Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Monster Roth Conversions - How big to go and for how long?
Old 02-11-2021, 02:59 PM   #41
Thinks s/he gets paid by the post
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 4,617
Monster Roth Conversions - How big to go and for how long?

Quote:
Originally Posted by fiyesno View Post
Here is something I have been trying to work out related to this thread. Lets say you have a goal to give away a million dollars while you are still alive. How about moving post-tax account appreciated assets into a donor-advised fund (Fidelity and Schwab both have easy ones to use) at the same time as doing large roth conversions. For example, convert $500k 401k to roth in a year, and move $250k taxable (with say a $50k cost basis) to a DAF. You would then have a taxable net of $250k from these conversations. It seems like this might work well and allow you to convert a large amount to roth in a small number of years. But I am not totally sure how to model this out accurately.



Has anyone modeled this type of scenario out?


Just be aware you can only deduct donations to a DAF up to 30% of your adjusted gross income.
Dash man is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-11-2021, 03:31 PM   #42
Thinks s/he gets paid by the post
Out-to-Lunch's Avatar
 
Join Date: Jan 2020
Location: Milwaukee
Posts: 2,558
Let's make sure we are using the same terms. In year 1, it is showing, I believe, $565k in distributions from your taxable account. It has your after-tax disposable income (DI) as $471. Is this the way you are understanding it, too?

The premise of I-ORP is to see how much DI you can have, and have it the same every year. It does not expect you to want to spend less than you can.

A tweak that you can do: You can specify that you will die with a lot of money (by specifying a large Plan Surplus).
Out-to-Lunch is offline   Reply With Quote
Old 02-11-2021, 03:42 PM   #43
Full time employment: Posting here.
 
Join Date: Oct 2015
Posts: 802
Quote:
Originally Posted by Out-to-Lunch View Post
Let's make sure we are using the same terms. In year 1, it is showing, I believe, $565k in distributions from your taxable account. It has your after-tax disposable income (DI) as $471. Is this the way you are understanding it, too?

The premise of I-ORP is to see how much DI you can have, and have it the same every year. It does not expect you to want to spend less than you can.

A tweak that you can do: You can specify that you will die with a lot of money (by specifying a large Plan Surplus).
You are correct. Wrong terminology. If I play around with the surplus to hit my desired DI, does it still model the most efficient Roth conversions (assumes I want to leave Roth/after tax accounts first)?
DawgMan is online now   Reply With Quote
Old 02-11-2021, 04:05 PM   #44
Thinks s/he gets paid by the post
Out-to-Lunch's Avatar
 
Join Date: Jan 2020
Location: Milwaukee
Posts: 2,558
Quote:
Originally Posted by DawgMan View Post
You are correct. Wrong terminology. If I play around with the surplus to hit my desired DI, does it still model the most efficient Roth conversions (assumes I want to leave Roth/after tax accounts first)?
That is a good question; I realized that not only did I not know the answer, I didn't have clarity on what I-Orp was trying to do. So I poked around, and found this helpful bit:

(You can find the explanation of the entry fields by clicking on the blue link.)

Quote:
Minimum Roth IRA Balance

The Roth IRA minimum balance parameter is used to instruct ORP to maintain a specified balance in the combined Roth IRA accounts throughout retirement.

In Which Assets to Leave to Heirs and Related Issues Potts and Reichenstein [2015] demonstrate situations where there are tax advantages to leaving the estate all or partly in the Roth IRA Account.

Leave money in your Tax-deferred Account for heirs in income tax brackets lower than yours. Their tax-deferred withdrawals pay less income tax than you would. You can only do this to a limited extent because the Required Minimum Distribution (RMD) will drive your Tax-deferred account balance toward zero at your planning horizon.
Leave money in the Tax-deferred Account if you have a designated beneficiary who can withdraw the money at their RMD rate. This stretches withdrawals over anywhere from 44 to 66 years.
Leave money in the Roth IRA for heirs in income tax brackets higher than yours. There are no taxes on your heirs' withdrawals.
Money in the After-tax Account has it's yields subject to personal incomer tax each year. Txable account capital is not taxed until it is withdrawn when it is subject to capital gains tax.
For the details see Vanguard's discussion on the topic.

Left to its own devices ORP will leave all of the specified estate in the Tax-deferred Account because if the balance is not withdrawn there is no income tax paid -- by you. Your heirs, however, will have to pay income tax on their distributions from your Tax-deferred account.

ORP will maintain the specified minimum in your Roth for each year of retirement so that if you and your spouse do not actually live to the end of your plan, the specified minimum will be in the estate. The specified Roth minimum balance is inflated over the term of the plan.

The Tax-deferred Account does not have a minimum balance. ORP will leave as much of your Final Total Asset Balance (FTAB) as it can in the Tax-deferred Account. The RMD will drive the Tax-deferred Account balance toward zero over the course of retirement. This may conflict with a Roth IRA minimum account balance.

ORP will position at least your specified Roth minimum balance in your Roth and divide the remaining FTAB across all three accounts, depending on IRA to Roth conversions, compliance with the RMD and transfers to and savings in the After-tax Account.

Careless use of the Roth IRA minimum balance has the potential to create model inconsistencies that result in unsolvable models. When ORP declares your model to be unsolvable your Roth IRA minimum balance and your estate are the first places to look for the cause.

When you specify a Roth IRA minimum balance that is greater than the starting Roth account balances then ORP automatically enables unlimited IRA to Roth IRA conversions to ensure sufficient Roth IRA funds are available to satisfy your minimum.
Out-to-Lunch is offline   Reply With Quote
Old 02-11-2021, 05:36 PM   #45
Thinks s/he gets paid by the post
RetireBy90's Avatar
 
Join Date: Feb 2009
Location: Cville
Posts: 1,405
Quote:
Originally Posted by davebarnes View Post
I read this thread this morning.
I had my session with our tax prep guy at 1100. I got to experience the NIIT.
We talked about Roth conversions.
As "the poors" with only $1.4M in tIRAs, our life is a bit simpler.
I believe "America is great" because we seem to have the most complicated tax code in the universe.
[RANT]As a common man with plenty to meet all our needs, I’m still surprised by the complexities of the federal tax system. I printed the 2020 tax last weekend, so I could compare key figures with the 2019 return, 69 pages ! Form 1040SR is up to 3 pages ! I couldn’t believe the info you have to provide that didn’t directly impact taxes ! [/RANT]
__________________
FIRE 31 Aug, 2018 - Always leave every place better than you found it, always give more than expected or Due
RetireBy90 is offline   Reply With Quote
Old 02-11-2021, 07:05 PM   #46
Full time employment: Posting here.
Whisper66's Avatar
 
Join Date: Apr 2014
Location: Houston
Posts: 906
Quote:
Originally Posted by DawgMan View Post
I took a shot at IORP as suggested and perhaps I am entering something wrong/differently (probably by more conservative annual returns), but I am getting the following output relative to Roth conversion years...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 516 565 0 516 0 130 224 471
058 0 494 572 0 494 0 121 212 480
059 0 345 525 0 345 0 112 147 490
060 0 364 550 0 364 0 102 152 499
061 0 384 576 0 384 0 91 158 509
062 0 414 628 0 414 0 79 187 520
063 0 225 570 0 225 0 67 107 530
064 0 243 597 0 243 0 55 112 541
065 0 265 636 0 265 0 41 126 551
066 0 286 667 0 286 0 27 131 562
067 0 308 700 0 308 0 11 137 574
068 0 325 458 0 76 0 0 122 585

I'm somewhat new to IORP so may be missing something. Yr1 it's showing $471K in after tax distributions. Can I manipulate the model to only show say $250K in after tax distributions to see what it does to my Roth conversions modeling?
Sorry, been a busy day and just now catching up.

Your answers are in the ballpark of what I expected. Your results will differ from mine due to things I didn't know (such as SS amount, expected planning horizon, etc) and differing assumptions (example - I accepted defaults for rates of return).

The $471k value is what ORP calculates as your maximum allowable disposable annual income (excludes taxes). In other words, that's what you would need to spend spend annually to use up your assets fully over the planning horizon (estimated life time).

Your run suggests very high Roth conversions as did mine. See IRA2Roth column ... conversions starting at 516k, then 494k, etc... If you look at the last table in the report,, the Federal Tax Bracket report, you can see what tax brackets your Roth conversions are driving you into. I assume you will see it's well into the 30's brackets somewhere.

You only expect to spend about $250k annually. Directionally this will leave you with more money each year than the current run suggests so optimum Roth conversions will be higher. Some suggest that you just put some value in the "Plan Surplus" input to drive down the result for max disposable income. I'm not sure the progam can handle things well this way and have seen some funny results when I've tried it. So I've discounted that as an acceptable method for now.

I am retired and we don't spend near our "max disposable income" each year. So each new year, I run a new ORP case to see what it suggests the Roth conversion should be in the current year given I didn't spend as much as the prior year plan suggested. As expected, the amount of conversion ORP suggests for the current year is higher than the prior year results suggested I would need to make for the current year. This makes sense since I have more assets then the ORP run of the prior year figured I would have.

You could use the above concept to address your under spending the max disposable income. You could run multiple ORP cases. The first case would represent year 1, the next year 2, the next year 3, etc.... ( I think running 3-4 cases would give you a pretty solid understanding of what is happening with Roth conversion suggestions.) Run year one as you have already done but only consider the first years results. Then start a new case 2 to represent year 2. For input, use your best estimate for assets assuming your lower spend rate. And only look at the results for the 1st year in Case 2. Then do this again for case 3 representing year 3. Kind of a clunky work around but it's one way to manage it.

Another way may be to find a tool that allows your expected spend as an input. I haven't used it but hear others say there is another tool one can purchase that can do it. I think it may be called "Retirement Income Management Optimizer" ?
__________________
"Learn everyday, but especially from the experiences of others. It's cheaper! " - John Bogle
Whisper66 is offline   Reply With Quote
Old 02-11-2021, 07:16 PM   #47
Full time employment: Posting here.
Whisper66's Avatar
 
Join Date: Apr 2014
Location: Houston
Posts: 906
Quote:
Originally Posted by Whisper66 View Post
.....................You could run multiple ORP cases. The first case would represent year 1, the next year 2, the next year 3, etc....
Just thinking about this a bit ....

ORP suggests spending 471k in year one. You only spend $250k. This means you will have higher end of year assets than ORP expected by 471-250 = 221k (plus some earnings). That's 221k represents about 1.8% of 12M total assets. I expect you'll just see somewhat higher conversions suggested for somewhat more years. But only running the numbers will tell for sure.
__________________
"Learn everyday, but especially from the experiences of others. It's cheaper! " - John Bogle
Whisper66 is offline   Reply With Quote
Old 02-11-2021, 07:43 PM   #48
Recycles dryer sheets
 
Join Date: Jan 2006
Posts: 311
With that much money, I'd be tempted to convert it all at 37% in one shot and be done. Then you can live the rest of your life giving the finger to the man. Seeing how much debt we're going into as a nation, you could find yourself getting taxed well over 50% in the future.
__________________
Seems to me that the corporation's race to the top is resulting in a race to the bottom for the employee's quality of life. FIRE can't come soon enough.
kjpliny is offline   Reply With Quote
Old 02-11-2021, 08:16 PM   #49
gone traveling
 
Join Date: Dec 2015
Location: Berkeley, Denver, CO, USA
Posts: 1,406
Quote:
Originally Posted by kjpliny View Post
With that much money, I'd be tempted to convert it all at 37% in one shot and be done... [vs] getting taxed well over 50% in the future.
I think we will get a year+ warning about the 50% rate, so I plan to proceed at 24% until/if the hammer drops.
davebarnes is offline   Reply With Quote
Old 02-11-2021, 08:17 PM   #50
Full time employment: Posting here.
SnowballCamper's Avatar
 
Join Date: Aug 2019
Posts: 560
Quote:
Originally Posted by Whisper66 View Post

I am retired and we don't spend near our "max disposable income" each year. So each new year, I run a new ORP case to see what it suggests the Roth conversion should be in the current year given I didn't spend as much as the prior year plan suggested. As expected, the amount of conversion ORP suggests for the current year is higher than the prior year results suggested I would need to make for the current year. This makes sense since I have more assets then the ORP run of the prior year figured I would have.

You could use the above concept to address your under spending the max disposable income. You could run multiple ORP cases. The first case would represent year 1, the next year 2, the next year 3, etc.... ( I think running 3-4 cases would give you a pretty solid understanding of what is happening with Roth conversion suggestions.) Run year one as you have already done but only consider the first years results. Then start a new case 2 to represent year 2. For input, use your best estimate for assets assuming your lower spend rate. And only look at the results for the 1st year in Case 2. Then do this again for case 3 representing year 3. Kind of a clunky work around but it's one way to manage it.
When you run ORP you are telling the computer model to determine your maximum disposable income. It gives the best case scenario results, and this is helpful to determine IRA conversion strategies because higher income is taxed at a greater percentage.

The second part we should use is the Montecarlo simulation to see what the likely disposable income will be. ORP doesn't suggest spending the maximum...

I recall most of the posts on the forum from people who use ORP do an annual run to guide how high a tax bracket to to convert up to. I think that is prudent, but with a large increasing traditional IRA balance you could be doing conversions for a while. I think you can model a specified large conversion and compare the result to smaller conversions over more years. In each case, the prudent comparison is the Montecarlo simulation output, not just the maximum disposable income (which will show an inflated difference).

For my own case, there is little difference between doing conversions or not, and I'm not in a higher tax bracket, so not planning to convert.
__________________
--At what age does spending less now in order to have more later stop making sense?
SnowballCamper is online now   Reply With Quote
Old 02-11-2021, 08:24 PM   #51
Thinks s/he gets paid by the post
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 4,617
Quote:
Originally Posted by kjpliny View Post
With that much money, I'd be tempted to convert it all at 37% in one shot and be done. Then you can live the rest of your life giving the finger to the man. Seeing how much debt we're going into as a nation, you could find yourself getting taxed well over 50% in the future.

We are looking into that. Were considering hiring a tax advisor after this tax season is over, to help us along with our own calculations to make sure its not a bad move.
Dash man is offline   Reply With Quote
Old 02-11-2021, 09:25 PM   #52
Full time employment: Posting here.
Whisper66's Avatar
 
Join Date: Apr 2014
Location: Houston
Posts: 906
Quote:
Originally Posted by kjpliny View Post
With that much money, I'd be tempted to convert it all at 37% in one shot and be done.....Seeing how much debt we're going into as a nation, you could find yourself getting taxed well over 50% in the future.
I have had that same temptation. We currently convert to the top of the 24% tax bracket. If either the tax rates go up dramatically or one of us (spouse or I) dies too soon so that the one that remains is in the singles tax brackets .... then much more aggressive conversions would have been desireable. After running the numbers for our situation, I chose to spread out the conversions per ORP recommendations and take the benefit of filling up the lower tax brackets each year. That will likely change if taxes change too much or our health deteriorates quickly.
__________________
"Learn everyday, but especially from the experiences of others. It's cheaper! " - John Bogle
Whisper66 is offline   Reply With Quote
Old 02-11-2021, 10:04 PM   #53
Full time employment: Posting here.
Whisper66's Avatar
 
Join Date: Apr 2014
Location: Houston
Posts: 906
Quote:
Originally Posted by SnowballCamper View Post
When you run ORP you are telling the computer model to determine your maximum disposable income. It gives the best case scenario results, and this is helpful to determine IRA conversion strategies because higher income is taxed at a greater percentage.
I think we are in agreement here. A single run of I-ORP gives an optimal answer (disposable income, recommended Roth Conversion) for the single set of conditions one has input. Results may be conservative or aggressive depending on the input provided by the user. Relying on results from a single run for an entire retirement is not prudent.

I run ORP yearly using what I consider "realistic" values for input to get reasonable guidance on how much my wife and I can spend and how much to convert to Roth during that specific year. If times change for the worse, future yearly ORP results will guide us to pull back on spending and limit conversions.

Quote:
Originally Posted by SnowballCamper View Post
The second part we should use is the Montecarlo simulation to see what the likely disposable income will be. ORP doesn't suggest spending the maximum...
Monte Carlo is one method. Personally I prefer to use Firecalc's historical analysis to test how our assets are likely to perform over time with a specified yearly spend. Clearly I am ok assuming the future won't look all that much different than the past. If it does turn out much different, we will naturally cut spending as much as needed to adjust.

Quote:
Originally Posted by SnowballCamper View Post
I recall most of the posts on the forum from people who use ORP do an annual run to guide how high a tax bracket to to convert up to. I think that is prudent, but with a large increasing traditional IRA balance you could be doing conversions for a while. I think you can model a specified large conversion and compare the result to smaller conversions over more years. In each case, the prudent comparison is the Montecarlo simulation output, not just the maximum disposable income (which will show an inflated difference).

For my own case, there is little difference between doing conversions or not, and I'm not in a higher tax bracket, so not planning to convert.
FWIW - Comparing converting or not under one set of input conditions will typically not show a large difference in disposable income. I-ORP's developer (J Welch) had a nice white paper on this (https://www.i-orp.com/ModelDescription/Conversions.pdf) and found only ~1.5% difference in the cases he studied. Several on this board have seen the same in their own analysis (me included). Welch's paper points out potentially stronger reasons to convert are (1) protection against future tax increases or (2) reducing tax burden to heirs. These are the two reasons my wife and I are converting.
__________________
"Learn everyday, but especially from the experiences of others. It's cheaper! " - John Bogle
Whisper66 is offline   Reply With Quote
Old 02-12-2021, 03:28 AM   #54
Thinks s/he gets paid by the post
 
Join Date: Jul 2004
Posts: 1,524
Quote:
Originally Posted by kjpliny View Post
With that much money, I'd be tempted to convert it all at 37% in one shot and be done. Then you can live the rest of your life giving the finger to the man. Seeing how much debt we're going into as a nation, you could find yourself getting taxed well over 50% in the future.
^^^^ Not to make it political, but this, for sure. I have thought about that as single. I did go to top of 24% bracket last year for my conversion, but might be pushing to next bracket to accelerate the conversions this year. i-ORP tells me to convert even faster than what I have calculated with RPM. I will have a pension that ensures I am in at least the 14% bracket - when SS hits, I will probably be permanently in a higher bracket due to both pensions. In my case, having no to minimal tax deferred is to my benefit.....
__________________
Deserat aka Bridget
We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.
deserat is offline   Reply With Quote
Old 02-12-2021, 05:36 AM   #55
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
street's Avatar
 
Join Date: Nov 2016
Posts: 6,962
Quote:
Originally Posted by Dash man View Post
We are looking into that. Were considering hiring a tax advisor after this tax season is over, to help us along with our own calculations to make sure its not a bad move.
It will be interesting to see what your tax advisor says. I have followed this thread and will need to be advised myself on what I need to do also.
street is online now   Reply With Quote
Old 02-12-2021, 05:37 AM   #56
Full time employment: Posting here.
 
Join Date: Oct 2015
Posts: 802
I really appreciate everyone's insight here. As it relates to how IORP, works, using my year 1 numbers(default)...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 516 565 0 516 0 130 224 471

If I only plan on spending after tax $250K, would I not adjust the above and do something like this (my guess)...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 737? 565? 0 737? 0 130 224? 250

I don't want to beat this into the ground, just trying to understand how the model thinks, but if I spend less than than default (net $471K), wouldn't the model effectively suggest filling the Roth conversion bucket up to the level of taxes ($224K), doing a higher level of conversions sooner vs later?

I have started using NewRetirement Planner Plus which allows you to manipulate year by year Roth conversions, illustrating the differences in lifetime taxes. On the surface, it seems like a pretty good tool that may be helpful here. Anyone use this or have an opinion as to how it compares to IORP relative to Roth conversions?

I have actually thought of doing 1 big conversion or break it down into 3 to 5 years and empty the 401K, but it just feels like a big nasty IRS check. I think I prefer a slower bleed...
DawgMan is online now   Reply With Quote
Old 02-12-2021, 06:11 AM   #57
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
street's Avatar
 
Join Date: Nov 2016
Posts: 6,962
I know there was a thread years ago on converting all tax deferred money in one shot or in two shots in a couple year span. I'm thinking if I remember right it worked out to be a good plan. I beleive someone smarter then I on ER did the scenario and it was not a bad way to go.
street is online now   Reply With Quote
Old 02-12-2021, 06:27 AM   #58
Full time employment: Posting here.
 
Join Date: Oct 2015
Posts: 802
Quote:
Originally Posted by street View Post
I know there was a thread years ago on converting all tax deferred money in one shot or in two shots in a couple year span. I'm thinking if I remember right it worked out to be a good plan. I beleive someone smarter then I on ER did the scenario and it was not a bad way to go.
I suppose where the analysis starts to get a little complicated is that outside of guessing where taxes will be in 15+ years (other than higher!), its not all about reducing lifetime taxes, but really includes comparing your after tax balances (Roth account) vs your guestimate of pretax balances (after some tax deduction) sometime in the future. To analyze even further, I would think you would apply some NPV to your different annual tax obligations to see how that weighs out (a $$ today is worth more than a $ tomorrow). Point being, maybe it does make sense to bite the big bullet year 1 if time is on your side to let the Roth grow.
DawgMan is online now   Reply With Quote
Old 02-12-2021, 06:42 AM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,383
Quote:
Originally Posted by street View Post
I know there was a thread years ago on converting all tax deferred money in one shot or in two shots in a couple year span. I'm thinking if I remember right it worked out to be a good plan. I beleive someone smarter then I on ER did the scenario and it was not a bad way to go.
It works out if the market soars after the large conversion. Or maybe that person only had a couple years before SS + pensions kicked in.
RunningBum is offline   Reply With Quote
Old 02-12-2021, 06:46 AM   #60
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
street's Avatar
 
Join Date: Nov 2016
Posts: 6,962
DawgMan, you made some great points. In time I need to get it figured out what I need to do but more importantly is be comfortable with how I proceed with converting to ROTH, convert the lump or do just my yearly RMD when the time comes.
I'm most likely will never use the money that is in tax deferred money now. It will go to heirs unless the world ends first.
street is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Taming my healthcare cost monster Alex in Virginia Health and Early Retirement 18 05-11-2013 05:39 AM
Weird, Scary, Mold Monster TromboneAl Other topics 65 11-02-2008 08:12 AM
The Flying Spaghetti Monster Strikes Again! brewer12345 Other topics 7 03-26-2008 02:24 PM
New footage of the Loch Ness Monster! cute fuzzy bunny Other topics 4 06-01-2007 08:39 AM

» Quick Links

 
All times are GMT -6. The time now is 04:34 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2022, vBulletin Solutions, Inc.