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i-ORP No Longer Includes Roth Conversion?
Old 10-26-2016, 10:47 AM   #1
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i-ORP No Longer Includes Roth Conversion?

I only run i-ORP once every few years so maybe I am the last to notice. Every time I've run i-ORP in the past, it included Roth conversions. Evidently that's no longer the case? Maybe assumptions can be changed, but I didn't look into it.

Right or wrong, we've never done Roth conversions because independent analysis has shown it's close to a wash for our situation, and who knows what future tax rates will be (although not lower rates presumably).

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Applies conventional wisdom to retirement policy issues:
  1. Assume constant retirement spending, indexed to inflation.
  2. Delay Social Security Benefits to age 70; the best long term investment money can buy. Live off of savings until Social Security benefits begin.
  3. Allocate 60% of savings to stock and 40% to fixed income at the beginning of retirement. Gradually reduce stock allocation to zero at the end.
  4. Sell the house and/or business, if any, at age 80.
  5. The planning horizon is age 95, the Joint Life and Last Survivor Expectancy for a 65 year old married couplei, according to the IRS.
  6. No estate at the end of the plan.
  7. IRA to Roth IRA conversions are not included. At least one quantitative study (See page 47) reports that conversions offer little economic advantage but their dramatic increase in taxes paid in early retirement tends to panic the novice.
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Old 10-26-2016, 10:55 AM   #2
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Originally Posted by Midpack View Post
I only run i-ORP once every few years so maybe I am the last to notice. Every time I've run i-ORP in the past, it included Roth conversions. Evidently that's no longer the case? Maybe assumptions can be changed, but I didn't look into it.

Right or wrong, we've never done Roth conversions because independent analysis has shown it's close to a wash for our situation, and who knows what future tax rates will be (although not lower rates presumably).
Do the recent dramatic increases in ACA insurance premiums make conversions more important now, in terms of reducing MAGI? Essentially making it more valuable to do because there are advantage for both taxes and insurance subsidies?
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Old 10-26-2016, 12:07 PM   #3
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I looked at I-orp and it till has an input for IRA to roth conversions. Not sure what you are looking for.

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Do the recent dramatic increases in ACA insurance premiums make conversions more important now, in terms of reducing MAGI? Essentially making it more valuable to do because there are advantage for both taxes and insurance subsidies?
For me the increase in ACA premiums will likely reduce my roth conversions as it looks like the PTC may be better than the roth conversion. Remember that roth conversion increase the MAGI. I will need to do some modeling to see if the PTC or larger conversion are better in the long run. Unfortunately some information is just not available to plug in... so results may be of limited use.
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Old 10-26-2016, 12:13 PM   #4
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Do the recent dramatic increases in ACA insurance premiums make conversions more important now, in terms of reducing MAGI? Essentially making it more valuable to do because there are advantage for both taxes and insurance subsidies?
I don't understand your post. Roth conversions raise MAGI, rather than reducing it.

I haven't even looked at I-orp in any real detail in quite some time. Does it even consider ACA subsidies as part of its calcs? That seems like a complex task, to determine whether the subsidy is worth other trade-offs, or even possible.
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Old 10-26-2016, 12:22 PM   #5
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Roth conversions are still there. Did you click through to the full version of ORP from the home page? You may have missed it. Or perhaps your assumptions of returns cause the program to converge on a solution that doesn't include Roth conversions?
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Old 10-26-2016, 12:41 PM   #6
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I don't understand your post. Roth conversions raise MAGI, rather than reducing it.

I haven't even looked at I-orp in any real detail in quite some time. Does it even consider ACA subsidies as part of its calcs? That seems like a complex task, to determine whether the subsidy is worth other trade-offs, or even possible.
OOOPS! I was not clear. Sorry.

I was thinking further into the future. Go ahead and take the MAGI hit for a few years in order to have a much lower MAGI in the future, pulling from Roth.
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Old 10-26-2016, 01:05 PM   #7
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OOOPS! I was not clear. Sorry.

I was thinking further into the future. Go ahead and take the MAGI hit for a few years in order to have a much lower MAGI in the future, pulling from Roth.
Problem (first world, I grant) would be if you have very large tax deferred accounts and such front loaded conversions to eventually get, say, 1/2 converted, puts you into 30%+ federal marginal rates.

So many permutations.... I'll be spending some quality time analyzing this to death once our wage income stops. Of course, who knows what the insurance situation will be like a year from now.
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Old 10-26-2016, 01:09 PM   #8
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Do the recent dramatic increases in ACA insurance premiums make conversions more important now, in terms of reducing MAGI? Essentially making it more valuable to do because there are advantage for both taxes and insurance subsidies?
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OOOPS! I was not clear. Sorry.

I was thinking further into the future. Go ahead and take the MAGI hit for a few years in order to have a much lower MAGI in the future, pulling from Roth.
higher premiums now from what I can see increase the subsidy. If anything this would play more in favor of going for the PTC since the subsidy increased. It has always be a debate if the PTC is better or the Roth conversion -- and to what level of tax do you increase your roth conversions (top of the 15% marginal bracket? 25%...or higher). This really is dependent on each person's situation. How much do people have in TIRA. What other taxable income will there be? There are some on this forum that have little in their IRA, but much in real estate. A conversion would not have a significant effect.

Looking at the ACA preview, in my area it looks like the subsidy for a family of 2 @ age 55 and just below the cliff will get about $90/month on the PTC than what I recall last year. If this was the only change, I would think the delta change would be for more people to go for the PTC verse the roth conversion.
Last year I was off exchange part of the year and cobra the rest. So I will do roth conversions likely to the top of the 15% bracket.
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Old 10-26-2016, 01:35 PM   #9
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Cross-posting from another thread - I thought this was a really interesting investigation!

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Maybe this is an old link (it is from 2015) already here somewhere, but I found this REALLY interesting, comparing ACA and Fed a tax and looking for the "holes".

Obamacare Optimization vs Tax Minimization - Go Curry Cracker!Go Curry Cracker!
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Old 10-26-2016, 07:19 PM   #10
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OOOPS! I was not clear. Sorry.

I was thinking further into the future. Go ahead and take the MAGI hit for a few years in order to have a much lower MAGI in the future, pulling from Roth.
Yes! For those of us with a number of years before medicare, and have reasons or inability to keep MAGI low every year. That was my plan the first year, and was my plan for this year. I figure as I got closer to 65, my premiums would rise, and that would be a better time to try to reduce MAGI. It's not easy, because much of my money is in a taxable account, so dividends and mutual fund cap gains distributions put me over. One danger is that ACA subsidies might go away, so this may be a "take it while you can" thing.

I shot my self in the foot this year, though. I needed to raise some cash, so I sold off my losers and have a big CG loss. So I just realized I'm a little over the ACA cliff. I could convert a lot, but when I tried to do that last year I was getting hit with AMT. Instead, I'm recharacterizing the small amount that put me over the cliff, and will take the subsidy.

The problem is that I can only do this for a few years before those distributions eat up that CG loss I took. First world problem, but I'm worried what health insurance will be over the next 10 years once I run out of subsidies. Vanguard doesn't have an ETF for PRIMECAP to convert to, and if I sell it I would have a huge cap gain that year.
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Old 10-27-2016, 09:06 AM   #11
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I looked at I-orp and it till has an input for IRA to roth conversions. Not sure what you are looking for.
I see it's in Full ORP, but it used to automatically include Roth conversions based on every output I got before this time (our assumptions haven't changed much). And they acknowledge the change in their assumptions, as I showed in red.

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Roth conversions are still there. Did you click through to the full version of ORP from the home page? You may have missed it. Or perhaps your assumptions of returns cause the program to converge on a solution that doesn't include Roth conversions?
I did miss full, but it used to include Roth conversions by default, now you have to choose them.

I was just pointing out a change in their default WRT Roth conversions FWIW.
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Old 10-27-2016, 09:52 AM   #12
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I see what you mean - the basic version of ORP doesn't do Roth conversions, indeed.

There appears to be an option in the full ORP to consider ACA subsidy limits. It's not very obvious; be sure to check the documentation. I need to study it further to fully understand what it's doing.
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Old 11-03-2016, 09:22 AM   #13
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The way the ACA works is that you enter an amount to not exceed to protect your ACA PTC. And you enter what you expect to get as your PTC. This tends to be a better deal than Roth conversions oftentimes, and besides, it's a bird in the hand vs waiting until the RMD torpedo to get the benefit.
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