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Old 06-11-2015, 06:29 AM   #41
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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.
My goal is more to set a spending floor. Imho, some of the other spending models reduces the annual spending in later years way too much.
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Old 06-11-2015, 08:36 AM   #42
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Originally Posted by orplanner View Post
What do you have in mind?
Does avoiding the ACA subsidy tax cliff really save much? That's the question that I think is important to have answered. Currently, a cliff-on vs. cliff-off i-orp run isn't quite apples to apples because a cliff-on run has a significant reduction in taxes for model years below age 65 that is not credited in the model. For me, $11K for 9 years. For people who will work to age 65 or those who can't qualify for the ACA, this feature would be of no value. But for those of us with years of ACA in our future, it would allow us to see if we really should bother with cliff avoidance.

From an implementation standpoint, the idea would be to have another input: "Annual ACA Premium Tax Credit" (PTC). This would be used if the cliff avoidance option was selected. This field would be defined as the number of thousands of dollars annually that the family would get in tax credits associated with having purchased health insurance from one of the exchanges. Or more succinctly, the number of thousands expected on line 24 of IRS form 8962. That value, indexed by inflation, would reduce the federal income tax for model row ages less than 65 (the ACA doesn't apply to Medicare users of 65 and older). It's a straight reduction in taxes, even allowing taxes to "go negative", meaning the government pays the taxpayer.

Now, the edge cases. These, I think, can be managed or ignored.

What happens when one member of the couple turns 65, goes on Medicare and the other is still using ACA? I suspect that the PTC could be halved and things would work out about right. An alternative would be to have a PTC input value for each spouse. That would be more complicated for the end-user to complete the two fields for most couples, since with the typical a joint policy, the number is not broken out by spouse. The only time it would make a big difference, I think, is if there was one person who was much more expensive to insure than the other (a lot older and/or a smoker). But I'd say halving it would be 95% of the way there, and not to bother with and input for each spouse.

Another edge case would be hot to handle a family size change. The PTC goes down as the kids leave the nest. I'd say this case can be ignored without compromising much; the expected PTC can be set to the forecast for the PTC value of whatever the majority of years will be, or some kind of average determined by the user.

I'm not sure how other i-orp users feel about it, but I think it would be cool to put a tidy dollar figure on what the PTC is worth by comparing one run with, and one run without doing the ACA dance.
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Old 06-11-2015, 09:49 AM   #43
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This whole thread, or rather the subject of optimizing tira conversions to Roth gives me a headache. Iorp tells me to pay some really big tax bills for the next 6 years doing conversions; sort of backed up by the FIDO RIP calculator that has my tax bills quadrupling when I hit 70. Sorta frozen in the headlights right now; know I'm going to do something but it's likely not to be full Iorp. I have no question that from this point forward, asset allocation (well, at least within reason) and investment selection will have less of an impact on spendable income/estate remains than will tax strategy. It's a long way from the income earning days when all I cared about was sheltering as much money from taxes as I could. That built us an incredible "nest egg" but unfortunately it's now being held hostage by the tax man!
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Old 06-11-2015, 10:36 AM   #44
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This whole thread, or rather the subject of optimizing tira conversions to Roth gives me a headache. Iorp tells me to pay some really big tax bills for the next 6 years doing conversions; sort of backed up by the FIDO RIP calculator that has my tax bills quadrupling when I hit 70. Sorta frozen in the headlights right now; know I'm going to do something but it's likely not to be full Iorp. I have no question that from this point forward, asset allocation (well, at least within reason) and investment selection will have less of an impact on spendable income/estate remains than will tax strategy. It's a long way from the income earning days when all I cared about was sheltering as much money from taxes as I could. That built us an incredible "nest egg" but unfortunately it's now being held hostage by the tax man!
We are seeing this train coming down the tracks as well, even as we continue to push as much money into tax deferred accounts as the law permits. Not going to be fun once we start drawing down and converting, but the odds of us ever seeing our present marginal rate in retirement are vanishingly small. Hopefully, the same is true for you.
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Old 06-11-2015, 11:02 AM   #45
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I see the same problem but not sure I want to pay a bunch of taxes 10 years early (60 vs 70). What if I sell to start the conversions and pay taxes @ a market high?


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Old 06-11-2015, 12:34 PM   #46
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Iorp tells me to pay some really big tax bills for the next 6 years doing conversions; sort of backed up by the FIDO RIP calculator that has my tax bills quadrupling when I hit 70.
I'll be doing lots of Roth conversions (up to the top of the 15% bracket, anyway) to minimize the "tax torpedo" caused by RMDs and SS. But I'm not going far beyond that. The projections that have me paying >tons< of taxes at age 85+ generally assume high portfolio growth rates. If that happens, then I'll be happy and our portfolio will have done its job--gotten us to the "finish line" with a comfortable amount of spending money. Right now I'm most concerned about the 30 years from now until age 85, and making sure my portfolio lasts/grows. So, a dollar kept in my portfolio, hard at work and available as a cushion in the possible rough stretches over the next three decades is worth a lot more to me than one I later have to pay to the taxman after I'm comfortably in the home stretch. IOW, I'm eager to improve my chances of success, not to maximize my final portfolio value.
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Old 06-11-2015, 01:12 PM   #47
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Originally Posted by H2ODude View Post
This whole thread, or rather the subject of optimizing tira conversions to Roth gives me a headache. Iorp tells me to pay some really big tax bills for the next 6 years doing conversions; sort of backed up by the FIDO RIP calculator that has my tax bills quadrupling when I hit 70. Sorta frozen in the headlights right now; know I'm going to do something but it's likely not to be full Iorp. I have no question that from this point forward, asset allocation (well, at least within reason) and investment selection will have less of an impact on spendable income/estate remains than will tax strategy. It's a long way from the income earning days when all I cared about was sheltering as much money from taxes as I could. That built us an incredible "nest egg" but unfortunately it's now being held hostage by the tax man!
Before you jump under the bus, caution dictates that you should compare ORP runs with conversions and without conversions. There is a growing body of evidence that conversions don't make any difference in annual spending but they do shift taxes from the end of the plan to the front; i.e. prepaying your taxes. Both models will pay the same amount of taxes, just at different ages. If your plan shows anything different than my conjecture I would sure like to know about it. Please send me a Model Id.

There are several justifications for doing conversions but economics ain't one of them.
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Old 06-11-2015, 01:27 PM   #48
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...
I'm not sure how other i-orp users feel about it, but I think it would be cool to put a tidy dollar figure on what the PTC is worth by comparing one run with, and one run without doing the ACA dance.
This is an intriguing idea. Anything that affects initial income, particularly as it relates to Federal Taxes should to be considered.

I do have one point that I could stand some elaboration on. Is PTC actually income? Is it credit for out of pocket expenses? PTC reduces Federal Taxes but what about the computations?

I need to be clear on this stuff before I diddle the software. As a non tax expert I need all the help I can get.
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Old 06-12-2015, 05:29 PM   #49
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This is an intriguing idea. Anything that affects initial income, particularly as it relates to Federal Taxes should to be considered.

I do have one point that I could stand some elaboration on. Is PTC actually income? Is it credit for out of pocket expenses? PTC reduces Federal Taxes but what about the computations?

I need to be clear on this stuff before I diddle the software. As a non tax expert I need all the help I can get.
It's not income. It is a credit to reduce the sting of health insurance monthly premium payments. It just comes in as a credit on the second page of the 1040. The first page results in the MAGI. Then taxes are computed based on that, and that's a number that you have already in the model...thats the taxes computed 'before credits'. So you already have that value as an expense. The PTC reduces that expense. If the PTC is less than the before credits tax, it should be easy to manage that. But since the PTC can exceed what the before credits tax is, you have to allow what remains of the PTC to be non-taxable income. In other words, if my income generates $3k in before credits income tax, and my PTC is $5k, the model would need to set taxes to zero, and chunk $2k into after tax, but not count it as income. Its like the 2k helped pay my bills. Alternatively, I suppose that the model could hang onto the negative amount, keeping it in the tax bucket and apply it to future taxes. But then taxes would be another "account" with a balance, and all that. It seems easier to do an non taxable add to the after tax. Or, since thats probably very uncommon for the kind of person that uses the model, you could just set taxes to zero, and in the help, say, if you have zero taxes, and are running with the PTC "on", you may not have the full advantage of the PTC.
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Old 06-13-2015, 08:01 PM   #50
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I'll be doing lots of Roth conversions (up to the top of the 15% bracket, anyway) to minimize the "tax torpedo" caused by RMDs and SS. But I'm not going far beyond that. The projections that have me paying >tons< of taxes at age 85+ generally assume high portfolio growth rates. If that happens, then I'll be happy and our portfolio will have done its job--gotten us to the "finish line" with a comfortable amount of spending money. Right now I'm most concerned about the 30 years from now until age 85, and making sure my portfolio lasts/grows. So, a dollar kept in my portfolio, hard at work and available as a cushion in the possible rough stretches over the next three decades is worth a lot more to me than one I later have to pay to the taxman after I'm comfortably in the home stretch. IOW, I'm eager to improve my chances of success, not to maximize my final portfolio value.
[Emphasis added]

All of this. And text in bold is the extent of my strategy as well.

I've been frugal (but comfortable, and spending lots more in retirement now) for so many years that all calculators say I'll have a bunch of $ left over at plan end, even in the most dire scenarios. So I'm not going to worry about a few $ lost to taxes because I didn't spend months figuring out how to absolutely dodge the tax bullet. 2 out of 3 dollars are in after tax or Roth anyway, so squeezing that last nickel out won't make much difference. I'd rather go dancing, which I'm about to do.
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Old 06-15-2015, 10:38 AM   #51
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... If the PTC is less than the before credits tax, it should be easy to manage that. But since the PTC can exceed what the before credits tax is, you have to allow what remains of the PTC to be non-taxable income. In other words, if my income generates $3k in before credits income tax, and my PTC is $5k, the model would need to set taxes to zero, and chunk $2k into after tax, but not count it as income. Its like the 2k helped pay my bills. ...
That's a good formulation, with nothing non linear as far as I can tell.

How much money per year are we talking about?

I assume that the PTC stops when Medicare kicks in?

The health insurance premium that we are talking about is a constant known to the user?
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Old 06-15-2015, 10:15 PM   #52
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That's a good formulation, with nothing non linear as far as I can tell.

How much money per year are we talking about?

I assume that the PTC stops when Medicare kicks in?

The health insurance premium that we are talking about is a constant known to the user?
The amount varies, so that would have to be an input. The user would know, or have a pretty good idea of the credit, since the government healthcare exchange estimates it for the upcoming year. There are also calculators that take income and family size to give an estimate. The thread above suggests 10k for some, but others low enough not to bother (just a couple of hundred).

Yes, it would go only for ages less than 65, and only for incomes under the cliff, of course.
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Old 08-19-2015, 12:54 PM   #53
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Question, is anyone else here having issues with the i-orp website? I'm trying to run some scenarios and it keeps giving me an error if estate > 0.
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Old 08-19-2015, 04:32 PM   #54
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Question, is anyone else here having issues with the i-orp website? I'm trying to run some scenarios and it keeps giving me an error if estate > 0.
ORP was recently changed to block models with an estate> total assets/2. Many of these models are either infeasible or giving spurious results. Is your planned estate > 0 large relative to your assets?
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Old 08-19-2015, 06:20 PM   #55
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ORP was recently changed to block models with an estate> total assets/2. Many of these models are either infeasible or giving spurious results. Is your planned estate > 0 large relative to your assets?
I tried an estate of 1 ($1,000) and even that gave me an error.

Current Age: 31
Retirement Age: 55
All Current Account Balances: 0
Maximum Annual Contribution of All Types: 20
Pension Inflation Adjusted: 65

I think it's basing the assets on current account balances.

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Your estate 10 is larger than one half your assets 0.
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Old 08-28-2015, 10:04 AM   #56
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I tried an estate of 1 ($1,000) and even that gave me an error.

Current Age: 31
Retirement Age: 55
All Current Account Balances: 0
Maximum Annual Contribution of All Types: 20
Pension Inflation Adjusted: 65

I think it's basing the assets on current account balances.
You are correct. ORP wanders into a forest of infeasible models when it tries to generate an estate from cash flow, i.e. Social Security. The idea was to head these bad models "off at the pass". If you would care to share your situation with me I will investigate loosening this restriction.
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Old 08-28-2015, 12:36 PM   #57
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....ORP wanders into a forest of infeasible models when it tries to generate an estate from cash flow, i.e. Social Security. The idea was to head these bad models "off at the pass". ....
Can you elaborate on that statement?

So for instance, my grandmother's ultra-frugal living expenses were less than her SS and small pension so even in retirement she was saving and building an estate.... ORP would consider her situation "infeasible"?
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Old 08-28-2015, 01:08 PM   #58
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I tried an estate of 1 ($1,000) and even that gave me an error.

Current Age: 31
Retirement Age: 55
All Current Account Balances: 0
Maximum Annual Contribution of All Types: 20
Pension Inflation Adjusted: 65

I think it's basing the assets on current account balances.
hnzw_rui, you have embarrassed me. I totally forgot about assets built up by you young folks through savings contributions before retirement. Adjustments will be made. I appreciate you bringing this little piece of stupidity to my attention.
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Old 08-28-2015, 01:20 PM   #59
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Can you elaborate on that statement?

So for instance, my grandmother's ultra-frugal living expenses were less than her SS and small pension so even in retirement she was saving and building an estate.... ORP would consider her situation "infeasible"?
Your grandmother may or may not be infeasible. Most likely any estate she builds up between now and her 105th birthday will be small.

ORP's mission is to maximize spending by minimizing taxes on IRA withdrawals. If Grandma doesn't have an IRA then ORP really has little to offer. That is, optimization is not required and a spreadsheet will serve her needs nicely.

When you think about it most of your retirement income is determined by contract at retirement, e.g. Social Security benefits and pensions. The only real decisions the retiree has to make are regarding savings distributions. Other factors affect the distribution decisions but the Retiree can't change them.
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ORP question
Old 08-28-2015, 01:53 PM   #60
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ORP question

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Hi everyone,

It has me doing about 25K/year conversion from IRA to Roth, which seems ok until I look at the "Taxes" column. That shows that I'm paying about 24% income tax, and I think that is solely from the the Roth conversion.
I'd never heard of that "10% penalty within 5 years" before ... unless that was just for folks under the age of 59.5? Or is that penalty really true for everyone? If so, it really seems unwise to to convert anything to Roth during those first 5 years? Of course, the vast majority of funds in the IRA have been in there much longer than 5 years, so I don't understand how/why that 10% penalty would apply anyway?

I'm sure I'm misunderstanding something ... maybe I was right, and it's easier to just keep working anyway! ;-)

However, that amount is more than twice what I think I'd ever be able to spend in a year (based on my current spending and lifestyle habits). Is there anyway for me to input that number into I-ORP somewhere, instead of relying on it to figure out how much I should spend each year?

Thanks!
Three interesting questions:
  1. Spending one's retirement savings on taxes first thing out of the box is a source of some discomfort. This is addressed at length in a white paper at http://i-orp.com/ModelDescription/Conversions.pdf.
  2. The 10% penalty is a non issue in all but extreme cases. Basically ORP's help file grammar could do with some tiding up. The 10% applies only to recent additions to the Roth IRA; recent meaning during the 1st 5 year of retirement. Most optimal plans distribute the Roth IRA after the after-tax is gone and the IRA has been reduced to a low level. Roth IRA distribution occur well after 5 years from the conversion.
  3. You can lower your spending by increasing your estate.
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