ORP Calculator Question

[Debinnov a]

I like to use different calculators but have a question about ORP. When I put in my factors, I put in taxable and tax deferred, along with my social security. When it prints out, it shows Roth IRA withdrawals starting at age 57, - but I don't have Roth IRAs.

So, is it telling me to convert to Roth IRA's or is this social security - not sure where social security shows on the graph?

I love that it gives me what my after tax spend will be, but it sure is complicated trying to figure out all of the reports - and I thought my portfolio was pretty basic.

Anyone know the answer about the Roth IRA?

Deb

 

[MasterBlaster]

So, is it telling me to convert to Roth IRA's or is this social security -
...
Anyone know the answer about the Roth IRA?

Deb

The ORP calculator does quite a bit of regular IRA to ROTH IRA conversions. That's part of the tax optimization.

They have a "help" tab you can click for better explanations.

 

[Alan]

The ORP calculator does quite a bit of regular IRA to ROTH IRA conversions. That's part of the tax optimization.

They have a "help" tab you can click for better explanations.

+1

I'm doing IRA to ROTH conversions using ORP as a guide, but each year I use Turbo Tax to run scenarios as well so I have a better estimate of how much tax I will pay for the conversions. ORP has a very aggressive first few years of conversions recommended for me, but with RMD's, DW's SS, my SS, another private pension, and UK SS all in the future, I can be fairly sure that I will have higher tax bands in the coming years.

 

[Debinnov a]

Okay, so it is telling me to convert my 401K and IRA to Roth IRA? I think I need to buy Turbotax - is that what you guys recommend to figure out the tax ramifications?

I've heard people talk about Taxcaster as well - part of Quickbooks?

I printed out the ORP "cheat sheet" but still confused - probably just me!

Debbie

 

[Alan]

Okay, so it is telling me to convert my 401K and IRA to Roth IRA? I think I need to buy Turbotax - is that what you guys recommend to figure out the tax ramifications?

I've heard people talk about Taxcaster as well - part of Quickbooks?

I printed out the ORP "cheat sheet" but still confused - probably just me!

Debbie

It doesn't need to be turbotax, that just happens to be what I use to do my taxes each year. I save a copy of my return to play with then I can enter differing sums on a 1099-R and see how much the tax changes.

Use whatever tax software you normally use to do your taxes, or you can use Taxcaster which is free. For me, using TT is easy since it already has my data in from the previous year.

 

[Debinnov a]

Okay, got it! I own a business so my CPA has been doing my taxes for 25 years! But that is soon going to change with my retirement!

Probably that is the reason I don't understand alot of the tax "stuff".

Deb

 

[BTravlin]

If you look at the withdrawal report you can probably see your taxable IRA decline and your Roth IRA increase by the same amount. This will probably go on for a few years depending upon your particular circumstances.

 

[dtbach]

When I ran ORP it showed that I could take out about 3X what I am. But I'm more comfortable with the FC figures. Plus I just don't like what it wants me to take out of my ROTH IRA's in the early years.

 

[Debinnov a]

Is there a website or tutorial somewhere to explain to me the whole process of changing IRA's to Roth. I get the basics, that you are paying taxes now to get it tax free later. But the whole point of getting tax deferred was to not pay taxes, right?

So is it to save on taxes later on (assuming the tax bracket will be lower later in retirement) or is it to manage your income so that you can count that withdrawal in the current year and pay taxes - but keep it under a certain tax threshold?

I'm confused... nothing new. And I read alot about this - but haven't seen an actual "why" explanation.

Deb

 

[Alan]

Is there a website or tutorial somewhere to explain to me the whole process of changing IRA's to Roth. I get the basics, that you are paying taxes now to get it tax free later. But the whole point of getting tax deferred was to not pay taxes, right?

So is it to save on taxes later on (assuming the tax bracket will be lower later in retirement) or is it to manage your income so that you can count that withdrawal in the current year and pay taxes - but keep it under a certain tax threshold?

I'm confused... nothing new. And I read alot about this - but haven't seen an actual "why" explanation.

Deb

Converting IRA to ROTH is done primarily for 2 reasons. Pay tax now because you expect to be in a higher tax bracket once SS, pensions and RMD's push up your income. Pay tax now so your non-spouse heirs don't have to pay tax when they inherit. If your children inherit they have to start withdrawals immediately based on their life expectancy, or they can cash it out etc. either way they will have no tax to pay with a ROTH but with an IRA they will pay tax based on their income.

I didn't do any conversions while working because I was in a higher tax bracket before I retired. Now that I am retired I still have some years before future pensions, SS and RMD will move me to a higher bracket. (I retired 4 years ago at 55)

 

[2B]

Is there a website or tutorial somewhere to explain to me the whole process of changing IRA's to Roth. I get the basics, that you are paying taxes now to get it tax free later. But the whole point of getting tax deferred was to not pay taxes, right?

So is it to save on taxes later on (assuming the tax bracket will be lower later in retirement) or is it to manage your income so that you can count that withdrawal in the current year and pay taxes - but keep it under a certain tax threshold?

I'm confused... nothing new. And I read alot about this - but haven't seen an actual "why" explanation.

Deb

You have it right that the whole purpose of the IRA/401k/403b was to avoid paying taxes when you deposited the money into the account but that assumed that your tax rate in retirement would be lower. That is not always the case. In the case of married couples, the death of one spouse would trigger the much higher individual tax rates for the surviving spouse.

There are lots of tax games that can be played out and converting to a Roth is only one aspect. As Alan case stated above shows, there can be many issues in ones finances that are not covered by iORP.

One particular flaw/limitation I've found with iORP is based on putting in different returns between types of accounts. Typically, fixed income is maximized in tax deferred accounts up to an individuals asset allocation level. This rate of return is usually considered to average below that for equities which would be maximized in a Roth. Putting in a low tax deferred ROR and a higher Roth ROR has any conversions put on steroids. The program converts massive amounts of tax deferred assets to the Roth without any consideration to the asset allocation and the return on those assets.

 

[prototype]

I was looking at the same thing on iORP last week and got the same results of large Traditional to Roth conversions over the next few years before SS starts (and large tax bills). There are quite a few ira to roth conversion calculators available that I then ran to try to help figure all this out. They are pretty basic, and only one I found/used let you pick you state (for taxes). Some are brokerage supplied calculators (Vanguard, Fidelity...). Others aren't. One interesting thing I noted (if I remember correctly from last week when I was "playing" with these calculators) is that for my age (58) the advantage of converting didn't really come in to play (i.e. the two lines of converting and not converting) until I got well into my 80's and it was't a huge %. But that is just my specific case.

Googling what I posted in blue above will display alot of the available ones. I'll probably need to see a independent financial/tax professional before I make a final decision. I'm still trying to figure what direction (% of my tIRA to convert to Roth each year for the next few years) to go on all this.

 

[racy]

Here's Vanguard's "should I convert to Roth" calculator:
http://www.archimedes.com/vanguard/roth/RothConsumer.phtml

 

[Alan]

Here's Vanguard's "should I convert to Roth" calculator:
http://www.archimedes.com/vanguard/roth/RothConsumer.phtml

That is even scarier than ORP for me, particularly if I put in a future marginal tax rate of 40%, which is a real possibility as we are hoping to set up a permanent place in England and split our time equally between here and England. It will mean very large tax bills this next few years doing the conversions.

Pity this calculator doesn't allow you to play with conversions over a few years.

What to do, what to do..... ??

 

[Debinnov a]

Thanks, everyone for the feedback. One question.... can you also convert 401K monies to Roth IRA or just IRA monies? Also, what is tIRA? taxable IRA or no?

Deb

 

[Alan]

Thanks, everyone for the feedback. One question.... can you also convert 401K monies to Roth IRA or just IRA monies? Also, what is tIRA? taxable IRA or no?

Deb

a tIRA is a traditional or taxable IRA.

I rolled my 401k in entirety to a tIRA (often called a Rollover IRA, but it is taxable on withdrawal like a tIRA). Zero tax liability for 401k -> Rollover IRA.

Now I am in the process of doing ROTH conversions, at a pace that suits me.

 

[MasterBlaster]

Here's something else to ponder concerning ROTH conversions....

Looking forward regarding our budget situation, I suspect that there will be quite a bit of pressure to change ROTH IRA rules.

Are you confident that they won't cap tax-free ROTH withdrawals ? Or could they put an "excess distribution" penalty on large ROTH withdrawals. There certainly is a historical basis for such.

Note also that Obama floated the idea of a total qualified balance cap that would require those with very large IRA/401k balances to divest down to the proposed cap and pay income taxes on the excess.

In my opinion things like this are coming, like it or not.

 

[Rustward]

Here's something else to ponder concerning ROTH conversions....

Looking forward regarding our budget situation, I suspect that there will be quite a bit of pressure to change ROTH IRA rules.

Are you confident that they won't cap tax-free ROTH withdrawals ? Or could they put an "excess distribution" penalty on large ROTH withdrawals. There certainly is a historical basis for such.

Note also that Obama floated the idea of a total qualified balance cap that would require those with very large IRA/401k balances to divest down to the proposed cap and pay income taxes on the excess.

In my opinion things like this are coming, like it or not.

Then maybe we should just hope the asteroid gets here soon so we don't have to deal with all the gloom and doom?

Sorry. It's a little OT.

 

[Brooks Saddle]

Just call me stupid. I don't understand ORP as it has me taking considerably much more money than firecalc, FIDO or any other retirement calculator I've tried. When I say considerably more I mean considerably more.

 

[dtbach]

Just call me stupid. I don't understand ORP as it has me taking considerably much more money than firecalc, FIDO or any other retirement calculator I've tried. When I say considerably more I mean considerably more.

+1

 

[MasterBlaster]

Then maybe we should just hope the asteroid gets here soon so we don't have to deal with all the gloom and doom?

Sorry. It's a little OT.

I don't know if you were joking or not ?

The concern though is that after you have optimally gamed the system and paid your front-loaded ROTH conversion taxes, then the rules change to your detriment. Considering all that's coming in the next decade and beyond, it is a very realistic concern.

I personally wouldn't want to be in that position.

 

[Rustward]

I don't know if you were joking or not ?

The concern though is that after you have optimally gamed the system and paid your front-loaded ROTH conversion taxes, then the rules change to your detriment. Considering all that's coming in the next decade and beyond, it is a very realistic concern.

I personally wouldn't want to be in that position.

So, what do you do? How can you be sure you made all the right decisions?
Just about anything can change in the future. You might save multi-millions and then get hit by a beer truck, or contract some rare quick-killing disease for which there is no cure. I think you have to make the decisions that are likely in your best interest, but there are no guarantees. Again -- what do you do?

 

[Alan]

So, what do you do? How can you be sure you made all the right decisions?
Just about anything can change in the future. You might save multi-millions and then get hit by a beer truck, or contract some rare quick-killing disease for which there is no cure. I think you have to make the decisions that are likely in your best interest, but there are no guarantees. Again -- what do you do?

+1

For the government to tax you when withdraw from an IRA and place it in a ROTH and tax you again when you withdraw from the ROTH sounds very unlikely so I am willing to take the risk. They are more likely to raise taxes with a VAT than resort to this IMO. It's all a gamble when it comes to guessing future tax policy.

 

[Katsmeow]

Just call me stupid. I don't understand ORP as it has me taking considerably much more money than firecalc, FIDO or any other retirement calculator I've tried. When I say considerably more I mean considerably more.

Same for me. One thing I realized was that it really makes a difference in a married couple as to which one you put as retiree and which you put as spouse.

If I put DH who is 6 1/2 years older than me as retiree and me as spouse it says we can spend $4000 more a year than if I put me as the retiree and DH as spouse.

Basically when DH is shown as spouse it shows the plan ending when he is 92 (when I would be 86) versus when I am shown as retiree it goes through when I'm 92.


One reason I don't get much from ORP is that it assumes that you will spend the same amount every year and doesn't give the option to have any one time expenditures or variable spending. In our case we will be spending more for the next 3 years (2 kids in college) and then our spending will go down a lot. That doesn't really get modeled in ORP.

 

[2B]

Just call me stupid. I don't understand ORP as it has me taking considerably much more money than firecalc, FIDO or any other retirement calculator I've tried. When I say considerably more I mean considerably more.

Orp is a fancy spread sheet that sequences the values you enter for assets, SS and pensions. It all comes down to the difference between ORP's constant return/inflation and FireCalc'c historical sequencing. You can lower the return and get a lower withdrawal rate if you want. ORP has more degrees of freedom for entering assets but lacks the historical returns. ORP has no Roaring 20's, Great Depression, Stagflation, Arab Oil Embargo, WWI, WWII, Korea, Cold War......