Any good Roth conversion estimator websites ?

[Delawaredave5]

Any good websites for calculating / modeling Roth conversion impact ?

Looked at Taxcaster and HR Block - both clumsy, but usable.

Thanks !

 

[RunningBum]

IMO the simpler the tool, the less likely it is to figure in all factors. Especially things like the ACA subsidy. This close to tax time, I'd probably get an early copy of whatever tax program I was using and go with that. I've only used Taxcaster a few times, but it seemed pretty easy to use to me. I've developed a spreadsheet for my own purposes to show how much I can convert up to the top of various brackets, and to the cliff edge of the subsidy. It's actually a little easier now without itemizing deductions, but without the ability to recharacterize you have to get it right the first time.

 

[pb4uski]

If you used TT last year, then try the What-If worksheet included in last year's software. make sure to check the box for 2018 towards the top of the column.

 

[Delawaredave5]

Thanks - I'll do below - it will have/incorporate 2018 law changes ?

Person I'm helping has primarily SS income, around $20k. Adding conversion money starts making a portion of the SS taxable - right ? So I don't understand how to get to maximum amount of conversion and stay in bottom 12% bracket - besides iterating.

https://www.ssa.gov/planners/taxes.html

If you used TT last year, then try the What-If worksheet included in last year's software. make sure to check the box for 2018 towards the top of the column.

 

[kaneohe]

Thanks - I'll do below - it will have/incorporate 2018 law changes ?

Person I'm helping has primarily SS income, around $20k. Adding conversion money starts making a portion of the SS taxable - right ? So I don't understand how to get to maximum amount of conversion and stay in bottom 12% bracket - besides iterating.

https://www.ssa.gov/planners/taxes.html

nothing wrong w/ iterating.....might be faster than from first principles.
See if this calculator is less clumsy https://www.mortgagecalculator.org/calcs/1040-calculator.php

 

[SevenUp]

Any good websites for calculating / modeling Roth conversion impact ?

Looked at Taxcaster and HR Block - both clumsy, but usable.

It's a downloadable spreadsheet, not a website, but the Case Study Spreadsheet will show you the answer in chart form.

 

[Ed_The_Gypsy]

nothing wrong w/ iterating.....might be faster than from first principles.
See if this calculator is less clumsy https://www.mortgagecalculator.org/calcs/1040-calculator.php

I used Taxcaster to plot my IRA to Roth conversion. Our situation is fairly simple. I paid tax on the conversion above the 15% bracket to get it done before I filed for my benefits at 70, for a reason. I saw that after I started receiving benefits, conversion drove my marginal rate went high and stayed high with no way around it. YMMV.

We are getting the family maximum SS. Your client is not so you should study it. I made a large number of different spreadsheets from here to age 100, identified as BEST-BEST and BEST-WORST. The WORST-WORST is the Tax Torpedo for the surviving spouse: lose one deduction and the RMD for IRA increases and no escape. No bueno. Your client may be single, which simplifies it but if so, they are trapped now. Better just take RMD'S and pay. Good thing the standard deduction was raised.

After a number of bone head mistakes, if I never work again after this year, we will pay no taxes and won't even have to file. The trick is to convert to Roth (and you don't have to convert everything, just until the RMD'S will be just under the tax threshhold) before you take SS.

Old Dutch saying: We grow too soon old and too late smart. They knew what they were talking about.

 

[kaneohe]

iterating using calculator linked above...assumed single, >65y.o., 20K SS +
varying amts of conversion:
1)20K conversion; taxable inc 8.9K
2)40K conversion; taxable inc 43.4
3) 35K; 35.25K
4) 37K; 38.95K
note that top of 12% bracket = 38.7K (also shown on the linked calculator pg)
5) 36.8K conversion; 38.58K taxable inc so you can convert a bit less than 37K

5 iterations prob took a bit more than 1 minute.

 

[sengsational]

Seems to me, unless you model all years you're around, you can't make the best decision about Roth conversions, primarily driven by RMDs off in the rather distant future. That means making assumptions about when you'll take SS, if there will be an SS haircut, tax rates, etc. Despite it's deterministic treatment of investment returns, I still like to see what a carefully prepared i-orp run has to say about the current Roth conversion decision.

 

[ERD50]

As a side note to this, and I guess it is obviuos, I just never really thought about it this way:

If you convert $X to ROTH at say 12%, and would have paid 22% on the RMD, it looks to take ~ 14 years to 'break even'. Because you only reduce your RMD by some %, the savings is relatively small each year. Well, unless you manage to convert your entire T-IRA and bring RMDs to zero.

But in my case, my IRA is the largest part of my portfolio, I can't convert it down all that much %-wise.

Assuming heirs are in a > 12% marginal tax bracket, they benefit as well by my conversions (I essentially pre-paid their taxes with my (now 'their) funds, at 12%. So maybe payback isn't a big concern anyhow.

-ERD50

 

[kaneohe]

ERD50.......I was a bit confused by your payback concept......but perhaps you ended up discarding that idea in the end?

I guess I think about it a bit differently. Suppose you have 10K TIRA and 1.2K in taxable. Compare:
1) Convert to Roth. Pay 1.2K tax from taxable . End up w/ 10K Roth.
vs.
2) Keep as is. 10K TIRA and 1.2K taxable.

While it is true that you have "spent" 1.2K tax for conversion in 1) and
2) has "11.2K" total assets vs 10K for 1), that's comparing apples/oranges in some sense. You can't get to the 10K TIRA w/o paying taxes (except for a short period) so I would consider them equal on an after-tax basis immediately after the conversion. As time goes by, advantage goes to the Roth since growth is tax free and advantage is even greater when RMDs are taken from TIRA at the 22% rate.

 

[ERD50]

ERD50.......I was a bit confused by your payback concept......but perhaps you ended up discarding that idea in the end?

I guess I think about it a bit differently. Suppose you have 10K TIRA and 1.2K in taxable. Compare:
1) Convert to Roth. Pay 1.2K tax from taxable . End up w/ 10K Roth.
vs.
2) Keep as is. 10K TIRA and 1.2K taxable.

While it is true that you have "spent" 1.2K tax for conversion in 1) and
2) has "11.2K" total assets vs 10K for 1), that's comparing apples/oranges in some sense. You can't get to the 10K TIRA w/o paying taxes (except for a short period) so I would consider them equal on an after-tax basis immediately after the conversion. As time goes by, advantage goes to the Roth since growth is tax free and advantage is even greater when RMDs are taken from TIRA at the 22% rate.

I'm looking at it from the RMD view. Now, in my case, with most of my portfolio in my T-IRA, and delaying SS to 70, my RMD+SS+Pension will very likely exceed what I will spend each year. So I likely will not be spending down my ROTH money, that (and my equities) will likely go tax-free to heirs.

So for example - a $1M IRA at 70 would have an RMD of 3.65%, $36,500. If I was able to ROTH convert $100,000 over a few years, then my RMD would be $32,850, which is $3,650 less. My ROTH conversions only reduced my RMD, they didn't eliminate them.

Assuming I paid 12% on the conversion, and 22% on the RMD, I paid $12,000 in taxes to convert, and in the first year, I save $803 in taxes on the lower RMD (22% * $3,650). So $12,000/$803 is ~ 15 years. Plus or minus some, RMD % goes up, but balance is likely going down as that % RMD goes up.

So as I said, and what I think you demonstrate is - if you deplete the T-IRA in a few years, the 'payback' is that quick. But if your T-IRA survives for many years, it takes ~ 15 years for a 'payback'.

Does that make sense, or is my thinking off somewhere?

-ERD50

 

[RunningBum]

Does that make sense, or is my thinking off somewhere?

-ERD50

I think you're not really paying attention to pre-paying taxes for your heirs at a lower rate. You mentioned it once but don't really factor it in.

If you can put money in an account that will never be taxed, at a tax rate lower than what you or an heir would pay later, you'll be ahead.

Some people don't seem to like the idea of paying taxes for heirs. I just figure the source of the money I'm paying taxes with would be what they inherit.

 

[kaneohe]

I guess it comes down to how you compare the apple and the orange:
prefer to have (10K in Roth )vs (10K in TIRA plus 1.2K in taxable). To me
they are the same current value at this time.

But you could argue, I suppose, that 11.2K > 10K.........if you had huge medical expenses that you could deduct against TIRA withdrawals or if you wanted to make large QCDs.

 

[Brat]

DH and I are well within the RMD status, husband's withdrawal rate is fast increasing (in excess of 5.5% next year). What is driving me to consider rolling some excess into our Roths is the fact that we would still be in the 12% marginal tax rate. I don't expect the current rates to last for more than a few more years, better now than later.

 

[Cobra9777]

...Does that make sense, or is my thinking off somewhere?...

There is no payback period for the tax paid at time of conversion. "Payback" implies you spent some money and expect to recover it (and hopefully more) over some period of time. As kaneohe points out, you are no worse off after paying tax on a Roth conversion than you were before.

Before conversion: $10K in a tIRA+$1.2K in taxable... after-tax value=$10K
After conversion: $10K in a Roth... after-tax value=$10K

Thus, the breakeven period is zero. You simply prepaid some tax at a rate that was hopefully lower than what you (or your heirs) would otherwise pay once RMDs start. It didn't "cost" you anything to send the $1.2K to Uncle Sam because you never owned it to begin with.

The Roth calculus boils down almost entirely to the tax rate differential at time of conversion vs RMD. There is a smaller secondary benefit owing to the use of taxable funds to pay the tax, which in effect transfers money tax-free from taxable into the Roth.

 

[ERD50]

There is no payback period for the tax paid at time of conversion. "Payback" implies you spent some money and expect to recover it (and hopefully more) over some period of time. ....

OK, maybe the term 'payback' doesn't exactly fit, since I'm paying a lesser amount now than in the future.

I guess I'm looking at it from a cash flow perspective then. I 'spend' the 12% in tax now, and if I don't deplete my T-IRA before then, it takes ~ 15 years before I see that cash flow back to me.

Still seems like a 'payback' calculation to me though. I make a payment now, and expect future savings. Yes, the savings is in that T-IRA, but it takes time to realize it. The 'realization' of the savings is through the reduced RMD over those~ 15 years.

-ERD50

 

[CardsFan]

But, if you take SS at FRA (or earlier), things get more complicated. In our case, if we take SS at FRA, but do not Roth convert, our taxes would be under $1,000. If we Roth convert up to the 12% bracket (30-40k) taxes shoot up to over $8,000. Close to 20% effective rate on the converted amount. Yeah, less than 22%, but no big savings.

Like ERD50, there is no way we can convert a significant percentage of our tIRAs to Roth in the 7 years we have left (not a bad problem). We will be in the 22% bracket, or higher at 70.5.

So, the current plan is to convert to the top of the 12% bracket until FRA, then stop conversions, take SS, and see what happens.

We can always convert more, in the 22% bracket, when we hit RMD.

I have found this site helpful https://www.schwab.com/public/schwa...anning/understanding_iras/ira_calculators/rmd

Basically, market returns will overwhelm any minor benefits. Who knows what the tIRA will be worth in 7 years?

First world problems.

 

[popntx]

Does that make sense, or is my thinking off somewhere?

-ERD50

It makes sense to me. I retired earlier this year and I'm in a similar situation where I can do partial Roth conversions to the top of the 12% bracket over the next 6 years (before I turn 70 1/2), but when all is said and done will have only have converted about 25% of my current traditional IRA balance.

Before I gave this much thought, conversions seemed to be a "no brainer" because in my mind I was saving 10% in taxes by converting early at 12% versus RMD time in the 22% bracket. But after thinking it thru, I see that it takes time to "realize" that full savings, although I hadn't spent the time to quantify just how long it would take.

So, I have some decisions to make before the end of the year. I can go ahead and start doing Roth conversions. Or I can take advantage of taking some capital gains in my taxable account at 0% tax while I'm in the 12% bracket. Or I can take some distributions from my IRA now for living expenses (instead of from my taxable account), thus reducing future RMD's. Or I can do some combination of the above.

Retirement can be complicated.

 

[Cobra9777]

It makes sense to me. I retired earlier this year and I'm in a similar situation where I can do partial Roth conversions to the top of the 12% bracket over the next 6 years (before I turn 70 1/2), but when all is said and done will have only have converted about 25% of my current traditional IRA balance.

Before I gave this much thought, conversions seemed to be a "no brainer" because in my mind I was saving 10% in taxes by converting early at 12% versus RMD time in the 22% bracket. But after thinking it thru, I see that it takes time to "realize" that full savings, although I hadn't spent the time to quantify just how long it would take.

So, I have some decisions to make before the end of the year. I can go ahead and start doing Roth conversions. Or I can take advantage of taking some capital gains in my taxable account at 0% tax while I'm in the 12% bracket. Or I can take some distributions from my IRA now for living expenses (instead of from my taxable account), thus reducing future RMD's. Or I can do some combination of the above.

Retirement can be complicated.

This is a fairly common misconception. Roth conversions are break-even from day one. There is no payback period nor TVM impact related to the prepaid tax. (...unless you do something silly, like convert into a bracket that's significantly higher than what you'd otherwise pay with RMDs).

Reason:
Embedded in your tIRA is a tax liability that grows in lock-step with the taxable funds that could be used to pay tax in a conversion. IOW, when you continue to defer, the embedded tax liability continues to grow by the same amount as your would-be tax dollars on a conversion. When you convert, it's really just like paying off a liability early in the hope that the liability will be less today than in the future (due to tax rate differences).

Example:
Assume: tIRA of $10K, taxable account of $1.2K, tax rate 12% now and 12% later, rate of return 7%, and 15-year timeframe.

If converted, obviously the tIRA and taxable go to zero, and the Roth of $10K grows to $27.6K at 7% over 15 years.

If not converted, the tIRA grows to $27.6K and the taxable account grows to $3.3K, which is exactly how much is needed to pay tax on the $27.6K tIRA. Net after-tax proceeds are exactly the same as the convert scenario.

Again, there is no TVM impact nor payback period associated with prepaying the tax liability. This analysis could be done at year1, year5, or year10, and the answer would be the same.

Obviously, if you assume the tax rate is 12% now and 22% later, the convert scenario wins easily. In actuality, the convert scenario wins even when the tax rates are the same. In the convert scenario above, the $1.2K taxable balance was, in effect, "transferred" tax-free into the Roth. No tax will ever be due on the $1.2K going forward. In the no-convert scenario, the taxable account grows to $3.3K and will inevitably have some tax due over that period of time. So the real after-tax value of the no-convert scenario is less than $27.6K, but this is negligible compared to the effect of tax rate differences.

 

[pb4uski]

^^^^ Agreed... that last aspect can be easily quantified.

The $1.2k in taxable account money would grow to $2.9k ($1.2k * (1+7%*(1-12%))^15 = $2.9k. So converting earlier has a minor ($369.16) benefit after 15 years even if the tax rate is constant.

The tax rate play is the real reason to convert. And it doesn't take time to realize the benefit... it is immediate... if in the example one had $2.2k saved in after tax to cover teh eventual taxes and were able to convert and only pay $1.2k in tax, then $1.0k is immediately freed up.

 

[popntx]

But it seems to me that you do not "break even", or "come out ahead" in the 12% now 22% later scenario, until the 15 year timeframe expires (assuming ERD50's calculation is accurate). Another way to look at it is, if I'm being totally selfish (which I often am), if I pay the 12% tax this year on the Roth Conversion, and I die next year (or anytime between now and 15 years), I will not have not have fully recouped that tax expense. Of course, it will benefit my heirs assuming they are in a higher tax bracket, but again I'm using the totally selfish scenario.

Isn't this somewhat similar to delaying Social Security? There's a break even point when the decision to delay "paid off" depending on how long you live. Again using the totally selfish scenario....

 

[ERD50]

....
Example:
Assume: tIRA of $10K, taxable account of $1.2K, tax rate 12% now and 12% later, rate of return 7%, and 15-year timeframe.

If converted, obviously the tIRA and taxable go to zero, and the Roth of $10K grows to $27.6K at 7% over 15 years.

If not converted, the tIRA grows to $27.6K and the taxable account grows to $3.3K, which is exactly how much is needed to pay tax on the $27.6K tIRA. Net after-tax proceeds are exactly the same as the convert scenario. ... .

I totally agree with the above (no point in arguing arithmetic!). Every once in a while I have to do the back-of-the-envelope calculation like that to re-prove it to myself, the urge to defer taxes is strong, but does not apply in this case.

However, I still do not agree with: "This is a fairly common misconception. Roth conversions are break-even from day one."

In your example, the $1.2K is paid in the year you convert. You don't realize the savings until you have depleted the tIRA. There is a time factor there.

Consider a large tIRA, where you don't convert 100% of it the first year, and you are now subject to RMDs. I'll re-state my earlier description, keep the tax% the same as in your example.

Say $100K tIRA. You converted the $10K, so now $90K. Let's use 4% RMD as a round figure, you draw $4,000 from the original tIRA, and $3,600 for the partially converted tIRA. The 12% tax on the $400 difference is $48.

So it takes many years to recover your original $1.2K because you only recapture a part of that each year.

Maybe you can say that on paper, on a balance sheet or something, that the tax savings is there, it is 'embedded' in the tIRA. But unless you convert it all the first year, the savings takes all those years to realize.

edit: I cross posted with popntx, who is saying the same thing in a little different way.

-ERD50

 

[pb4uski]

But it seems to me that you do not "break even", or "come out ahead" in the 12% now 22% later scenario, until the 15 year timeframe expires (assuming ERD50's calculation is accurate). Another way to look at it is, if I'm being totally selfish (which I often am), if I pay the 12% tax this year on the Roth Conversion, and I die next year (or anytime between now and 15 years), I will not have not have fully recouped that tax expense. Of course, it will benefit my heirs assuming they are in a higher tax bracket, but again I'm using the totally selfish scenario.

Isn't this somewhat similar to delaying Social Security? There's a break even point when the decision to delay "paid off" depending on how long you live. Again using the totally selfish scenario....

No, in the 12% now 22% later scenario you realize the savings when the conversion occurs and the tax is paid.

Let's build on Cobra's example but change it so you have $10k in a tIRA and $2.2k in taxable because you expect to owe 22% in tax when you take out the $10k after SS starts.

Let's say you wait and as a result of investment results that the tIRA doubles to $20k and the taxable account doubles to $4.4k after 10 years. At the end of the 10 years you take the $20k in the tIRA to spend, but the taxable account is gone because you use it to pay the 22% tax so you only have $20k to spend.

The PV of that 22%/$4.4k tax is $2.2k. If you can take the tIRA today and settle that tax on it for 12%/$1.2k then you are $1.0k ahead today.

The proof is that if you redeem today and pay the $1.2k in tax then you have $11k today ($10k in Roth and $1.0k in taxable) and if they double in 10 years you have $22k to spend... $2k more than from waiting.... and that $2k difference is the $1k benefit today that doubled over 10 years.

 

[RunningBum]

One of the reasons I calculate my investable net worth with after-tax values is so I don't look at a Roth conversion as having lost 12% + state rate or whatever tax I pay on it. It keeps me from making decisions that would discourage an apparent loss of net worth and thinking there is a payback period to overcome. I don't know how to explain the break-even concept better than people have attempted so I won't bother, but I definitely consider it break-even or better from day 1.