid not: Worst case is the smallest spending value recorded from the set of problems solved with different random Rates of Return. Run ORP again and you will get a different but similar worst case value.
__________________

__________________
orplanner is offline   Reply With Quote
Old 05-16-2014, 09:16 AM   #63
Full time employment: Posting here.
 
Join Date: Mar 2008
Posts: 637
Quote:
Originally Posted by orplanner View Post
I'm afraid not: Worst case is the smallest spending value recorded from the set of problems solved with different random Rates of Return. Run ORP again and you will get a different but similar worst case value.
I am still confused. Isn't the whole point of ORP to show you your spending level and the withdrawal sequence? OPR shows a higher spending than we are comfortable with, but has given us some new ideas on withdrawal sequence.

If worse case is smallest spending value- is that the smallest spending within all the sequences run- thus it would be safe? (ran monte carlo three times and got the same worse case number each time- thought the other numbers varied some)
__________________
bizlady is offline   Reply With Quote
ORP
Old 05-17-2014, 08:18 AM   #64
Dryer sheet aficionado
 
Join Date: Nov 2013
Location: Clarksville
Posts: 37
ORP

Quote:
Originally Posted by bizlady View Post
If worse case is smallest spending value- is that the smallest spending within all the sequences run- thus it would be safe?
The worst case represents a situation in which the randomly selected returns on investment were mostly pretty dismal. There are no absolutes in retirement planning but the probability of actually meeting or exceeding the worst case is very small. So worse case can viewed as safe for planning purposes.
__________________
orplanner is offline   Reply With Quote
Old 05-17-2014, 08:58 AM   #65
Full time employment: Posting here.
Golden sunsets's Avatar
 
Join Date: Jun 2013
Posts: 734
Quote:
Originally Posted by adrift View Post
Trying to figure out how to optimally convert from my tIRA to ROTH is something I've been thinking about. So, based on this post, I've been trying to see if i-orp would be helpful. Perhaps I'm doing something wrong. But, at least from my attempts, it's advice is both wrong and harmful.

We have a substantial amount of our portfolio in tIRA's and 401K's at our prior megaCorp employer. We have a much larger amount of our portfolio in taxable. Our taxable portfolio yields multiple $10,000 in qualified dividends. We pay no federal taxes on these dividends.

Our strategy is to convert as much of our tIRA (and then 401K) as we can to ROTH up to the top of the 15% bracket.

I entered our approximate portfolio into i-orp. It's input did allow a % return on our taxable portfolio but then didn't seem to consider it in its tax strategy.

Its advice was to convert up to the top of the 15% bracket from tIRA/401K to ROTH (ignoring any other income from our taxable portfolio). It also carefully showed us the tax we would pay on that amount (also, ignoring any other income from our taxable portfolio).

I know for our situation that if we convert IRA's beyond the top of the 15% bracket we'll be taxed at a 30% marginal rate (not at 25% as some assume).

I've seen several positive comments on this tool. Is there some value to this program that I'm missing? Is it broken?
Adrift: Could you explain why you would jump from the 15 percent bracket directly to the 30? There isn't a 30 percent federal bracket is there?
__________________
Golden sunsets is offline   Reply With Quote
ORP's mystery Modeling
Old 05-17-2014, 10:55 AM   #66
Full time employment: Posting here.
Golden sunsets's Avatar
 
Join Date: Jun 2013
Posts: 734
ORP's mystery Modeling

In my post above I asked adrift to explain the jump from 15 to 30% and now understand where the concept comes from. To the extent that the money withdrawn from taxable money is all LTCG one would pay an additional 15% on that money as well. Got it.

My own puzzle with ORP is as follows:

DH and My tIRA represent 2/3's of our investments. We are aware that converting to Roth's is a good tax strategy, however because we have had substantial income in recent years and will for the current year, we have been unable to take advantage of Conversions, except for a small conversion several years ago. Our tIRA's are roughly equal. We will have no earned income after this year and will start the draw down in January. DH will be 70.5 in 2017. I will be 70.5 in 2019. My excel modeling shows that we would be in the 15% tax bracket for 2015 and 2016 only, based on Pension income with no Roth Conversions and after two years in the 25% bracket would jump to the 28% bracket when I turn 70.5, which is the year that I will first claim SS. That is also the year that our combined RMD's exceed our withdrawal needs. We would jump to the 33% tax bracket in 2028.

Our modeling with Roth conversions shows that we can avoid the 33% bracket entirely by spreading out our tIRA/conversion to Roth's over many years, with the first four years being the biggest Roth Conversion years as RMD's don't reduce our conversions for two years in DH's case and 4 years in my case.

My two spreadsheets (with and without Roth) are by no means perfect(I'm still working out the bugs)and I have yet to factor in possible AMT's and reduction of exemptions. But the plan seems to show me that we will save roughly $900,000 in taxes over our time horizon which I've run out to age 100. Additionally we leave an estate that is significantly larger and about 75% non taxable (Roth $).

I ran ORP yesterday and although the results are similar with respect to overall tax savings, ORP has us converting very heavily to ROTH in years 1-5, with withdrawals after that equaling the RMD. Additionally during those 5 years we would pretty much exhaust our taxable account. I get the fact that we have to use the next four years to max our ability to convert, however during those 5 years we would be in the 33% bracket just based on the TIRA withdrawal. I have not even factored in LTCG's taxes. It just seems counterintuitive to me to do this so aggressively, when we can stay out of the 33% indefinitely by spreading out the W/D's.

I've noticed that one of the ORP Planner's is now on this board. I was hoping he could weigh in on ORP's methodology on this front loading when it pushes one into the higher tax bracket.

We have until the end of 2015 to do the first W/D and I don't completely trust my modeling, so I need to have a professional vet this. Do any of the wise members on this board have a suggestion on what type of professional advise to seek? Accountant? Actuary? FP? (I don't think a FP is the way to go.)
__________________
Golden sunsets is offline   Reply With Quote
Old 05-17-2014, 11:14 AM   #67
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 60
Quote:
Originally Posted by Golden sunsets View Post
In my post above I asked adrift to explain the jump from 15 to 30% and now understand where the concept comes from. To the extent that the money withdrawn from taxable money is all LTCG one would pay an additional 15% on that money as well. Got it.
That's the right way to think about it. But, in our case it's qualified dividends which are treated the same way.

I don't know where you live. But, you should also look at your state tax law. In our state, once I turned 55 I could exclude up to $20,000 of retirement income from state taxes. Once I'm 65, it's up to $24,000. Roth conversions count. Social security counts. I'm not eligible for SS yet. So, my Roth conversions are lowering my state taxes. My wife just turned 55. So, we can get the same benefit with her Roth conversion.
__________________
adrift is offline   Reply With Quote
Old 05-17-2014, 01:06 PM   #68
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 60
Quote:
Originally Posted by Golden sunsets View Post
I've noticed that one of the ORP Planner's is now on this board. I was hoping he could weigh in on ORP's methodology on this front loading when it pushes one into the higher tax bracket.
Go back and read ORP Planner's post #60. It essentially says the tool doesn't work if you have income from a taxable portfolio.
__________________
adrift is offline   Reply With Quote
Old 05-17-2014, 01:29 PM   #69
Full time employment: Posting here.
Golden sunsets's Avatar
 
Join Date: Jun 2013
Posts: 734
Quote:
Originally Posted by adrift View Post
Go back and read ORP Planner's post #60. It essentially says the tool doesn't work if you have income from a taxable portfolio.
I see that adrift, but the my question regarding "why would ORP bump me into the 33% tax bracket for the next 5 years rather than spreading out WD's over more years and staying in the 28% tax bracket" is still a question that I have, irrespective of the additional tax from cashing out taxable investments.
__________________
Golden sunsets is offline   Reply With Quote
Old 05-17-2014, 02:41 PM   #70
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 60
Quote:
Originally Posted by Golden sunsets View Post
I see that adrift, but the my question regarding "why would ORP bump me into the 33% tax bracket for the next 5 years rather than spreading out WD's over more years and staying in the 28% tax bracket" is still a question that I have, irrespective of the additional tax from cashing out taxable investments.
This is an "educated" guess on my part.

The way it is broken is to ignore income from a taxable portfolio. From your description. I think you probably have such income. If so, it doesn't realize that it has pushed you into the next bracket. Hence, the harmful advice.

[edit]
On second thoughts, my guess may not be so "educated". Is it actually telling you that you are taxed at 33%? In my case it told me to convert a lot and then lied about the tax consequences.
__________________
adrift is offline   Reply With Quote
Old 05-17-2014, 04:36 PM   #71
Full time employment: Posting here.
Golden sunsets's Avatar
 
Join Date: Jun 2013
Posts: 734
Hi adrift; I just spent a few hours plugging in aggressive conversions over the next 11 years into my spreadsheet model (as ORP did) and I think I have just validated the ORP model. Not only do I pay even less taxes than in my own "slower conversion rate" model, but the final estate is 25% larger. This occurs despite the fact that we are in the 33% tax bracket for 10 years before dropping into the 28% bracket for two years and then the 25% bracket until the end.

The factor that I wasn't taking into consideration is by stretching out the conversions, that money is growing longer in accounts that will eventually be taxed at regular income rates, once converted. By converting earlier and biting the tax bullet, (even though it pushes us into a tax bracket that we would not otherwise fall into) the funds are transferred to Roth accounts where they grow and are never taxed again. Using our taxable funds to pay the taxes on the conversions enables all of the funds to be converted over and above RMD's.

The fact that I was able to replicate the same results using my own model gives me more confidence that this is the right strategy, but I still need another set of accuarial eyes to validate this strategy before implementing it in 2015.
__________________
Golden sunsets is offline   Reply With Quote
Old 05-17-2014, 04:46 PM   #72
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,315
Quote:
Originally Posted by Golden sunsets View Post
The factor that I wasn't taking into consideration is by stretching out the conversions, that money is growing longer in accounts that will eventually be taxed at regular income rates, once converted. By converting earlier and biting the tax bullet, (even though it pushes us into a tax bracket that we would not otherwise fall into) the funds are transferred to Roth accounts where they grow and are never taxed again. Using our taxable funds to pay the taxes on the conversions enables all of the funds to be converted over and above RMD's.
Another factor in favor of the aggressive Roth conversions suggested by ORP is that I won't even touch the Roth money for another 10 years. That's 10 years of growth I won't be taxed on. Even after I start taking funds from the Roth accounts, I will do so for another 30 years (assuming I live that long ). So, another 30 years of tax free growth.

My 2 cents.
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 05-17-2014, 04:57 PM   #73
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,815
Quite a few references in this thread to personally crafted spreadsheets. I wonder, is there a thread or should we start a thread that describes how these models are constructed? I would like to see descriptions of what each column is included, a description of the formula, etc. I constructed a sheet a long while back, but it was fairly basic. I'd like to construct or adapt a sheet some day, and I'd like it to be fairly detailed. It would be cool to start the model by matching inputs with i-orp and seeing the same outputs. Then extra things could be piled on...the things currently not available in the tool.
__________________
sengsational is offline   Reply With Quote
Old 05-17-2014, 04:59 PM   #74
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 60
Quote:
Originally Posted by Golden sunsets View Post
Hi adrift; I just spent a few hours plugging in aggressive conversions over the next 11 years into my spreadsheet model (as ORP did) and I think I have just validated the ORP model. Not only do I pay even less taxes than in my own "slower conversion rate" model, but the final estate is 25% larger. This occurs despite the fact that we are in the 33% tax bracket for 10 years before dropping into the 28% bracket for two years and then the 25% bracket until the end.

The factor that I wasn't taking into consideration is by stretching out the conversions, that money is growing longer in accounts that will eventually be taxed at regular income rates, once converted. By converting earlier and biting the tax bullet, (even though it pushes us into a tax bracket that we would not otherwise fall into) the funds are transferred to Roth accounts where they grow and are never taxed again. Using our taxable funds to pay the taxes on the conversions enables all of the funds to be converted over and above RMD's.

The fact that I was able to replicate the same results using my own model gives me more confidence that this is the right strategy, but I still need another set of accuarial eyes to validate this strategy before implementing it in 2015.
Thanks for the update.

You are making me feel guilty. I'm not confident that I'm executing the right strategy for our situation. I know that modeling it in a spread sheet along with running some scenarios through TurboTax is the right thing to do. Congratulations to you for doing this.
__________________
adrift is offline   Reply With Quote
ORP
Old 05-18-2014, 03:25 PM   #75
Dryer sheet aficionado
 
Join Date: Nov 2013
Location: Clarksville
Posts: 37
ORP

Quote:
Originally Posted by Golden sunsets View Post
I've noticed that one of the ORP Planner's is now on this board. I was hoping he could weigh in on ORP's methodology on this front loading when it pushes one into the higher tax bracket.
The high taxes on early IRA to Roth IRA conversions is the subject of considerable conversation because the high tax rate incurred therein is counterintuitive. It is a complicated question because ORP, being an optimizer as opposed to a straight calculator, balances investment returns in the long run against taxes paid in the immediate and not paid in the long.

To try and shed some light on the issue a feature was recently added to ORP to allow the user to exclude IRA to Roth IRA transfers in order to assess the effect of avoiding the high early taxes.
__________________
orplanner is offline   Reply With Quote
Old 05-19-2014, 08:28 AM   #76
Full time employment: Posting here.
Golden sunsets's Avatar
 
Join Date: Jun 2013
Posts: 734
Quote:
Originally Posted by orplanner View Post
The high taxes on early IRA to Roth IRA conversions is the subject of considerable conversation because the high tax rate incurred therein is counterintuitive. It is a complicated question because ORP, being an optimizer as opposed to a straight calculator, balances investment returns in the long run against taxes paid in the immediate and not paid in the long.

To try and shed some light on the issue a feature was recently added to ORP to allow the user to exclude IRA to Roth IRA transfers in order to assess the effect of avoiding the high early taxes.
Thanks for chiming in OR planner. Can you answer one question for me? Does ORP calculate and include the AMT where appropriate, and also the loss of exemptions?
__________________
Golden sunsets is offline   Reply With Quote
ORP
Old 05-19-2014, 07:06 PM   #77
Dryer sheet aficionado
 
Join Date: Nov 2013
Location: Clarksville
Posts: 37
ORP

Quote:
Originally Posted by Golden sunsets View Post
Thanks for chiming in OR planner. Can you answer one question for me? Does ORP calculate and include the AMT where appropriate, and also the loss of exemptions?
No. Invoking the AMT assumes some knowledge of itemized deductions which the model does not include. ORP assumes personal exemptions and standard deductions.
__________________
orplanner is offline   Reply With Quote
Old 05-22-2014, 01:49 PM   #78
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 60
Inspired by this thread, I'm still trying to grapple with ROTH conversion strategies.

I'm not very experienced at Excel programming. But, I think this entry over at the Bogleheads wiki describing a spreadsheet by BigFoot48 provides a starting point for me. The spreadsheet doesn't properly model the tax situations that apply to me. But, BigFoot48 has done some admirable work and I think I can piggyback on it.

I'm sure no one would disagree that our tax laws are exceedingly complicated. As noted above by it's developer, i-orp ignores these complications when it gives its tax advise. The BigFoot48 spreadsheet does a better job of modeling the tax code. But, it's still a simplification.

I've been doing some trial runs through TurboTax. I want to see if there are any obvious short term actions that I should take. Further, I need to see what factors I should include in a long term model.

I made two statements above. First, that any extra income I realize beyond the top of the 15% bracket would be taxed at 30%. Second, that one should also consider state taxes. My short term conclusion is that, my statement about 30% is only partially true. Also, I should follow my own advice about state taxes.

Briefly, the way an extra dollar beyond the 15% bracket is taxed at 30% is that it pushes a dollar of Qualified Dividend from the special 0% treatment into 15% taxation. Plus, that dollar gets taxed at 15% as well. The way I was wrong about this is that I have foreign income in our taxable portfolio. I fill out the very non-intuitive Form 1116 to claim a Foreign Tax Credit. I can only claim part of the foreign taxes that our investments paid. If I increase our income by converting more ROTH, I can claim more.

Our state excludes $20,000 of retirement income (SS, Pension, ROTH conversion) per individual if over 55 ($24,000 if over 65). Then, there is a 4.63% flat tax.

Before reading this thread, I'd already made partial ROTH conversions for 2014. I used a strategy of converting up to the top of the 15% bracket. This was less than the $40,000 ($20,000 self + $20,000 spouse) that gets special state tax status. TurboTax tells me if I convert up to $40,000. The tax on the additional amount is ~25% Federal (because of the Foreign Tax Credit quirk) plus 0% state. If I delay, it'll be taxed at least 25% Federal + 4.63% state (SS will fill the state retirement income exclusion).

Bumping our conversions to $40,000 now seems to be a no brainer. Converting more may also make sense. OR planner makes a good point about this. I need to delve deeper to convince myself.

I tried to describe this a simply as I could. It still sounds complicated. This is just my situation. Everyone is going to have their own complications. IMHO, most tax strategy recommendations ignore these complications.
__________________
adrift is offline   Reply With Quote
Old 05-22-2014, 04:49 PM   #79
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
Do you qualify for the simplified method of claiming foreign tax credit?

https://www.franklintempleton.com/re...oreign_src.jsf


Quote:
If you are an individual shareholder, you may claim the foreign tax credit without filing Form 1116 if you meet all of the following conditions:
  1. All of your foreign source gross income for the tax year is passive income such as dividends or interest and is reported on Form 1099-DIV2.
  2. Your total foreign taxes paid as reported on Form 1099-DIV are not more than $300 ($600 if married filing jointly).

If you meet these conditions, you may be eligible to claim your foreign tax credit directly on Form 1040, line 47, without regard to foreign tax credit limits and without filing Form 1116.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 05-23-2014, 12:40 AM   #80
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 60
Quote:
Originally Posted by pb4uski View Post
Do you qualify for the simplified method of claiming foreign tax credit?

https://www.franklintempleton.com/re...oreign_src.jsf
Alas, we fail to qualify for the simplified method because of condition #2.

Quote:
Your total foreign taxes paid as reported on Form 1099-DIV are not more than $300 ($600 if married filing jointly).
In fact, for the first time in 2013 I fell into the trap that exists in Form 1116. I exceeded $20,000 in Foreign Income by a small amount. This is a cliff in the determination of Foreign Tax Credit. It requires me to exclude Qualified Dividends on which I received preferential tax treatment (i.e. taxed at 0%) from my Foreign Income. This disallowed counting the majority of my Foreign Income.

This is actually an example of my claim that "most tax strategy recommendations ignore these complications". It's often asserted that you should hold your foreign investments in taxable so that you can take advantage of the Foreign Tax Credit. This is true. Until, it's not. From my understanding, the higher the Foreign Income is, the larger the advantage; until you hit the $20,000 cliff.

This year, I've taken some evasive maneuvers that I think will keep this from happening to us again. I'm still evaluating if I need to do more.
__________________

__________________
adrift is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 03:53 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.