I-ORP Alternatives - Reviving old thread

[savory]

Old thread, same question. In 2013 there was a discussion among many people still on the forum about early IRA withdrawl strategies, especially focused no I-ORP. Since it is recommended not to revive very old threads, I am starting this one.

Planning tools I looked at in the past suggested not to withdraw moneys from IRA prior to RMD. So, I kind of thought I had the answer. Taking another look this week, I-ORP, suggested to withdraw most of my IRA in the next six years. Then take minimum RMDs until the IRA is expired. My IRA represents about 25% of my retirement funds.

I took a look at my next years taxes by following I-ORP recommendations and I go from from paying 12% to 17% of gross income which is caused by a 8% or so IRA withdrawal at age 66. . It coincidentally keeps me just under the next Medicare level which is good news. My spending is such that paying the taxes now is not a financial burden. Also, my spending is much lower than I-ORPs straight line money available analysis.

What our your thoughts now for those who might be rejoining this discussion (and others who may be reading this now) about the best approach? Did any of you follow ORP. Any new calculators you might suggest?



Thanks

 

[pb4uski]

I-ORP usually suggests much more aggressive withdrawals than I am comfortable with.

We are currently in the 0% tax bracket before Roth conversions and convert to the top of the 12% tax bracket..... once SS starts we'll be solidly in the 22% tax bracket.... I don't see much sense in paying 22% now to avoid paying 22% later.

 

[CDRE]

An alternate tool that has been discussed somewhere on this forum is a very intensive spreadsheet called the Retiree Portfolio Model. https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

 

[teejayevans]

I disagree with the don’t touch IRAs until 70. You need figure out projected tax bracket with RMD+SS, if you can take money out and pay less tax today, then I would do it.

 

[corn18]

i-ORP did a good job of laying out a plan to fully convert my 401k prior to SS and RMD's. That seems helpful to me. But I could do it all in the 12% bracket. I restricted i-ORP from using the 22% bracket.

 

[sengsational]

My standard i-orp warning is to make sure your asset allocation (equity/bond split) is the same across all tax categories (tIRA/Roth/AT). The reason is that it will preferentially spend bonds, incorrectly presuming that you won't rebalance (and of course all of the best people will rebalance). So putting your overall equity/bond split in all 3 turns off that bias.



My next standard advice is to try it with, and without Roth conversions. If there are high taxes early and not much additional available spending, then don't do the big conversions early. You can run with limited conversions and often get within spitting distance of the optimal solution.



I haven't played with it much, but on the "convert more sooner" side, there is the possibility of tax rates going up.


And finally, I like to add that in one of my Roth conversions spreadsheets, I had this plan that was a TON better than any other conversion plan. Turns out I had left off state income tax. So this Roth conversions thing is small potatoes compared to moving to Florida, lol!

 

[Alan]

As well as trying to predict whether the tax rates and brackets are going to be different beyond age 70, for couples there is also the chance that one will die many years before the other, leaving the survivor filing as a single person.

For me I started Roth conversions the year after we retired but nowhere near the sums that I-ORP recommended, and I started doing my wife's IRA first since she had more basis than I had plus a much smaller sum. Wrong choice as it turned out because we moved back to England where married couples are each taxed as individuals and since I have a much higher income because of my pensions then RMD's will be in a higher tax bracket for me but not for DW.

I am now doing Roth conversions on my IRA to the top of the 22% bracket and won't worry about hers for a while.

 

[Corporateburnout]

My standard i-orp warning is to make sure your asset allocation (equity/bond split) is the same across all tax categories (tIRA/Roth/AT). The reason is that it will preferentially spend bonds, incorrectly presuming that you won't rebalance (and of course all of the best people will rebalance). So putting your overall equity/bond split in all 3 turns off that bias. !

I disagree as we've discussed before. I input my actual asset allocation by account to evaluate the impact of Roth conversions on my disposable income. My Roth accounts hold 100% equity funds and I plan to keep it as such for the duration and will only rebalance in my tax deferred accounts to maintain my overall asset allocation.

 

[Dtail]

I just started playing with the I-Orp Roth conversion module and I get the following error when trying to convert to the top of the 10/12% bracket.
"Model error - will not solve, possibly because your Roth conversion tax bracket limit may be over constricting your taxable income".

Can anyone translate what this really means?

 

[pb4uski]

I disagree with the don’t touch IRAs until 70. You need figure out projected tax bracket with RMD+SS, if you can take money out and pay less tax today, then I would do it.

+1 I have been "touching" my IRA since I was 57 by annual Roth conversions and paying the tax from taxable funds.... have converted ~$260k and paid 8% federal tax on average (plus state tax).... if we redomesticate to a no income tax state once Medicare starts I may get more aggressive with Roth conversions for a few years until SS starts.

 

[deserat]

This is a great subject - I looked into several different retirement calculators as well as consulted an advisor (free, I did not end up using them to manage my portfolio) and they all showed a significant advantage for me (to the tune of $20-40K yearly) to convert my IRAs to Roths either before or right after I start receiving my Reservist military pension at 60.

So, I think this is a YMMV scenario. I had about 75% of my assets in tax deferred savings and due to the way my income streams lay out as well as this mini-lull in my income until age 60, it is much better for me to use this time to convert at a lower tax bracket. I actually won't be able to keep all of the conversions below 22%, however, based on the projected income when I get to 60 and beyond, I will have a he!! of a time keep it below 22-24% after that.....

However, I think it is a good idea to look at many different calculators and compare/contrast. If they come up with similar answers, then you know you are close. To me it's like horseshoes and hand grenades.....at the effort I wish to put into it, close enough works.

 

[SevenUp]

I just started playing with the I-Orp Roth conversion module and I get the following error when trying to convert to the top of the 10/12% bracket.
"Model error - will not solve, possibly because your Roth conversion tax bracket limit may be over constricting your taxable income".

Can anyone translate what this really means?

In optimization programs, "over constricting" usually means two or more restrictions that can't be met simultaneously. For example, "annual spending must be over $50K" and "annual spending must be under $40K".

Don't understand your specific message, though, because one is not required to do any Roth conversions at all, so a "no Roth conversions that takes income above the 12% bracket" should at least have a feasible answer at $0.

Sending your question to the i-orp developer (see the bottom of the i-orp main page) might be your best bet.

 

[SevenUp]

I don't see much sense in paying 22% now to avoid paying 22% later.

There can be a small but real advantage to this, which an optimization program such as i-orp will likely use: if you pay the conversion tax from your taxable funds, that converts taxable funds into Roth funds.

Thus you get to eliminate tax drag for that amount of money. Whether that is "too risky" or "an added benefit" is a matter of taste.

 

[Dtail]

In optimization programs, "over constricting" usually means two or more restrictions that can't be met simultaneously. For example, "annual spending must be over $50K" and "annual spending must be under $40K".

Don't understand your specific message, though, because one is not required to do any Roth conversions at all, so a "no Roth conversions that takes income above the 12% bracket" should at least have a feasible answer at $0.

Sending your question to the i-orp developer (see the bottom of the i-orp main page) might be your best bet.

Thanks. Didn't make sense to me either for the reasons you mentioned above.
I will try the developer.

 

[pb4uski]

There can be a small but real advantage to this....

Yes, I understand the advantage of income from those funds being tax-free vs tax deferred... which is why i may consider doing some conversions into the 22% tax bracket if we move to a no state income tax state.

 

[sengsational]

My Roth accounts hold 100% equity funds and I plan to keep it as such for the duration and will only rebalance in my tax deferred accounts to maintain my overall asset allocation.

Since you have 100% equity in the Roth bucket, you won't run into the problem some people have with the optimization being "too aggressive with Roth conversions". Actually, your situation is an alternative solution to (what I perceive as) the problem with i-orp aggressive Roth conversions.

Since the model preferentially pulls from the tax category with the most bond holdings, your situation preferentially avoids Roth conversions.

I just started playing with the I-Orp Roth conversion module and I get the following error when trying to convert to the top of the 10/12% bracket.
"Model error - will not solve, possibly because your Roth conversion tax bracket limit may be over constricting your taxable income".

Linear programs can be a bit fickle. I've encountered many i-orp cases where I had a model that resolved fine, then a slight change which, logically, should have not caused any problem with resolution, caused the model to not come to a solution. Telling James about it won't hurt, but your best bet is to tweak your inputs and get the model to solve again. I've found that Roth conversions are where my models get stuck sometimes, so that's a place to start.

 

[Dtail]

Linear programs can be a bit fickle. I've encountered many i-orp cases where I had a model that resolved fine, then a slight change which, logically, should have not caused any problem with resolution, caused the model to not come to a solution. Telling James about it won't hurt, but your best bet is to tweak your inputs and get the model to solve again. I've found that Roth conversions are where my models get stuck sometimes, so that's a place to start.

Thanks. The only area in the model that I seem to have issues is with the Roth conversions. Will play around a little.
I know there are some other "sophisticated" planners out there, but these planners seem to all charge yearly fees.

 

[savory]

Another question. I want to try another calculator. the Retiree Portfolio Model is a bit confusing to me. Does anyone have another calculator besides RPM and I-ORP? I have not been successful in my search locating one.

Thanks

 

[SevenUp]

Another question. I want to try another calculator. the Retiree Portfolio Model is a bit confusing to me. Does anyone have another calculator besides RPM and I-ORP? I have not been successful in my search locating one.

https://www.bogleheads.org/forum/viewtopic.php?t=115839#p1686175 gives some suggestions, and links to a large list of these.

 

[IrishMoss]

i-ORP used to do a nice job of helping to determine how much to withdraw from IRA to convert to Roth when on the ACA with constrained income.

Today I tried the model as it's been several months and the model has been changed (again) and it just doesn't work for me.

The model appears to no longer be counting income from investment dividends/interest and there's no "income" column in the withdrawal reports, only a "guaranteed income" column which would be from a pension/ss/annuity, which I won't get for nearly 10 more years (just SS). What about expected yearly income from divs/cap gains?

As a result of this change, the amount i-ORP is telling me to convert from IRA to Roth is greatly inflated as it doesn't think I'm getting any income except "premium tax credits."

I don't understand why these changes were made. It appears to be not working as it used to (for Roth conversions). Very disappointing. I'll have to look for a replacement tool.

 

[sengsational]

You might consider relaying those thoughts to James (the tool's creator); I've had some "head scratcher moments" with the tool over the years, generated a minimal set of inputs that showed the problem, submitted it, and the problem was fixed in a few days.


[EDIT: I did a simple scenario, saw no income from stocks, and sent it along to James]

 

[rpguy4]

Another tricky part of this conversation is if you are planning to use the ACA for healthcare coverage and receive ACA subsidies. Be careful when doing the IRA to ROTH conversions NOT to exceed the ACA income limits. Otherwise you may have to pay back the subsidies you received.

 

[IrishMoss]

I've been in touch with James a bunch in the past (I actually worked with him on a very small portion of his tool, the HSA field, and he later removed that field entirely).

My last interaction, earlier this year, had him admitting I'd hit a "deficiency" in the model with the Roth withdrawals. At that point the model was indicating withdrawals from Roth in years before I would be 59.5 yrs old, which would result in me paying a 10% penalty for early withdrawals, when there was no reason I needed to withdraw anything from Roth at all. The underlying tax minimization assumptions resulted in a non-optimal withdrawal for me. There's some funky stuff with how the model is constructed, but I just got tired of reporting things.

As for careful planning around ACA/income constraints, I'd also reported inaccuracies to James, and he said his model is not an accounting tool (true enough) and can only give general rounded estimates. But now it's even worse since the tool is no longer counting expected income from divs/int/cap gains.

To stay tightly on track with ACA, I created my own spreadsheet just to track my actual income/divs/interest/cap gains, which I update monthly, and keep track against my total desired MAGI number for the year, so I know exactly how much I can convert from IRA to Roth IRA. Then I wait until the last week of Dec to do the actual IRA withdrawal to Roth conversion, if I can do a conversion that year.

I've reported anomalies on a few occasions. The model has morphed and is less useful for my needs. Thus, a search for a replacement tool if such a thing exists.

 

[Dtail]

I just use I-ORP as another calculator for maximum spending. Sorry, but I don't always trust some of the bucket withdrawal strategies.

 

[big-papa]

Might want to try RPM (retiree portfolio model) over on bogleheads.