Do you use i-orp.

[omni550]

What is, I-ORP?

http://www.i-orp.com/coverORP.html

 

[LongPrime]

many thanks. Need to reprint in color and do MC sims.,

 

[Willers]

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.

 

[pb4uski]

+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.

 

[Willers]

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.

Thanks for the info. My spreadsheet isn't nearly that sophisticated yet. Now I'm interested again and better get to work. We'll see how mine works out and if i-orp agrees. Having lots of LTCG is definitely a great problem to have. Congrats on that!

 

[grasshopper]

I have guessed my income and taxes to 75. I find when Ms G starts taking SS at 70 and RMDs at 70.5 that we may just barely crack the 25% tax rate. Trouble is guessing what her tIRA balance may be at 70, could be over 7 figures easily. I am maxing LTCG now, and will hope on converting to Roths when possible.
I am done for the year, took a bunch of LTCG converted to Roth, kinda easy to guess Total Stock and Total World qualified dividend payouts through the end of the year. I could still recharacterize Roths if needed, but I do think converting some tIRA and paying a little taxes, and having 10 years tax free growth could be a winner.

 

[adrift]

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?

 

[pb4uski]

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.

Also see http://www.early-retirement.org/forums/f28/ss-at-70-and-rmds-double-tax-whammy-71971.html especially post #20

 

[jebmke]

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.

If this is the case, it really isn't much use to me. I am also in a situation where income above the 15% bracket gets taxed at 30% instead of the next bracket rate.

The tax calculations are not that complicated - they just take a bit of programming work (I did it in Excel). It would be easy enough to incorporate the basics, including the dividend push-up -- even if they wanted to exclude more subtle changes like phase-out of exemptions and AMT.

 

[orplanner]

i-orp.com

... 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

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.

ORP does include personal exemptions and the standard deduction in its income tax model.

 

[bizlady]

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?

 

[orplanner]

ORP Monte Carlo

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.

 

[bizlady]

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.

I am still confused. Isn't the whole point of ORP to show you your spending level and the withdrawal sequence? OPR shows a higher spending than we are comfortable with, but has given us some new ideas on withdrawal sequence.

If worse case is smallest spending value- is that the smallest spending within all the sequences run- thus it would be safe? (ran monte carlo three times and got the same worse case number each time- thought the other numbers varied some)

 

[orplanner]

ORP

If worse case is smallest spending value- is that the smallest spending within all the sequences run- thus it would be safe?

The worst case represents a situation in which the randomly selected returns on investment were mostly pretty dismal. There are no absolutes in retirement planning but the probability of actually meeting or exceeding the worst case is very small. So worse case can viewed as safe for planning purposes.

 

[Golden sunsets]

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?

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?

 

[Golden sunsets]

ORP's mystery Modeling

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.

My own puzzle with ORP is as follows:

DH and My tIRA represent 2/3's of our investments. We are aware that converting to Roth's is a good tax strategy, however because we have had substantial income in recent years and will for the current year, we have been unable to take advantage of Conversions, except for a small conversion several years ago. Our tIRA's are roughly equal. We will have no earned income after this year and will start the draw down in January. DH will be 70.5 in 2017. I will be 70.5 in 2019. My excel modeling shows that we would be in the 15% tax bracket for 2015 and 2016 only, based on Pension income with no Roth Conversions and after two years in the 25% bracket would jump to the 28% bracket when I turn 70.5, which is the year that I will first claim SS. That is also the year that our combined RMD's exceed our withdrawal needs. We would jump to the 33% tax bracket in 2028.

Our modeling with Roth conversions shows that we can avoid the 33% bracket entirely by spreading out our tIRA/conversion to Roth's over many years, with the first four years being the biggest Roth Conversion years as RMD's don't reduce our conversions for two years in DH's case and 4 years in my case.

My two spreadsheets (with and without Roth) are by no means perfect(I'm still working out the bugs)and I have yet to factor in possible AMT's and reduction of exemptions. But the plan seems to show me that we will save roughly $900,000 in taxes over our time horizon which I've run out to age 100. Additionally we leave an estate that is significantly larger and about 75% non taxable (Roth $).

I ran ORP yesterday and although the results are similar with respect to overall tax savings, ORP has us converting very heavily to ROTH in years 1-5, with withdrawals after that equaling the RMD. Additionally during those 5 years we would pretty much exhaust our taxable account. I get the fact that we have to use the next four years to max our ability to convert, however during those 5 years we would be in the 33% bracket just based on the TIRA withdrawal. I have not even factored in LTCG's taxes. It just seems counterintuitive to me to do this so aggressively, when we can stay out of the 33% indefinitely by spreading out the W/D's.

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.

We have until the end of 2015 to do the first W/D and I don't completely trust my modeling, so I need to have a professional vet this. Do any of the wise members on this board have a suggestion on what type of professional advise to seek? Accountant? Actuary? FP? (I don't think a FP is the way to go.)

 

[adrift]

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.

That's the right way to think about it. But, in our case it's qualified dividends which are treated the same way.

I don't know where you live. But, you should also look at your state tax law. In our state, once I turned 55 I could exclude up to $20,000 of retirement income from state taxes. Once I'm 65, it's up to $24,000. Roth conversions count. Social security counts. I'm not eligible for SS yet. So, my Roth conversions are lowering my state taxes. My wife just turned 55. So, we can get the same benefit with her Roth conversion.

 

[adrift]

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.

 

[Golden sunsets]

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.

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.

 

[adrift]

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.

This is an "educated" guess on my part.

The way it is broken is to ignore income from a taxable portfolio. From your description. I think you probably have such income. If so, it doesn't realize that it has pushed you into the next bracket. Hence, the harmful advice.

[edit]
On second thoughts, my guess may not be so "educated". Is it actually telling you that you are taxed at 33%? In my case it told me to convert a lot and then lied about the tax consequences.

 

[Golden sunsets]

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.

 

[Chuckanut]

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.

Another factor in favor of the aggressive Roth conversions suggested by ORP is that I won't even touch the Roth money for another 10 years. That's 10 years of growth I won't be taxed on. Even after I start taking funds from the Roth accounts, I will do so for another 30 years (assuming I live that long ). So, another 30 years of tax free growth.

My 2 cents.

 

[sengsational]

Quite a few references in this thread to personally crafted spreadsheets. I wonder, is there a thread or should we start a thread that describes how these models are constructed? I would like to see descriptions of what each column is included, a description of the formula, etc. I constructed a sheet a long while back, but it was fairly basic. I'd like to construct or adapt a sheet some day, and I'd like it to be fairly detailed. It would be cool to start the model by matching inputs with i-orp and seeing the same outputs. Then extra things could be piled on...the things currently not available in the tool.

 

[adrift]

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.

Thanks for the update.

You are making me feel guilty. I'm not confident that I'm executing the right strategy for our situation. I know that modeling it in a spread sheet along with running some scenarios through TurboTax is the right thing to do. Congratulations to you for doing this.

 

[orplanner]

ORP

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.

The high taxes on early IRA to Roth IRA conversions is the subject of considerable conversation because the high tax rate incurred therein is counterintuitive. It is a complicated question because ORP, being an optimizer as opposed to a straight calculator, balances investment returns in the long run against taxes paid in the immediate and not paid in the long.

To try and shed some light on the issue a feature was recently added to ORP to allow the user to exclude IRA to Roth IRA transfers in order to assess the effect of avoiding the high early taxes.