Anyone else have a 'problem' with ORP's "moving money to a roth" before RMD......

[Cut-Throat]

Anyone else have a 'problem' with ORP's "moving money to a roth" before RMD......

I have not put a boatload of time into ORP's "Optimal Retirement Withdrawal Strategy", but I have run his calculator a few times and overall it makes sense. Here ...... http://www.i-orp.com/

What he does is that you move your IRA assets into a Roth IRA, up to the 15% tax bracket. This is primarily done during the years between 60 and 70. Delaying SS to age 70, keeps income down and moving the regular IRA to a Roth IRA, does increase the Withdrawal Rate.

The only problem that I have with this is you are paying a lot of taxes (at the 15% level) during the years before S.S and RMD kicks in. The payoff of course are the years after age 70, when the taxes will be less as the RMD is lower and when S.S. kicks in.

One of the tenants of investing and saving that I have come across many times is the rule "Always defer taxes, as you may never have to pay them". ORPs method assumes that the Tax laws will remain the roughly same for 30 years out. If for instance that tax laws change and become more favorable for people that don't have $100 million in their IRAs, under ORPs plan, you may have paid more taxes than you needed to in the early years of retirement. Which would not be a good thing.

What are others thoughts on this "Paying more taxes early". Would you be comfortable paying more taxes early for the chance to pay less later?

 

[timeasterday]

I've wondered about this myself. My plan is to retire at 60 and convert to a Roth each year until 70. If I didn't I calculated that RMD's plus SS and a small pension would provide more income than I needed (much more). Maybe tax rates would be higher in my 70's than my 60's so I am taking the chance of paying the taxes earlier.

 

[MasterBlaster]

I see similar (Roth conversion) advice from the ORP calculator website (www.i-orp.com).

I haven't personally followed their advice but it does make sense given the rules of the game as defined today. And per individual income taxes, my magic 9-ball predicts risng rates in the future. So if you wait you just may end up paying more taxes.

There is a level of trust there though that the government doesn't put some sort of backdoor tax on Roths like "excess" distribution taxes etc.

It's hard to game the system when the rules of the game are likely to change going forward.

 

[Rustward]

I have not put a boatload of time into Otar's "Optimal Retirement Withdrawal Strategy", but I have run his calculator a few times and overall it makes sense. Here ...... http://www.i-orp.com/

What he does is that you move your IRA assets into a Roth IRA, up to the 15% tax bracket. This is primarily done during the years between 60 and 70. Delaying SS to age 70, keeps income down and moving the regular IRA to a Roth IRA, does increase the Withdrawal Rate.

The only problem that I have with this is you are paying a lot of taxes (at the 15% level) during the years before S.S and RMD kicks in. The payoff of course are the years after age 70, when the taxes will be less as the RMD is lower and when S.S. kicks in.

One of the tenants of investing and saving that I have come across many times is the rule "Always defer taxes, as you may never have to pay them". Otar's method assumes that the Tax laws will remain the roughly same for 30 years out. If for instance that tax laws change and become more favorable for people that don't have $100 million in their IRAs, under Otar's plan, you may have paid more taxes than you needed to in the early years of retirement. Which would not be a good thing.

What are others thoughts on this "Paying more taxes early". Would you be comfortable paying more taxes early for the chance to pay less later?

Your post seems to be talking about two different people as though they are one.
I-orp was written by James S. Welch Jr.
Jim Otar is a different guy who also has his own calculator.

Most of your comments seem to be about i-orp, with which I am familiar. I don't know much about Otar.

What are others thoughts on this "Paying more taxes early". Would you be comfortable paying more taxes early for the chance to pay less later?

To answer this question, "yes", for my situation as it is right now. I don't think the answer for everyone would be "yes". And there may be a day when my "yes" changes to a "no".

One of the tenants of investing and saving that I have come across many times is the rule "Always defer taxes, as you may never have to pay them". Otar's method assumes that the Tax laws will remain the roughly same for 30 years out. If for instance that tax laws change and become more favorable for people that don't have $100 million in their IRAs, under Otar's plan, you may have paid more taxes than you needed to in the early years of retirement. Which would not be a good thing.

I think his tool is designed to work with current tax law, and assumes you will live to the end of your plan. To do anything differently would require a very high crystal ball factor.

You probably can't expect to find any tool that will give you, on day one of your retirement, an accurate year-by-year picture of what is going to happen. You should plan to reevaluate periodically and be prepared to adjust to current conditions over time.

 

[Cut-Throat]

Your post seems to be talking about two different people as though they are one.
I-orp was written by James S. Welch Jr.
Jim Otar is a different guy who also has his own calculator.

Most of your comments seem to be about i-orp, with which I am familiar. I don't know much about Otar.

Yes, I did confuse the two. Thanks for the clarification.
I meant ORP rather than Otar and have edited the post.

 

[GrayHare]

I like having some in Roth and some in traditional because that provides flexibility during withdrawal: I can draw from the traditional up to a certain tax bracket, then draw from the Roth without boosting the marginal rate.

 

[Lsbcal]

We have done the max Roth conversions we could. Now taking a combo of IRA distributions plus some Roth and SS. Absolutely no regrets on doing this as we have more latitude to dial in a tax rate.

One strategy we are using now is to take fairly high distributions this year and then next year to take fairly low distributions. This takes advantage of the bump up in marginal rates from SS, i.e. in year 1 you get the max SS taxation and in year 2 you get the lower SS taxation.

I personally think that rates will go up in the future for most of us. But this is a wild guess.

 

[ejman]

I have run a number of scenarios in I-orp and generally the advise I've seen from it is to convert to Roth to fill up to a certain tax bracket and to defer SS to 70. Personally after considering this I've ended up doing exactly the opposite. I've applied for SS at 62 and have not converted to Roth's. The main reason is that as I see it the benefits of the I-orp approach are predicated on the tax rules and SS staying more or less the same for the next 20-30 years. I don't see this happening.

Now, if I'm wrong, and I should have followed i-orp the impact (according to Firecalc) in my standard of living is relatively minimal.

I'f I'm right however, the impact of paying conversion taxes now plus using up my own money in the interim waiting for a hoped for greater payout at 70 to 100 (my plan limit) may be unpleasant. No guarantees in any event and it may all be moot given the realities outside financial planning from health to Bernstein's calculator from hell series.

 

[Free To Canoe]

I really like the ORP calculator better than any of the dozen or so calculators that I have tried. I like the year to year dispersion layout. I am OK with their Roth assumption.

 

[RetireBy90]

I'm actually in a different situation - with pensions my tax rate will be above 15% so if I convert from traditional IRA to Roth, it would be taxed above 15%.

I am thinking that I may want to start my rmd at 60 even if just to move to taxable account so that rmd at 70 when SS kicks in the kick into higher tax rates is at a minimum. Almost all of my retirement savings are tax deferred so I will count on them till I hit 70.

Anyone in my situation? 401k/ira about 600k and only about 50K in roth. I'm contributing to Roth 401K now so I'll be adding to that for the next 4 years till I retire, but I'll still be left with 80% or more in non-roth.

 

[LOL!]

ORP tells me to convert up to the top of the 0% tax bracket, but then calculates that incorrectly. If I use TurboTax to see how much I can convert and pay zero in taxes, it is a much larger number. I don't see that as a fault of ORP because it doesn't know my exact tax situation such as all the tax credits I get.

So my take-home message from this is that you have to double-check what ORP tells you by running real tax software. However in our case it appears that ORP is on the right track of paying zero income taxes to convert 401(k) to Roth IRA. It certainly does not suggest that I pay even 15% in taxes to do the conversion.

 

[teejayevans]

BTW, the ORP doesn't take into account the changes for Obamacare, when you do the Roth conversions, in 2014 you will pay 15% tax AND possibly lose out on subsidies which amount to an additional 15%, thus 30% total, be careful of online calculators.
TJ

 

[MasterBlaster]

BTW, the ORP doesn't take into account the changes for Obamacare, when you do the Roth conversions, in 2014 you will pay 15% tax AND possibly lose out on subsidies which amount to an additional 15%, thus 30% total, be careful of online calculators.
TJ

TJ: Can you expand on what you posted a bit. I am trying to understand where the extra 15% tax/loss of subsidies comes from ?

 

[Cut-Throat]

TJ: Can you expand on what you posted a bit. I am trying to understand where the extra 15% tax/loss of subsidies comes from ?

It's not a tax loss, but a loss of a credit towards health care insurance. It is not tested on net worth, just income and will bridge the gap before Medicare kicks in.

Here is calculator for the subsidy

Health Reform Subsidy Calculator - Kaiser Health Reform

 

[samclem]

I'm actually in a different situation - with pensions my tax rate will be above 15% so if I convert from traditional IRA to Roth, it would be taxed above 15%.

I am thinking that I may want to start my rmd at 60 even if just to move to taxable account so that rmd at 70 when SS kicks in the kick into higher tax rates is at a minimum. Almost all of my retirement savings are tax deferred so I will count on them till I hit 70.

Anyone in my situation? 401k/ira about 600k and only about 50K in roth. I'm contributing to Roth 401K now so I'll be adding to that for the next 4 years till I retire, but I'll still be left with 80% or more in non-roth.

I'm not following why you'd withdraw RMD amounts starting at 60. Is there something significant about the RMD number? It would seem more appropriate to try to anticipate your marginal tax rate after age 70 (when the IRS requires that you start RMDs) if you take no IRA/401K withdrawals before then. Look ahead for a reasonable window based on your expected longevity. If it looks like the RMDs will force you into a higher tax bracket than your age 60 marginal rate, then you know you'd be better off to withdraw money from your IRA/401K before the required RMDs start. It might be that you'd need to withdraw quite a bit more than the RMD amount between 60 and 70 to avoid paying the higher rates, only crunching the numbers and making assumptions can tell you how much--but it might not be anything close to the annual RMD amount. These are the calculations performed by i-ORP (among others).

Of course, you don't have to spend what you withdraw from your IRAs/401Ks, you can put it in a taxable account or into a Roth IRA and never pay taxes on it or the growth on it again. Unless the rules change . . .

 

[RetireBy90]

My point in doing withdrawls at 60 was to contrast with those that are able to move to Roth and stay in 15% bracket. If my taxable income will increase from 60 to 70, as SS kicks in, then it seems I'm a contrast to cut-throat and others.

 

[Khufu]

What are others thoughts on this "Paying more taxes early". Would you be comfortable paying more taxes early for the chance to pay less later?

I am not familiar with the retirement calculator you used, but when I use Esplanner to do my own projections, it's quite clear that Otar's strategy is the correct one. Among its outputs Esplanner shows the federal and state income taxes for each year of its projections. If I were not to do the Roth conversions between my retirement age of 62 and 70, the RMDs would result in a much larger lifetime tax bill, especially since the SS benefits would then be taxed at a higher rate as well. It's may be a little counter-intuitive, but if your calculator provides details for each year of its projections, then it is easy to see the benefit. If it doesn't, then you should use Esplanner.

If tax rates do change they are likely to go up, but by the time I have finished my Roth conversions my taxable income will be very low.





I am assuming that tax brackets and rates don't change in a way that would affect

 

[Animorph]

I like the Roth conversion scheme, which I learned about on this forum, and will be converting over several years starting in 2014 at the latest. Unless tax rates go down significantly in the next 30 years I should come out ahead. And as mentioned, this is not a giant life changing process. I think I clear an extra 1%-2% of yearly spending.

RetireBy90, ejman, if you withdraw from a pre-tax account over and above any RMD and have a taxable account, you have an opportunity to move an equal amount of that taxable account money into a Roth with no impact on taxes by doing a Roth conversion instead. Placing taxable money into a Roth is as close to a free lunch as you can get.

If you don't have that taxable account available then you are in Lsbcal's position, where you withdraw from pre-tax accounts to fill up a lower tax bracket and then take the rest of the income you need from a Roth account.

The efficiency of both schemes depends on your account balances and the amount of income you are seeking. The tax brackets or portfolio percentages of taxable, pre-tax, and Roth accounts might not work well for your specific case.

 

[Nords]

I can confidently predict that our income tax bracket in 10 years will be higher than it is now... spouse's pension will kick in and boost us from 15% to 25%.

So I can choose among three alternatives:
1. Convert IRAs to Roths now, up to the top of the 15% tax bracket.
2. Plan to donate our RMDs to charity.
3. Hope that the tax code changes before 2022.

I'll leave it up to you guys to decide the odds of each event actually occurring.

 

[ejman]

RetireBy90, ejman, if you withdraw from a pre-tax account over and above any RMD and have a taxable account, you have an opportunity to move an equal amount of that taxable account money into a Roth with no impact on taxes by doing a Roth conversion instead. Placing taxable money into a Roth is as close to a free lunch as you can get.

In Oregon the tax rate for a couples income is 9 % on income over $15,500. When I add that 9 % to the federal tax rate of 15% which starts at taxable income of $17,000 for couples I get a 24 % combined tax rate. I don't have a lot of deductions so the standard deduction will have to do. I'm not quite understanding how I can spend from my taxable account and have a tax free conversion from my IRA to a Roth that would not add income at a combined rate of 24% but I certainly would like to learn how this is done.

I very simplistically thought that a dollar converted from my IRA to a Roth would be taxed at 24% combined Federal and State. Again if this is not so then obviously I need to reevaluate.

 

[Texas Proud]

IMO, I do not see being able to pay less than the 15% tax bracket... so I would be willing to pay the 15% now and nothing on the future earnings...

If for some magical reason, the tax bracket is less than 15%, I think I would still be ahead not paying taxes on the gains.. if wrong, it is not like it would be that much money...

But, if you do not convert and have to pay in a higher tax bracket.... it could be a lot higher....

 

[Khufu]

RetireBy90, ejman, if you withdraw from a pre-tax account over and above any RMD and have a taxable account, you have an opportunity to move an equal amount of that taxable account money into a Roth with no impact on taxes by doing a Roth conversion instead. Placing taxable money into a Roth is as close to a free lunch as you can get.

This is not correct. A Roth conversion requires payment of income taxes on the amount converted. It is not tax-free. It's true that if you convert $100 from a TIRA to a Roth Ira you can end up with $100 more in the Roth, but you would also have had to pay the fed and state income tax on the $100 from another pocket.

 

[RetireBy90]

In Oregon the tax rate for a couples income is 9 % on income over $15,500. When I add that 9 % to the federal tax rate of 15% which starts at taxable income of $17,000 for couples I get a 24 % combined tax rate. I don't have a lot of deductions so the standard deduction will have to do. I'm not quite understanding how I can spend from my taxable account and have a tax free conversion from my IRA to a Roth that would not add income at a combined rate of 24% but I certainly would like to learn how this is done.

I very simplistically thought that a dollar converted from my IRA to a Roth would be taxed at 24% combined Federal and State. Again if this is not so then obviously I need to reevaluate.

Woa - 9% I hope the state cleans the house for ya!!!

After the shock wears off I will be following this to see how 0% can be done.

 

[pb4uski]

....I very simplistically thought that a dollar converted from my IRA to a Roth would be taxed at 24% combined Federal and State. Again if this is not so then obviously I need to reevaluate.

That is consistent with my understanding and if there is a workaround to avoid taxes I would be interested as well.

Wow, 9% on income over $15,500 is extreme.

In addition to federal and state income taxes, I am trying to factor the implications of property tax relief and Obamacare health insurance subsidies into the decision. For property tax relief and Obamacare subsidies, benefits decrease as income increases from Roth conversions so the loss of benefits is an additional economic "cost" of the Roth conversion. For the latter, my understanding is that the 2014 subsidies are likely to be based on 2012 tax return filings (at least provisionally).

It looks like the real constraint on Roth conversions for me in 2012 will be to keep my total income slightly below 400% of the federal poverty level (~$60k for a household of 2). If I do that, in 2014 I would get a premium subsidy of ~ 50% (worth about $9k). If I take additional Roth conversions in 2012 that cause my income to exceed 400% of FPL then the $9k goes away, so the cost of those additional conversions is extremely high. Of course, all this assumes that ObamaCare is still in place come 2014. Are others coming to similar conclusions?

 

[Lsbcal]

Ejman, maybe a mitigating factor is your deductions? Is the Oregon tax applied to the income or the income minus deductions and exemptions (as in Federal)?

In California the marginal rate is 2% on $15k taxable income.