I don't because it would have me doing Roth conversions right now but I have substantial LTCGs in my taxable account that I want to take advantage of the current 0% LTCG rate which fills up my 15% tax bracket. i-orp doesn't take this nuance into account.
Once those LTCGs are taken (rolled over into my basis) I had planned to start doing Roth conversions as i-orp would recommend, up to the top of the 15% bracket.
But beginning in 2014, I will be limiting my LTCG/Roth conversions to keep my O-MAGI under 400% FPL because from that point to the top of the 15% tax bracket the economic cost of lost Obamacare subsidies, taxes, lost property tax relief is about 36% of the additional income and I view that as too high a cost to pay.
+1 I also plan to use i-orp, but not until my LTCG are gone. I'm hoping this is built in at some point so we can see the whole picture up-front. Many that would actually use a tool like this likely have LTCG exposure.
My workaround when I've played with this tool has been to bump up the after-tax a little to account for what it thought I'd pay in taxes. Not perfect, but one more directional data point.
Subsequent to my prior post, I tore apart and rebuilt my retirement planning spreadsheet to do a better job of incorporating taxes (essentially building in an abridged federal and state tax calculation) and some other improvements. Using that analysis, I decided that it was preferable for me to prioritize Roth conversions over LTCG harvesting. Since we are still living off of our taxable funds at this point and all our positions have substantial LTCG , there will still be some LTCG as I sell taxable investments to replenish cash to support our living expenses, but other than that any leeway in the 15% tax bracket will go to Roth conversions.
I-ORP results align well with my plan to prioritize Roth conversions.
adrift, I agree, from what I have seen i-orp does seem to ignore income on the taxable portfolio in calculating its conversion amounts but it also ignores exemptions and deductions too.
ORP models income subject to personal income taxes in a rather crude way, i.e. by reducing annual account appreciation by the tax rate. This issue is to be addressed in a future release by including income from the taxable account in with the rest of the income tax computations.... i-orp does seem to ignore income on the taxable portfolio in calculating its conversion amounts but it also ignores exemptions and deductions too.
Also see http://www.early-retirement.org/forums/f28/ss-at-70-and-rmds-double-tax-whammy-71971.html especially post #20
If I run the Monte Carlo in ORP, I get a "worse case" number. Is this number, in theory, the safe amount to spend after taxes, and assures my portfolio does not run out, before death based on the numbers and ages we entered?
I'm afraid not: Worst case is the smallest spending value recorded from the set of problems solved with different random Rates of Return. Run ORP again and you will get a different but similar worst case value.
If worse case is smallest spending value- is that the smallest spending within all the sequences run- thus it would be safe?
Adrift: Could you explain why you would jump from the 15 percent bracket directly to the 30? There isn't a 30 percent federal bracket is there?Trying to figure out how to optimally convert from my tIRA to ROTH is something I've been thinking about. So, based on this post, I've been trying to see if i-orp would be helpful. Perhaps I'm doing something wrong. But, at least from my attempts, it's advice is both wrong and harmful.
We have a substantial amount of our portfolio in tIRA's and 401K's at our prior megaCorp employer. We have a much larger amount of our portfolio in taxable. Our taxable portfolio yields multiple $10,000 in qualified dividends. We pay no federal taxes on these dividends.
Our strategy is to convert as much of our tIRA (and then 401K) as we can to ROTH up to the top of the 15% bracket.
I entered our approximate portfolio into i-orp. It's input did allow a % return on our taxable portfolio but then didn't seem to consider it in its tax strategy.
Its advice was to convert up to the top of the 15% bracket from tIRA/401K to ROTH (ignoring any other income from our taxable portfolio). It also carefully showed us the tax we would pay on that amount (also, ignoring any other income from our taxable portfolio).
I know for our situation that if we convert IRA's beyond the top of the 15% bracket we'll be taxed at a 30% marginal rate (not at 25% as some assume).
I've seen several positive comments on this tool. Is there some value to this program that I'm missing? Is it broken?
That's the right way to think about it. But, in our case it's qualified dividends which are treated the same way.In my post above I asked adrift to explain the jump from 15 to 30% and now understand where the concept comes from. To the extent that the money withdrawn from taxable money is all LTCG one would pay an additional 15% on that money as well. Got it.
I've noticed that one of the ORP Planner's is now on this board. I was hoping he could weigh in on ORP's methodology on this front loading when it pushes one into the higher tax bracket.
Go back and read ORP Planner's post #60. It essentially says the tool doesn't work if you have income from a taxable portfolio.
This is an "educated" guess on my part.I see that adrift, but the my question regarding "why would ORP bump me into the 33% tax bracket for the next 5 years rather than spreading out WD's over more years and staying in the 28% tax bracket" is still a question that I have, irrespective of the additional tax from cashing out taxable investments.
The factor that I wasn't taking into consideration is by stretching out the conversions, that money is growing longer in accounts that will eventually be taxed at regular income rates, once converted. By converting earlier and biting the tax bullet, (even though it pushes us into a tax bracket that we would not otherwise fall into) the funds are transferred to Roth accounts where they grow and are never taxed again. Using our taxable funds to pay the taxes on the conversions enables all of the funds to be converted over and above RMD's.
Thanks for the update.Hi adrift; I just spent a few hours plugging in aggressive conversions over the next 11 years into my spreadsheet model (as ORP did) and I think I have just validated the ORP model. Not only do I pay even less taxes than in my own "slower conversion rate" model, but the final estate is 25% larger. This occurs despite the fact that we are in the 33% tax bracket for 10 years before dropping into the 28% bracket for two years and then the 25% bracket until the end.
The factor that I wasn't taking into consideration is by stretching out the conversions, that money is growing longer in accounts that will eventually be taxed at regular income rates, once converted. By converting earlier and biting the tax bullet, (even though it pushes us into a tax bracket that we would not otherwise fall into) the funds are transferred to Roth accounts where they grow and are never taxed again. Using our taxable funds to pay the taxes on the conversions enables all of the funds to be converted over and above RMD's.
The fact that I was able to replicate the same results using my own model gives me more confidence that this is the right strategy, but I still need another set of accuarial eyes to validate this strategy before implementing it in 2015.
I've noticed that one of the ORP Planner's is now on this board. I was hoping he could weigh in on ORP's methodology on this front loading when it pushes one into the higher tax bracket.