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Is ORP right about this?
Old 04-24-2012, 11:31 AM   #1
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Is ORP right about this?

I ran the Optimal Retirement Planner (ORP, Optimal Retirement Calculator and Retirement Decision Support System) recently with our numbers. It seems to suggest taking income with the following priorities:
1) after tax
2) Roth
3) IRA

So as an example it means withdrawals by age could be:
Quote:
age 63-64: take SS + after tax
age 65-70: take SS + Roth (after tax all used up in this example)
age 70-84: take SS + Roth + IRA (RMD's only)
age 85-94: take SS + IRA (Roth all used up in this example)
In my example above, I would think the age 65-70 line should be: take SS + Roth + IRA. You would take the IRA distribution up to some reasonable marginal tax rate and then fill up your income needs with Roth money. This would help to avoid Roth money running out in the later years. It does mean paying more taxes and also taxing the SS money more fully perhaps.

I don't really like the idea of totally spending the Roth money so that you cannot blend SS + Roth + IRA to get a better marginal tax rate throughout your retirement years. ORP seems to want to reduce taxes to close to zero in the age 65-70 period example above.

What do you think? Should one spend so much of the Roth money in the early years to extremely reduce taxes right away?
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Old 04-24-2012, 11:41 AM   #2
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It doesn't sound like anything I've heard of from ORP before. Are the RMD's low enough to still be in a low tax bracket? Is it doing the normal Roth conversions while you're living off the taxable accounts early on?
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Old 04-24-2012, 11:49 AM   #3
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What I don't like about ORP-type linear programming calculators is that they are so assumption dependent. If you assume high returns on assets and stable tax rates, you get one answer. If you assume low returns and rising tax rates you get another. Yet each answer is presented as a lost book of the Bible. Better to do as Uncle Mick suggests and remain agile, mobile and hostile.
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Old 04-24-2012, 11:59 AM   #4
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Originally Posted by Animorph View Post
It doesn't sound like anything I've heard of from ORP before. Are the RMD's low enough to still be in a low tax bracket? Is it doing the normal Roth conversions while you're living off the taxable accounts early on?
The example I showed was close to our situation. We've already done our Roth conversions and essentially drained the after tax money (still holding the old Ibonds though). Our situation is perhaps not that common as almost all our savings are IRA + Roth now.
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Old 04-24-2012, 12:08 PM   #5
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What I don't like about ORP-type linear programming calculators is that they are so assumption dependent. If you assume high returns on assets and stable tax rates, you get one answer. If you assume low returns and rising tax rates you get another. Yet each answer is presented as a lost book of the Bible. Better to do as Uncle Mick suggests and remain agile, mobile and hostile.
Agile, mobile and hostile -- I like that !

I think maybe the ORP numbers are pushing me to increase our Roth withdrawals a bit to get the taxes down. In our case we can avoid the higher marginal tax rates on SS (avoid having up to 85% of SS subject to taxation) by taking more Roth money. It's just hard to get over the psychological hurdle of having that big Roth pile of non-taxable assets.

I don't think taking only Roth rather then a mix of Roth + IRA is going to prove to be optimal. As you mention, ORP forces one to assume a fixed rate of return in the future and a fixed tax rate. It would be neat if it used FIRECalc like historical returns.
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Old 04-24-2012, 02:39 PM   #6
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I also would question if the answer would be the same when you take taxes into account on any IRA funds left to your benes...

If you leave it to your kids, they will have to pay taxes on the money.... I do not think they have to pay anything on ROTH money...

This might be a wash, but something that I would be thinking when it comes my time to start withdrawals.
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Old 04-24-2012, 02:46 PM   #7
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When I ran ORP, it was quite aggressive in moving funds from a T-IRA to a ROTH IRA until it lowered the T-IRA balance to give me a low RMD. I haven't looked into the significance of the amount, but I think it is trying to keep SS distributions from being taxed.

Once your RMDs are at an optimal level, I think it makes sense to take money from your ROTH instead of a non-optimal (from tax purposes) amount from the T-IRA.

I am about 18 years from starting SS payments, so the biggest value in these calculators, for me, is that they make me think through the variations. This forum helps with that too.
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Old 04-24-2012, 05:14 PM   #8
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Lsbcal,

I started to respond that ORP gave us the same result. And in fact when I ran the scenario about a month ago it did. (I have the spreadsheets from that run)

However, I just went back to double-check the scenario and the results have us moving no money into RothIRA after retirement.

I have no idea what parameters changed in the ORP calculator recently, but I no longer trust the results.
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Old 04-24-2012, 05:29 PM   #9
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...(snip)...
However, I just went back to double-check the scenario and the results have us moving no money into RothIRA after retirement.

I have no idea what parameters changed in the ORP calculator recently, but I no longer trust the results.
One possibility is that it wants you to use taxable money and maybe even IRA money for spending needs. Since you have no earned income in retirement you couldn't fund the Roth from that and IRA -> Roth conversions would add to your tax burden (assuming you were taking IRA and/or Roth money for living expenses). Also if it's suggesting to use Roth money for spending (may depend on when you are taking SS) it would make no sense to do IRA -> Roth conversions and then Roth -> spending in the same year.
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Old 04-24-2012, 06:57 PM   #10
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Originally Posted by Lsbcal View Post
I ran the Optimal Retirement Planner (ORP, Optimal Retirement Calculator and Retirement Decision Support System) recently with our numbers. It seems to suggest taking income with the following priorities:
1) after tax
2) Roth
3) IRA
I get the same order as you do every time I have run ORP. I'm sure it's to keep taxes as low as possible for as long as possible to enhance capital growth. However, I don't know if it's the overall best way to do that. Anybody want to do a study?
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Old 04-25-2012, 07:52 AM   #11
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Wouldn't the order be very situational based on the proportions of taxable, tax-deferred and non-taxable assets, particular if one considers RMDs and taxation of SS?
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Old 04-25-2012, 08:59 AM   #12
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Originally Posted by brewer12345 View Post
What I don't like about ORP-type linear programming calculators is that they are so assumption dependent. If you assume high returns on assets and stable tax rates, you get one answer. If you assume low returns and rising tax rates you get another. Yet each answer is presented as a lost book of the Bible. Better to do as Uncle Mick suggests and remain agile, mobile and hostile.
+1. It's a crude tool at best, but not without its uses.

It suggests timing for my Roth IRAs, though we don't have any and didn't input that we did... I guess they're implying we should do a conversion, but taxes make that a losing proposition as far as I can tell.
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Old 04-25-2012, 10:10 AM   #13
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I found one mistake in my description of the ORP runs in our case. The actual results were:
Quote:
age 63-64: take SS + after tax
age 65-70: take SS + Roth (after tax all used up in this example)
age 70-84: take SS + Roth + IRA (RMD's only)
age 85-94: take SS + IRA + after tax (bonds mature)
The Roth did not get all used up. What happened was our Ibonds matured at age 84 and so the "after tax" money it generated started getting used. An interesting thought -- would not have considered this if I had not run ORP.

Our case did not seem to be at all sensitive to tax rates. Even at almost zero rates I got the same sort of results.
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Old 04-25-2012, 12:56 PM   #14
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+1. It's a crude tool at best, but not without is uses.

It suggests timing for my Roth IRAs, though we don't have any and didn't input that we did... I guess they're implying we should do a conversion, but taxes make that a losing proposition as far as I can tell.
I just ran Orp for the first time in a while. First time I had seen it use the pre-Bush tax cut rates for future calculations. We have Roths but the run recommended a BIG conversion in first year. I agree; perhaps the tax bite would work out favorably over the long term, but future tax law is just too iffy for me to take that kind of advice.
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Old 04-25-2012, 01:13 PM   #15
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I plan to leave my ROTH alone with hopes of leaving it to family after I'm gone as the tax treatment is desirable for heirs. It will remain available if I need the money or really really want to spend some extra bucks sometime.

Several months ago I looked at ORP and it would have me draining the ROTH at an earlier time. My situation is probably a bit different though as I have a cola'd pension which provides for my current lifestyle and expenses.
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Old 04-25-2012, 07:36 PM   #16
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I plan to leave my ROTH alone with hopes of leaving it to family after I'm gone as the tax treatment is desirable for heirs. It will remain available if I need the money or really really want to spend some extra bucks sometime.

Several months ago I looked at ORP and it would have me draining the ROTH at an earlier time. ......
+1 I just don't understand why ORP would have Roth withdrawals earlier than tIRA withdrawls. Anyone have any idea what the logic/rationale is?
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Old 04-25-2012, 07:50 PM   #17
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+1 I just don't understand why ORP would have Roth withdrawals earlier than tIRA withdrawls. Anyone have any idea what the logic/rationale is?
It appears it is purely to keep taxes way down and does not seem to be a function of tax rates. It would be better if the user could apply some control to the tax strategy.
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