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Old 09-13-2019, 07:28 AM   #41
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That said, I agree with aggressively converting to a Roth. People complain that i-orp is too aggressive, but I think the reason why is that it uses average returns and if you aren't aggressive, the tIRA will grow and push you into a higher tax bracket when you hit MRDs. I'm managing for ACA subsidies so I'm only able to do small conversions until age 65, but any year I forego the subsidy I do a larger conversion.
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Old 09-13-2019, 07:32 AM   #42
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Interesting discussion. I tried once or twice to wrap my head around this and never really did. My best guesstimate was that, since our pensions/SS income is fully taxable and takes us into a high enough bracket to make Roth conversions not sensible we should just take our spending withdrawals fro taxable. DW's tax differed accounts are large so we will get hit by a torpedo in 4 years but there doesn't appear to be much room to wriggle savings out. Our plan will be to just pay the tax on the RMDs and bank the excess in taxable which will be stepped up on death.

I vaguely remember running the numbers thru i-orp years back and being over-whelmed by the output. But doesn't it claim to do what you want?
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Old 09-13-2019, 08:02 AM   #43
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Even if rates don't go back up, if you can pay the tax from savings then converting now at 24% is probably better than withdrawing at 22% if the withdrawal is more than ~11 years from now.

That is due to exchanging (in effect) the tax drag in the taxable account for the tax free growth in the Roth.
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No, that's not true. Put it in a spreadsheet and you'll see it's not.
The spreadsheet analysis reflected the simplest situation regarding traditional vs. Roth, for which one needs to know only the current and future marginal rates.

If one can pay the conversion tax from savings, it's a more complicated situation, for which one needs to know other things such as the tax rate on taxable investments. See that link for links to two other spreadsheets one can use to quantify the effect.

Does the quote at the top of this post make more sense now?
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Old 09-13-2019, 08:13 AM   #44
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The spreadsheet analysis reflected the simplest situation regarding traditional vs. Roth, for which one needs to know only the current and future marginal rates.

If one can pay the conversion tax from savings, it's a more complicated situation, for which one needs to know other things such as the tax rate on taxable investments. See that link for links to two other spreadsheets one can use to quantify the effect.

Does the quote at the top of this post make more sense now?
Yes, I was just coming back to correct myself for the more preferred case of paying the tax from savings. It would depend on the tax rate for the side fund you'd have in the tax deferred case, where you got to keep invested the amount you'd have paid for taxes in the Roth conversion. For some, they may be at 0%, or may keep it in their estate and their heirs get an stepped up basis. But if it's taxed at 15% LTCG or higher, the Roth conversion does come out ahead. I didn't fully read the link you provided, but I'm sure there are other complications, and my spreadsheet was too simplistic. I'll agree with you that a conversion at 24% probably does beat paying 22% later.
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Old 09-20-2019, 04:34 PM   #45
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Much like the OP, those are the questions in my head as I head to the magic 59.5 in January. Woooo Hoooo!

Many thanks to all of you for your insight & esp for the shared links. I've bookmarked this post!
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Old 09-20-2019, 05:02 PM   #46
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An advanced question often asked, rarely answered specifically that Iíve seen. In the past, these threads seem to elicit few replies?

With DW finally retired, we have a 5-7 year window where our taxable income will probably be at itís lowest, before Soc Sec and RMDs hit, and the tax torpedo. TIRAs are about 29% of our holdings, so RMD will be significant. We have no Roth accounts. We havenít had room for Roth conversions without exceeding the 0% cap gains threshold, but we may for the next 5-7 years. It may well be weíre better off paying more taxes now (above the 0% threshold) to do conversions before age 70 anyway.

My cocktail napkin approach has been to try and keep taxable income constant inflation adjusted year after year as a means to minimize taxes long term.

Iím decent with spreadsheets, so Iíve tried several times to build one to model retirement income and taxes but there are just too many interdependent moving parts for my brain to keep straight. I havenít been able to build one I trust.

Online searches provide tons of articles explaining all the variables and issues, but not solutions other than talk to Ďyour tax advisorí - weíve never had or needed one before.

IME Vanguard wonít touch anything significantly related to taxes with a 100í foot pole, Iíve asked several times, several ways.

Some financial advisors do appear to include tax planning, but every one Iíve talked to pushes/insists on managing investments also - preferably ongoing, at a % of AUM of course. Thatís not going to happen if I can help it. I only want a tax plan for income optimization.

I realize assumptions of future taxes have to be set, and that predicting taxes exactly is therefore impossible. But that doesnít mean no plan, and I am willing to make specific assumptions. Ideally Iíd like to see a plan with tax rates and cap gains the same inflation adjusted, and another assuming higher tax rates. We also know when some of the current rates/laws are set to expire.

So Iím looking for professional guidance, and expect to pay for it. Any ideas? Again we donít know any tax advisors, and weíve just moved to another state (our problem) so references are almost non existent as we build a new network of friends and contacts.

We hired a true fee only financial planner from the Garrett Network. (Cost us $1200 for the plan- period-he does not manage our accounts- just advises- with access to him all year and an option to put him on retainer or hourly in the following years if we so desire)He has advised us to delay SS until age 70 (or at least just my husband) and to draw down our assets from taxable and/or tax deferred accounts to live on in the meantime.


This will start in January- me being age 63 (and already retired) and hubby age 65 1/2 and retiring then. This to help decrease the tax torpedo at age 70 1/2 when RMD's kick in and we start collecting SS. We will also have to pay health insurance for me until I reach age 65. He doesn't seem concerned about any of this. But I am freaking out! LOL! I am so used to saving money not depleting our accounts.


We have a very conservative portfolio but I still worry about a market downturn.
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Old 09-20-2019, 08:19 PM   #47
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Financial planners with a RIA (Retirement Income Advisor? I think) designation have specific expertise in these kinds of questions. My long-time CPA recently became a CFP and he has been really helpful to me on these kinds of questions. I should not be left alone with a spreadsheet, so I couldn't do this without help.
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Old 09-20-2019, 08:31 PM   #48
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If one can pay the conversion tax from savings, it's a more complicated situation,
No it isn't. The money in savings to pay the tax doesn't just magically appear from nowhere. It's simply part of your overall portfolio.

Money if fungible. If you can use it to pay the tax you could also use it to invest, and you're right back to the spreadsheet printout that RunningBum showed in his 08:23 AM post.
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Old 09-21-2019, 03:49 AM   #49
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No it isn't. The money in savings to pay the tax doesn't just magically appear from nowhere. It's simply part of your overall portfolio.

Money if fungible. If you can use it to pay the tax you could also use it to invest, and you're right back to the spreadsheet printout that RunningBum showed in his 08:23 AM post.
Money may be fungible, but money held in a taxable account is subject to annual taxation while money held in a Roth account is not.

See the first of the two More complicated situations for a summary, Maxing out your retirement accounts for more details, and Roth 401(k) vs. 401(k) Spreadsheet Attempt - Critique Please for math derivation details.
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Old 09-21-2019, 06:01 AM   #50
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I think the analysis of using money in an IRA or 401K to pay tax for conversion depends on what you are trying to accomplish. Of course one objective in any action on your savings is to maximize the savings balance, but there are other objectives also. One is to pay taxes today while in a lower bracket, another is to allow for lower MAGI when having to contend with Medicare IRMAA or taxable portion of SS distributions. Yet another is perhaps you have a plan to draw after tax funds where you need to sell securities and realize capital gains, trying to minimize other reported income to minimize capital gain taxes. And a favorite of mine is to allow for taxes to be paid today so I don't have to worry about falling into some unknown tax trap invented by the boys and girls in Washington when they change income tax rules.

Just one man's opinion, not to be sexist
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Old 09-21-2019, 07:13 AM   #51
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a favorite of mine is to allow for taxes to be paid today so I don't have to worry about falling into some unknown tax trap invented by the boys and girls in Washington when they change income tax rules.
Yet you ignore the possibility that they will change the tax rules to put a tax on ROTH withdrawals.

See, when you set about to make plans to guard against potential bad risks you have to make allowances for _all_ reasonable risks, not just the ones that have a favorable outcome.

And there's an example of just that.
SS benefits were not subject to income tax originally. Reasonable, since you paid the SS tax with after-tax dollars. Then they changed the tax rules and it suddenly became taxed.
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Old 09-21-2019, 07:49 AM   #52
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Midpack,
I retired this year at age 55 and am in the same situation, trying to find software which handles all of the variables. The i-orp "extended orp" was very helpful. As stated in the thread, you have to adjust the ending asset balance upward in order to reduce the annual spend to what you want.

I recently started using software from RightCapital which I got access to through Heritage Wealth Planning. He charges a one time fee of $150 for access through him. The software has a few quirks I am working through, but well worth the money. Heritage Wealth has several youtube videos and videos on his site worth looking at. He uses the software in many of those videos, so you can get a feel as to what it does. One thing I like is it creates 1040 tax forms for each year so you can look at many scenarios on the actual form.

In my particular situation, I will be converting to the top of the 24% bracket each year. Yes, it is tough sending that money to the IRS each year, but the bottom line is that the numbers don't lie. It is the optimal solution. Personally, I don't believe fed rates will be this low again in my lifetime.

The i-orp software also has me filling the 24% bracket for several years, then reducing conversions when my regular IRA is cut in half. RightCapital has me filling 24% bracket until my IRA goes all the way to zero. I need to study the difference in software assumptions to see why the difference, but since they both have me doing the same level of conversions for several years, I have time to figure it out.

Hope this helps.
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Old 09-21-2019, 07:54 AM   #53
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Midpack,

Here are some links to what I have been using:

https://heritagewealthplanning.com/

https://www.youtube.com/channel/UCSE...rKPoaU9z0_XbmA

https://www.rightcapital.com/

RightCapital's website shows all the features.

Eric
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Old 09-21-2019, 09:15 AM   #54
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The chances of a Roth withdrawal becoming taxable are far less than SS taking a haircut, which I also think is only a remote possibility. Apples and oranges. I’m surprised that moving to a tax free state is brought up so many times, here. Sure if you are a lower income FIRE, that rents, but that’s few on this forum. Maybe if you have an additional specific reason to be in that tax free state, but for the most part it is pretty well known that the states get their revenue one way or the other. If there is no income tax, then other taxes and costs are higher, so the savings are often phantom. And states where all costs are low, mean few or poor services, limited population, so typically not on my radar as desirable to live in. I agree that some states are just expensive to live in at every turn, like Taxachussetts, or NJ, and from a net income standpoint only, are hard to justify IMHO, so maybe that is the reference point mentioned.
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Old 09-21-2019, 10:04 AM   #55
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Yet you ignore the possibility that they will change the tax rules to put a tax on ROTH withdrawals.

See, when you set about to make plans to guard against potential bad risks you have to make allowances for _all_ reasonable risks, not just the ones that have a favorable outcome.

And there's an example of just that.
SS benefits were not subject to income tax originally. Reasonable, since you paid the SS tax with after-tax dollars. Then they changed the tax rules and it suddenly became taxed.
I don't think there's a chance in hell that the gov't will start taxing Roth withdrawals. Since I'm in retireby90's corner with doing the conversions ahead of reaching RMD age, I'm obviously willing to take that chance. If I'm wrong I'll be really pissed, but it would have been worth the risk.

Much more likely are things like a VAT, or even the mythical wealth tax that keeps getting floated. But either of those would hit you whether you have your money in a Roth or a tIRA, so it's a wash. And, if by some chance they do start taxing Roth withdrawals, I suspect it will come long after regular tax brackets have been massively inflated. In which case getting the money from the tIRA to the Roth at these current rates will look pretty smart.
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Old 09-21-2019, 10:04 AM   #56
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Midpack,

Here are some links to what I have been using:

https://heritagewealthplanning.com/

https://www.youtube.com/channel/UCSE...rKPoaU9z0_XbmA

https://www.rightcapital.com/

RightCapital's website shows all the features.

Eric
Thank you very much. I've watched quite a few of the Heritage Wealth Planning YouTube videos. He's kind of quirky, but he seems knowledgeable and no nonsense, so worthwhile watching. I may try that.

I've also watched several Money Evolution videos, and they talk about all the right retirement income-tax issues so I may give them a look. However, they're upfront that they're looking for ongoing accounts so getting a one time plan from them (available) will probably have just enough hooks/missing pieces to annoy me...
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Old 09-21-2019, 10:15 AM   #57
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With iORP I think it comes down to wanting proof it's right, even though I have no reason to doubt it. I have done several online calculators like Vanguard (no longer available) and others over the years using our numbers and they've all come back suggesting Roth conversions would be a wash in the past using the assumptions I'd want them to use - we're going to take about the same tax hit either way. I've never understood why iORPs results are consistently much different, every time I've run it it recommends Roth conversions.

I realize I'm planning on a very conservative WR, but iORP tells me our constant spending income is between $188K and $246K depending on assumptions, where we're used to spending about $70K year. So the results seem like they're from another planet. If iORP would let me set an income for comparison that might help - yes, I realize I can do that by setting a (large) surplus. On one pass thru, I accidentally left an extra "0" and put in a surplus of $10,000,000 - and it said we could manage a constant spending income of $61K/year!!! That just doesn't compute to me...

I ran iORP last week and the first plan I got back showed MASSIVE taxes in the first two years, like $150,000 each year - more than 15 times what I am paying now. And then it tailed off to lower, but not low taxes thereafter. I'd want to talk that through with someone to better understand - I don't know that I could be talked into a tax hit like that.

Then I ran it again a few hours later and could not get that same front loaded result. I am sure it was something with one of my entries, I am not suggesting iORP is erratic, I am sure it's not.

Still considering my options including the two above.

I never needed any hand holding for investing, but I guess I do when it comes to long term retirement income - tax planning.
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Old 09-21-2019, 11:32 AM   #58
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Midpack,

In my case, even if it was a wash I would aggressively do Roth conversions, because I believe tax rates have nowhere to go but up. But that is just a personal opinion. I don't know for sure, but in my case the difference between i-orp and RightCapital may be that i-orp is not taking into account optimizing social security taxes and medicare premiums. That would explain why RightCapital uses Roth conversions until my regular IRA goes to zero by age 65 so medicare and soc sec are optimized.

Please share with me any new discoveries you make on this topic. It is worth studying closely due to the amount of money involved.

Eric "fishfactory"
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Old 09-21-2019, 12:26 PM   #59
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Yet you ignore the possibility that they will change the tax rules to put a tax on ROTH withdrawals.

See, when you set about to make plans to guard against potential bad risks you have to make allowances for _all_ reasonable risks, not just the ones that have a favorable outcome.

And there's an example of just that.
SS benefits were not subject to income tax originally. Reasonable, since you paid the SS tax with after-tax dollars. Then they changed the tax rules and it suddenly became taxed.

One thing I have going for me if I convert to ROTH now and they start talking seriously about it I could just take a complete withdraw and add to the cash account. Risk I'm willing to take.
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Old 09-23-2019, 09:15 PM   #60
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Midpack,

Are you running the MonteCarlo after you run ORP on the extended tab?

After you run ORP, click on the "Monte Carlo" at the bottom. A pop up window comes up, but it might take up to a minute to get results. Sometimes it comes up with an error too...

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