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Old 06-01-2015, 10:30 PM   #21
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The whole point of i-orp is that some retirees underestimate their retirement resources. The Journal of Personal Finance article found on page 17 of http://www.iarfc.org/documents/issues/Vol.14Issue1.pdf is intended to establish the credibility of ORP as a retirement planning tool. ORP is not completely off the wall with its projections.
Thanks for the link. The article is good, and concludes that conversion (as well as which type of accounts to draw down when) is highly variable, depending upon the size of an individual/couple's nest egg, and the allocation among types of accounts.

Makes me reassess my preliminary plans.

Truly, YMMV.
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Old 06-01-2015, 10:37 PM   #22
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I artificially forced my excel model to have very high Roth conversions similar to what i-orp is suggesting between now and age 70 and the age 100 NW is substantially higher than limiting Roth conversions to the top of the 15% tax bracket and NW is actually fairly close to i-orp.

I think it might be because at the end of the plan most assets are Roth and the growth in the Roth never gets taxed.

Interesting and definitely worth further study.
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Old 06-02-2015, 05:07 AM   #23
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Yes, I did really read it and it was in a thread here beginning at post #71....
Do you use i-orp.

Assumptions make.... (oh you know).

One thing I've learned is everyone's situation is unique and generalizations will not always be true in retirement planning........ hence my YMMV (<<< Your Mileage May Vary).

I agree if allocation is equal, rate of return is the same. The roth grows tax free while the traditional ira is taxed as income with an even bigger bite than the taxes on a taxable account (accounting for qualified dividends and long term gains), unless you are heavy munis in taxable (another unique situation).

I've considered perhaps a more aggressive allocation is appropriate in roth accounts if they will be spent later and have more years to recover from a bear run.
The aggressive Roth conversion strategy works if you plan on leaving a large estate because you avoid taxes on unnecessarily large RMDs and on taxable accounts.

However, purely on the math front, spreading out Roth conversions over several years at lower tax brackets is more beneficial than one giant conversion pushing you to higher tax brackets. Of course, that's assuming you don't have a taxable account (with LTCG) from which to pay taxes and assuming your RMDs will never be higher than your spending ergo making paying the higher taxes at the beginning unnecessary. No doubt the i-ORP model takes these factors into account and minimizes taxes at retirement while maximizing spending. That said, it doesn't appear to try to minimize taxes pre-retirement. Unfortunately, it doesn't quite handle more complicated state taxation rules, either.
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Old 06-02-2015, 06:34 AM   #24
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The aggressive Roth conversion strategy works if you plan on leaving a large estate because you avoid taxes on unnecessarily large RMDs and on taxable accounts.

How does doing roth conversions avoid taxes on a taxable account?
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Old 06-02-2015, 06:37 AM   #25
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How does doing roth conversions avoid taxes on a taxable account?
Because you use taxable account money to pay taxes on Roth conversions so it isn't earning income that is taxed because the money is gone.
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Old 06-02-2015, 06:54 AM   #26
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Maybe it is just me but I would not consider that tax avoidance. My neighbor buys cars more frequently than I do. I see now he is avoiding taxes.

I took hnzw to mean he would have more estate money in the end from his taxable account with the conversion strategy.
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Old 06-02-2015, 07:04 PM   #27
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How does doing roth conversions avoid taxes on a taxable account?
What pb4uski said. You don't pay taxes if all your money is in Roth. Most of estate money will be in Roth, too.

If you do aggressive Roth conversions (thereby minimizing or eliminating RMDs from tax-deferred accounts), that money is forever tax-free (assuming they don't amend tax laws).

If, however, you reach a point where RMDs are higher than spending, you can only invest excess RMDs in a taxable account. Which is fine if you're in the 15% bracket and paying 0% LTCG. Not so much if you're at the 25% bracket or higher. Then there's also state income tax to consider.
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Old 06-03-2015, 08:26 AM   #28
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However, purely on the math front, spreading out Roth conversions over several years at lower tax brackets is more beneficial than one giant conversion pushing you to higher tax brackets. Of course, that's assuming you don't have a taxable account (with LTCG) from which to pay taxes and assuming your RMDs will never be higher than your spending ergo making paying the higher taxes at the beginning unnecessary. No doubt the i-ORP model takes these factors into account and minimizes taxes at retirement while maximizing spending. That said, it doesn't appear to try to minimize taxes pre-retirement. Unfortunately, it doesn't quite handle more complicated state taxation rules, either.

Great thread not only from an ORP-understanding perspective, but from a strategy in general. (I'm fast approaching an unexpected early retirement..in terms of months..and I'm on a steep learning curve on how best to approach it. ORP is one tool I've used..)

Would the (paid version, not Basic) ESPlanner software address the case described above? I know it'll handle the comparable state taxes aspect, but how about the conditions/constraints in the first couple sentences?
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Old 06-03-2015, 11:19 AM   #29
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Would the (paid version, not Basic) ESPlanner software address the case described above? I know it'll handle the comparable state taxes aspect, but how about the conditions/constraints in the first couple sentences?
If ESPlanner still offers the money-back guarantee, you could try it. It takes some study time, though. I tried it, but it didn't fit my situation because it would not pull penalty-free from my 401k at age 55. I don't think it did Roth conversions either (maybe?). And it didn't have the Obamacare cliff. Roth conversions don't make that big of a deal, but it's something. And it's easy for me to have a plan that lets me stay under the cliff, but if the software doesn't know about the cliff, that's giving up a lot.

When it comes to planning software like this, I'd say you need one that does two things...comes up with a reasonably optimized plan for the entire duration, and secondly, one that gives you a solid plan for what to do this year that fits-in with the long-term plan. Those are separate because one is actionable now, and for the other one, you must just be convinced (have faith) that the future plan is "realistic enough". Next year, you'll run another plan from what reality is at that point. And the year after that. Maybe you'll use the same planning software, maybe that software will have new features, or maybe some other software will begin guiding you.


Too many scenarios!!!! Help!

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Old 06-03-2015, 12:11 PM   #30
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Merlin3942 -

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes
Clearly, I'm a little new to conversion. But, I don't understand the distinction between the taxable portion and the non-taxable portion in the above table.

It appears that all of the funds concerned are currently sitting in a TIRA awaiting conversion (or withdrawal), and that all such funds are taxable upon either withdrawal or conversion. So, to clarify the question: what do the terms taxable and non-taxable mean in this context?
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Old 06-03-2015, 12:41 PM   #31
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Here's my understanding

The table is a Roth IRA Distribution (see title). The assets in the Roth come from (1) direct contributions (2) Conversions from tIRA funds that have not been taxed yet and therefore are called "taxable" (3) Conversions from tIRA funds that were taxed before they went into the tIRA....such as can occur in a 401k rollover to tIRA and therefore are now called "nontaxable" and (4) Roth asset earnings.

For (3 - nontaxable), you've already paid taxes before the assets entered the Roth account and are not required to pay taxes or penalty on early withdrawal. That would be consistent with no penalty on direct contributions since taxes have already been paid there as well.

I believe this is correct but hopefully others will confirm.
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Old 06-03-2015, 03:34 PM   #32
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Here's my understanding

The table is a Roth IRA Distribution (see title). The assets in the Roth come from (1) direct contributions (2) Conversions from tIRA funds that have not been taxed yet and therefore are called "taxable" (3) Conversions from tIRA funds that were taxed before they went into the tIRA....such as can occur in a 401k rollover to tIRA and therefore are now called "nontaxable" and (4) Roth asset earnings.

For (3 - nontaxable), you've already paid taxes before the assets entered the Roth account and are not required to pay taxes or penalty on early withdrawal. That would be consistent with no penalty on direct contributions since taxes have already been paid there as well.


I believe this is correct but hopefully others will confirm.
Whisper66.........you have the basic idea but I am not sure I understand your example for 3) : 401K rollover to TIRA..........in my mind, you don't pay a tax for that rollover since typically the 401K is a pre-tax contribution and you wouldn't pay a tax to put that in a TIRA.

A taxable conversion is exactly what you said......... a pre-tax (or deductible) TIRA contribution is converted to Roth. You pay taxes on that conversion .....thus the name : taxable conversion.

A non-taxable conversion results when you convert a post-tax (non-deductible) TIRA contribution to Roth. You don't pay taxes on that conversion.....thus the name: non-taxable conversion. If you MAGI is too high, you cannot deduct your TIRA contribution.......this is how you get post-tax (non-deductible) TIRA contributions.

If you have both deductible and non-deductible components in the TIRA, the Roth conversion will consist of components of both (so called pro-rata) so you will have a taxable and a non-taxable component to the conversion. The Roth
withdrawal rules say that the taxable part comes out before the non-taxable so they can penalize you.
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Old 06-03-2015, 05:25 PM   #33
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One thing I'm curious about, there's a Desired Spending Level parameter when looking at results but for the life of me, I can't find it when filling out the form.
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Old 06-03-2015, 07:43 PM   #34
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I think i-orp calculates it. You can adjust it up or down by chaning the estate you want to leave at the end of the projection period.
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Old 06-03-2015, 08:13 PM   #35
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I think i-orp calculates it. You can adjust it up or down by chaning the estate you want to leave at the end of the projection period.
That's just the thing. You can only adjust spending level by doing a trial and error on estate value but on the results page, there's a specific parameter for Desired Spending Level which I think would be helpful if you need to set a floor for expenses for basic living.
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Old 06-03-2015, 09:44 PM   #36
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hnzw_rui - I asked the author (James Welch) recently about that "Desired Spending" on the results page. His response was that ...."it is in there as reminder for me to finish that option someday......"
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Old 06-03-2015, 09:50 PM   #37
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Responding to Kaneohe comment....Whisper66.........you have the basic idea but I am not sure I understand your example for 3) : 401K rollover to TIRA..........in my mind, you don't pay a tax for that rollover since typically the 401K is a pre-tax contribution and you wouldn't pay a tax to put that in a TIRA.

You are correct that no tax will be paid on the rollover. The example was maybe not clear. In my personal 401k, the majority of money is indeed pre-tax contribution but there still is a chunk of contribution that was a post-tax contribution. That later chunk was the part I was intending to use as an example. If I roll it into a tIRA, there will be no tax on that rollover. Nor will there be taxes if I convert that part to a rIRA. And if I withdraw it from the rIRA, there will be no tax nor penalty. I think this is all correct but maybe a bad example for others that may not have that situation.
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Old 06-03-2015, 10:28 PM   #38
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hnzw_rui - I asked the author (James Welch) recently about that "Desired Spending" on the results page. His response was that ...."it is in there as reminder for me to finish that option someday......"
Thanks! Would be nice if we can get that option.
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Old 06-10-2015, 03:40 PM   #39
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hnzw_rui - I asked the author (James Welch) recently about that "Desired Spending" on the results page. His response was that ...."it is in there as reminder for me to finish that option someday......"
It goes against what i-orp is all about! The whole purpose is for it to optimize your actions so you can end with whatever ending balance you want, and spend the rest! I'd rather he spend his time modeling the ACA into the tax calculations. We already have a "cliff avoidance" , which is awesome.
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Old 06-11-2015, 06:08 AM   #40
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It goes against what i-orp is all about! The whole purpose is for it to optimize your actions so you can end with whatever ending balance you want, and spend the rest! I'd rather he spend his time modeling the ACA into the tax calculations. We already have a "cliff avoidance" , which is awesome.
What do you have in mind?
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