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Old 07-14-2021, 10:53 AM   #21
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I have to admit, as I start to play with some different Roth conversion strategies, my head spins. You guys are all much smarter than me. A tool I have used to help with this is New Retirement Planner Plus. I would be curious to get everyone's feedback on the results I have gotten so far...

Macro Modeling Assumptions
- Start withdrawals 2022 (no earned income), age 57 (both me and DW)
- Using current tax brackets (married, file jointly), which stay "as is" growing 2% annually
- Higher than typical annual planned withdrawal amount (FatFire- very discretionary spend), growing 2% annually
- 2% annual inflation
- 60/40 AA averaged across all retirement accounts, ideally positioned to minimize taxes, underwriting 5% annual returns
- Current retirement accounts: 55% after tax/45% Tax deferred, 0% Roth
- Planning on 75% of current SS benefit. Current WR in low 2% range before SS.

Test 1: No Roth Conversions, live off after tax $$ until RMDs (no tax deferred acct withdrawals), upon age 72 (RMDs) results in hitting the 32% tax bracket until age 78, then goes to 35%+.

Test 2: Do larger Roth Conversions starting in 2022 (age 57) into the 24% tax bracket through age 71 and then stop (no withdrawals other than conversions from tax deferred accts), then RMDs kick in resulting in me staying in the 24% tax bracket until one of us passes. Lifetime tax savings save me over 31% from Test 1, which relates to real $$ in my case.

So, aside from legacy concerns (ideally transferring Roth vs tax deferred accounts to kids) and future single spouse tax issues, should that not be a strong enough argument alone to do Roth conversions into a tax bracket that in theory is the same as it would be in RMDs? The only counter argument I would make to my 31% tax savings is that it is in real $$, and probably should be somewhat discounted since I can effectively pay no taxes until RMDs hit (a dollar today is worth more than a dollar tomorrow)? What discount rate should I use and what does it do to the 31% (is it really 20%?), I'm not sure?

So, based on my analysis, it seems Roth conversions are worth it, even into the 24% tax bracket. Throw in the legacy and single spouse benefits, even more beneficial. Assume high probability of even higher taxes in the future, they become even more more beneficial.

What say you?
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Old 07-14-2021, 11:18 AM   #22
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I think it is worthwhile in your case because with no conversions you would be in the 32% or 35% tax bracket vs paying 24% today.... that 8-11% tax savings adds up. And 31% tax savgs seems credible given the disparity in rates that you quoted.

Similarly, in my case trading off 12% for 22% is also worthwhile.

But if your're in the 22% for 24% range then not so much.
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Old 07-14-2021, 11:19 AM   #23
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The legacy benefits are only there if there are tax savings. Or are you identifying other legacy benefits?
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Old 07-14-2021, 11:23 AM   #24
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The legacy benefits are only there if there are tax savings. Or are you identifying other legacy benefits?
Legacy, as in the kids will not have taxable RMDs with inherited Roth accounts.

Frankly, I look at anything my kids get (which will be plenty) as of little concern as they should look at it as found money. My main focus is the benefits it provides for my DW & me.
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Old 07-14-2021, 11:42 AM   #25
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Originally Posted by DawgMan View Post

Test 2: Do larger Roth Conversions starting in 2022 (age 57) into the 24% tax bracket through age 71 and then stop (no withdrawals other than conversions from tax deferred accts), then RMDs kick in resulting in me staying in the 24% tax bracket until one of us passes. Lifetime tax savings save me over 31% from Test 1, which relates to real $$ in my case.

So, aside from legacy concerns (ideally transferring Roth vs tax deferred accounts to kids) and future single spouse tax issues, should that not be a strong enough argument alone to do Roth conversions into a tax bracket that in theory is the same as it would be in RMDs? The only counter argument I would make to my 31% tax savings is that it is in real $$, and probably should be somewhat discounted since I can effectively pay no taxes until RMDs hit (a dollar today is worth more than a dollar tomorrow)? What discount rate should I use and what does it do to the 31% (is it really 20%?), I'm not sure?

So, based on my analysis, it seems Roth conversions are worth it, even into the 24% tax bracket. Throw in the legacy and single spouse benefits, even more beneficial. Assume high probability of even higher taxes in the future, they become even more more beneficial.
Yes, in your situation I would be probably convert to the top of the 24% bracket.

There is the see-saw effect to watch out for. As you convert and pay some taxes now, does it eliminate or reduce your tIRA enough that you won't be in that higher tax bracket later? You don't want to convert at 24% only to find out that you're down to 22% because you have little or no RMD. OTOH, that 22% bracket may revert back to 25% in 2026. And a 2% difference in either direction isn't going to amount to that much.

You talk about the inflation effect and a dollar now being worth more. That is offset by the fact that your Roth grows tax free, but your tIRA doesn't. Run that through a spreadsheet to see for yourself.
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Old 07-14-2021, 12:07 PM   #26
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Yes, in your situation I would be probably convert to the top of the 24% bracket.

There is the see-saw effect to watch out for. As you convert and pay some taxes now, does it eliminate or reduce your tIRA enough that you won't be in that higher tax bracket later? You don't want to convert at 24% only to find out that you're down to 22% because you have little or no RMD. OTOH, that 22% bracket may revert back to 25% in 2026. And a 2% difference in either direction isn't going to amount to that much.

You talk about the inflation effect and a dollar now being worth more. That is offset by the fact that your Roth grows tax free, but your tIRA doesn't. Run that through a spreadsheet to see for yourself.
Based on my modeling, I stay in the 24% bracket starting with conversions thru RMD years (until 1 spouse passes). Of course, all of this is based on the assumptions I noted.

My comment on regarding truly comparing the lifetime tax savings is that in Test 1 (no conversions) all of my taxes are paid starting at age 72+, whereby for the first 15 years I can pay arguably no taxes. So, if my analysis says I will pay a total of $6 in lifetime taxes in Test 1 and $4 in taxes in Test 2 (annual Roth conversions), but I start paying a part of the $4 at age 57 (2022), am I really saving $2 in taxes or should I really be discounting the $2 at some factor? Am I making sense here?
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Old 07-14-2021, 12:45 PM   #27
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I understand what you are saying, and I think you can compare the two directly but I'm not coming up with a quick way to prove that.

I look at it a slightly different way: Which way will give me more money to spend? That's pretty much the equivalent of asking which gives me the higher net worth, but without getting in the troublesome discussion of how to treat deferred tax liabilities.

I evaluate this as if I will spend all of the money, which means my tIRA will be zero at death. If that means I calculate out to beyond 100, so be it. If I die earlier, my heir gets it, with whatever tax implications. I'm not optimizing for my heir, I'm doing it for me.

So if converting to a Roth gives me more money in the end, I convert. Fully, if that's what my numbers say, partially or not at all if that works out best.

There's clearly no breakeven point here. If I'm looking at spendable dollars, anything in my tIRA is not spendable until I pay the taxes. So it's not meaningful to look at the larger tIRA balance if I don't convert, because I can't touch it in that form. But I can get at the Roth.

Access to converted money has the extra advantage of having more flexibility if I need a large amount of money in an emergency or special situation. If I've chipped away at the tIRA with conversions and now have a big chunk in the Roth, I can get to all of that in an emergency, if I'm 59.5+. But if I didn't convert, and I have need for a large amount out of my tIRA, I'm likely going to get hit with a very large tax bill so I'll net less money available to spend.

I hope that answers your question.
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Old 07-14-2021, 02:26 PM   #28
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Originally Posted by RunningBum View Post

You talk about the inflation effect and a dollar now being worth more. That is offset by the fact that your Roth grows tax free, but your tIRA doesn't. Run that through a spreadsheet to see for yourself.
Unless tax rates change, the Roth and regular IRA are equivalent. I'm not sure I see the "offset" you are referring to. A dollar today is always worth more than a dollar in the future. That is true even if inflation is zero.
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Old 07-14-2021, 02:31 PM   #29
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Legacy, as in the kids will not have taxable RMDs with inherited Roth accounts.

Frankly, I look at anything my kids get (which will be plenty) as of little concern as they should look at it as found money. My main focus is the benefits it provides for my DW & me.
Whether larger taxable distributions are better than smaller tax-free ones depends on tax rates. The benefit should be in the form of more money after taxes.

But I certainly agree with you on any bequests to the kids being found money. I can't imagine anyone bellyaching about an inheritance because they owe taxes on it.
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Old 07-14-2021, 02:41 PM   #30
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One important thing to consider about conversions is how it impacts your ACA subsidies, assuming you are using this insurance. Makes the calc even more complicated.
Yes, I have a window of a couple years where Pralana Gold suggests I go for ACA subsidies. That restricts the amount of conversions that could be done in the 22% bracket, but there is still room in the 24% bracket for conversions in other years and the analysis says don't bother to use it. I probably will go into the 24% bracket this year and next before thinking about trying to get subsidies the following couple of years, regardless of the analysis. The future has a lot of uncertainties and I want to get the Roth off to a good start.
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Old 07-14-2021, 03:25 PM   #31
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Originally Posted by DawgMan View Post
I have to admit, as I start to play with some different Roth conversion strategies, my head spins. You guys are all much smarter than me. A tool I have used to help with this is New Retirement Planner Plus. I would be curious to get everyone's feedback on the results I have gotten so far...

Macro Modeling Assumptions
- Start withdrawals 2022 (no earned income), age 57 (both me and DW)
- Using current tax brackets (married, file jointly), which stay "as is" growing 2% annually
- Higher than typical annual planned withdrawal amount (FatFire- very discretionary spend), growing 2% annually
- 2% annual inflation
- 60/40 AA averaged across all retirement accounts, ideally positioned to minimize taxes, underwriting 5% annual returns
- Current retirement accounts: 55% after tax/45% Tax deferred, 0% Roth
- Planning on 75% of current SS benefit. Current WR in low 2% range before SS.

Test 1: No Roth Conversions, live off after tax $$ until RMDs (no tax deferred acct withdrawals), upon age 72 (RMDs) results in hitting the 32% tax bracket until age 78, then goes to 35%+.

Test 2: Do larger Roth Conversions starting in 2022 (age 57) into the 24% tax bracket through age 71 and then stop (no withdrawals other than conversions from tax deferred accts), then RMDs kick in resulting in me staying in the 24% tax bracket until one of us passes. Lifetime tax savings save me over 31% from Test 1, which relates to real $$ in my case.

So, aside from legacy concerns (ideally transferring Roth vs tax deferred accounts to kids) and future single spouse tax issues, should that not be a strong enough argument alone to do Roth conversions into a tax bracket that in theory is the same as it would be in RMDs? The only counter argument I would make to my 31% tax savings is that it is in real $$, and probably should be somewhat discounted since I can effectively pay no taxes until RMDs hit (a dollar today is worth more than a dollar tomorrow)? What discount rate should I use and what does it do to the 31% (is it really 20%?), I'm not sure?

So, based on my analysis, it seems Roth conversions are worth it, even into the 24% tax bracket. Throw in the legacy and single spouse benefits, even more beneficial. Assume high probability of even higher taxes in the future, they become even more more beneficial.

What say you?
If you are giving away your estate to charity, the metric that matters is NW, if you care about how much your heirs get, then the value after heir liquidation is what matters. I don't have a methodology for caring about heirs, but only sort of. maybe look at both and then decide?

That's a big tax bite difference between the 24% bracket and the 32% or higher. Your situation certainly won't get better if TCJA expires, so my guess is you should be converting at the top of the 24% bracket for the next few years. Then once IRMAA starts to matter, the math might change a bit, but you will get the privilege of paying a lot of taxes either way.

The tax rate doesn't need to be discounted for time and because of the progressive tax code, the best way to avoid high tax rates is to avoid low tax rates too and try fill the lower rate years with Roth Conversions to make the tax rates closer to level throughout life. My conundrum was that for me, it didn't take as much as I thought.
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Old 07-14-2021, 04:00 PM   #32
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One important thing to consider about conversions is how it impacts your ACA subsidies, assuming you are using this insurance. Makes the calc even more complicated.
TheFinanceBuff blog has a good description of a tool for just this situation: Roth Conversion and Capital Gains On ACA Health Insurance
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Old 07-14-2021, 08:03 PM   #33
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@Exchme thanks for this thread and posting your results.

Did you note the age of neutrality, or breakeven age, when comparing Roth conversions vs no Roth conversions?

For scenarios where Roth conversions were helpful, what % net worth difference at end of plan did you calculate? I'm didn't see how to form a conclusion on that question using the charts in the original post.
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Old 07-14-2021, 08:33 PM   #34
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And here we go again.
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Old 07-14-2021, 08:44 PM   #35
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For us the #1 reason is helping the surviving spouse dodge the single filing tax torpedo. That is plenty enough reason. I see mention of avoiding the 32% bracket. Now look at it from single filing tax rates.
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Old 07-15-2021, 06:38 AM   #36
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I think it's worth it for everyone to at least take a look at Roth conversions. Results and benefits will vary widely for each individual case. I tend to look at corner cases to see if it is beneficial to my situation.

My model calculates taxes and includes everything. I model taxes on SS, MFJ vs Single if one of us dies and CG/dividend taxes. So a fairly comprehensive look at taxes. I am retired, age 55 and in the 12% tax bracket. My model assumes that goes up to 15% in 2025. Once SS kicks in @ 70, I will be in the 22% tax bracket just with my COLA pension and SS. So on the face of it, I should maximize conversions between 55 and 72. Let's take a look (first number is total Federal and State taxes paid from now until age 95):

374,160 No conversions
365,445 100% to top of 12%/15% bracket

Not a huge difference there.

358,149 No conversions, me dead @ 73
297,714 100% to top of 12%/15% bracket, me dead @ 73

Hmm, this corner case shows that Roth conversions are more impactful, but not life changing.

I didn't run a scenario for my heirs inheriting a tIRA vs Roth, but they should benefit from inheriting a Roth vs traditional IRA, so the nod goes to conversions.

So I agree there is nothing life changing. We are going to do conversions to the top of the 12% bracket from 56-70 just because it's not hard to do.
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Old 07-15-2021, 07:32 AM   #37
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@Exchme thanks for this thread and posting your results.

Did you note the age of neutrality, or breakeven age, when comparing Roth conversions vs no Roth conversions?

For scenarios where Roth conversions were helpful, what % net worth difference at end of plan did you calculate? I'm didn't see how to form a conclusion on that question using the charts in the original post.
Let me start with my preface that net worth at death is a useful measure if you are giving your tax deferred money to charity as the assets transfer without taxes. But I am willing money to individuals and am interested in estate planning that will optimize their assets after heir liquidation, so that's the measure I used, rather than unadjusted NW. From other discussions, you seem to be in the middle, giving your estate to private individuals but not interested in estate planning that would optimize their inheritance. To each his own.

But rather than rehash that tired subject, the short answer is there was very little change in net worth during our lifetimes. Here are equivalent graphs to the original post, but this time using the present value of the change in NW/Roth conversion value.

The curve shapes (though not the scale) look very close to the original and the optimum point is still the same at 35% conversions, corresponding to the 22% bracket prior to IRMAA and staying within the 176K IRMAA tier.
Attached Images
File Type: jpg Roth NW basis existing bracket.jpg (262.3 KB, 33 views)
File Type: jpg Roth NW basis TCJA expires.jpg (258.4 KB, 32 views)
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Old 07-15-2021, 07:45 AM   #38
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I think it's worth it for everyone to at least take a look at Roth conversions. Results and benefits will vary widely for each individual case. I tend to look at corner cases to see if it is beneficial to my situation.

My model calculates taxes and includes everything. I model taxes on SS, MFJ vs Single if one of us dies and CG/dividend taxes. So a fairly comprehensive look at taxes. I am retired, age 55 and in the 12% tax bracket. My model assumes that goes up to 15% in 2025. Once SS kicks in @ 70, I will be in the 22% tax bracket just with my COLA pension and SS. So on the face of it, I should maximize conversions between 55 and 72. Let's take a look (first number is total Federal and State taxes paid from now until age 95):

374,160 No conversions
365,445 100% to top of 12%/15% bracket

Not a huge difference there.

358,149 No conversions, me dead @ 73
297,714 100% to top of 12%/15% bracket, me dead @ 73

Hmm, this corner case shows that Roth conversions are more impactful, but not life changing.

I didn't run a scenario for my heirs inheriting a tIRA vs Roth, but they should benefit from inheriting a Roth vs traditional IRA, so the nod goes to conversions.

So I agree there is nothing life changing. We are going to do conversions to the top of the 12% bracket from 56-70 just because it's not hard to do.
Agreed, the 12% bracket is a gift. If you have enough money to even worry about Roth Conversions at all, that's probably a given unless you want an ACA subsidy, then you will need to keep it within the subsidy limit. If you optimize asset location, you can get a lot of movement in your accounts in those years.
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Old 07-15-2021, 07:59 AM   #39
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Agreed, the 12% bracket is a gift. If you have enough money to even worry about Roth Conversions at all, that's probably a given unless you want an ACA subsidy, then you will need to keep it within the subsidy limit. If you optimize asset location, you can get a lot of movement in your accounts in those years.
That's a good point about AA. All my fixed income is in my 401k in my stable value fund which is yielding 2.2%. That's better than bonds so I'll keep it there. And it minimizes growth in my 401k so I have to convert less. My taxable and Roths are 100% stock, which will maximize growth there. As I convert, I will have to find another fund for my fixed income allocation in my Roths.
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Old 07-15-2021, 08:07 AM   #40
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For us the #1 reason is helping the surviving spouse dodge the single filing tax torpedo. That is plenty enough reason. I see mention of avoiding the 32% bracket. Now look at it from single filing tax rates.
Yep, a factor that will favor the Roth includes early death of one spouse and long life of the other.

Also, in planning, most folks use conservative returns and the market often gives happy surprises, so quite often folks end up in high brackets and wish they had done some conversions sooner.
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