Thanks for weighing in pb4uski. Is your projection model a spreadsheet that can be easily created? Please advise how I would start putting together this projection model?
Traditional 401K Roth Conversions - How to determine the Benefits?
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Thanks for weighing in pb4uski. Is your projection model a spreadsheet that can be easily created? Please advise how I would start putting together this projection model?
If it is a spreadsheet you seek, have you looked at either/both of the ones mentioned in the Using a spreadsheet section of the Roth IRA conversion wiki in Bogleheads?
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I guess that "easily" is subjective and it developed over many years with things periodically added, but here are the basic columns:
| Year |
| Age |
| Int |
| Div |
| Pension |
| tIRA withdrawals |
| SS – DW |
| SS – lf |
| AGI |
| Std Dedn |
| TI Subtotal |
| IRMAA limit |
| Roth conv |
| RMD factor |
| RMD |
| TI |
| Ordinary Income |
| Pref income |
| Effective federal tax rate |
| 10% bracket |
| 12% bracket |
| 22% bracket |
| Ordinary tax |
| Div/CG Tax |
| Federal tax |
While we don't have dividends anymore I left it in since dividends are taxed at preferential rates compared to interest. While I have a column for tIRA withdrawals we don't have any... all Roth conversions and we live off of taxable account savings. While I don't really use the IRMAA tier 1 limit I include it for informatonal purposes. The tax brackets are current for the current year and then increased for inflation thereafter. For simplicity, I assume that 85% of SS is taxable after considering Roth conversions and RMDs.
I have other columns to the right that start with my current taxable, tax-deferred and tax-free balances and they grow at an assumed investment rate and are reduced for spending (net of pension, SS, etc), increased and reduced for Roth Conversions, reduced and increased for RMDs, etc. The taxable account projection drives the interest included in income.
It has become a lot simpler since we no longer have qualified income so I don need to do two tax calculations.
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I do not recommend folks try to build a model suitable for Roth Conversion planning on their own unless they just love the tax code and programming and have lots of free time for testing and debugging.
I've made the same point in other threads and posts, but I use Pralana Gold extensively, it's a paid Excel sheet with a modest cost of $99 1st year, $49 renewal. It has huge flexibility and power, much more for instance than the Boglehead Retiree Portfolio Model. I don't mean to knock RPM, it is excellent for freeware, is far better than most individual's attempts and can be extended with your own logic if you really want to do so. But I find RPM quirky to set up, it takes a long time to understand what it is and isn't doing and it's completely manual on setting up a Roth conversion plan.
It will take some time to set up a model in any good tool, with more time required for more complex plans, but making no plan or a bad plan is potentially very expensive. If folks can't do the setup themselves, a one-time-fee advisor could be hired. The advisor may be worth it if folks are not familiar with the issues and a pro may have ideas that wouldn't have occurred to you - just be certain it's a one time fee and not an asset-under-management advisor as those will take both your wallet and your pants in the long run.
People used to be able to get quick (though often misunderstood) plans from I-orp, but I read over on Bogleheads that the author's health and age preclude him from continuing that effort.
I've made the same point in other threads and posts, but I use Pralana Gold extensively, it's a paid Excel sheet with a modest cost of $99 1st year, $49 renewal. It has huge flexibility and power, much more for instance than the Boglehead Retiree Portfolio Model. I don't mean to knock RPM, it is excellent for freeware, is far better than most individual's attempts and can be extended with your own logic if you really want to do so. But I find RPM quirky to set up, it takes a long time to understand what it is and isn't doing and it's completely manual on setting up a Roth conversion plan.
It will take some time to set up a model in any good tool, with more time required for more complex plans, but making no plan or a bad plan is potentially very expensive. If folks can't do the setup themselves, a one-time-fee advisor could be hired. The advisor may be worth it if folks are not familiar with the issues and a pro may have ideas that wouldn't have occurred to you - just be certain it's a one time fee and not an asset-under-management advisor as those will take both your wallet and your pants in the long run.
People used to be able to get quick (though often misunderstood) plans from I-orp, but I read over on Bogleheads that the author's health and age preclude him from continuing that effort.
I downloaded the Retiree Portfolio Model spreadsheet. I'm getting some errors as I enter my data. Need to read the instructions again.
ncbill
Thinks s/he gets paid by the post
I use New Retirement also but try to convert only up to the top of the 12% bracket (MFJ) by spreading the conversions out over several years
So hopefully all our rollover traditional IRAs should be converted to Roth by our early 60s.
Spouse still works so as much as possible of that income goes into her tax-deferred plan...once she stops we'll consider converting that to Roth as well...might just keep it for QCDs instead after age 70.5.
So hopefully all our rollover traditional IRAs should be converted to Roth by our early 60s.
Spouse still works so as much as possible of that income goes into her tax-deferred plan...once she stops we'll consider converting that to Roth as well...might just keep it for QCDs instead after age 70.5.
What are you estimating for the Standard Deduction increase each year? I'm working on my own spreadsheet and including tax information in it. The irscalculators.com calculator is great in estimating taxes at the various marginal tax brackets and the effective tax rate.
TheWizard
Thinks s/he gets paid by the post
As Exchme said, it's a difficult/impossible job to build a spreadsheet that accurately projects income taxes even five years into the future. This because certain things are indexed to inflation and we really don't know what that will be year to year.
That's why I simply try to project my AGI year by year and even that is challenging: I had been projecting SS to increase 3% per year and next January we'll be getting what? A nine percent increase?
Fortunately, you can take the December approach to doing Roth conversions. By early December your actual AGI for the year will be computable to within a few hundred dollars. So you can do additional Roth conversions to top up your AGI for the year, based on tax bracket, income levelizing, IRMAA thresholds, or whatever your scheme is...
SecondCor521
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I'm starting to realize as I look at my own model over the years that rate of investment return and annual adjustments of IRMAA and my date of death are significant uncertainties that probably swamp my 4 significant digit estimate of my tax rate at age 82.
The value of ACA subsidies varies. I calculate them in terms of a marginal rate on conversions (which can be twice as high as the nominal ACA curve rates, because of the way the math works). In my case last year they were equivalent to about an 18% marginal rate.
I do a similar thing with FAFSA. In my case with two in college, FAFSA concerns are equivalent to about a 17% marginal rate.
I'm not the one you asked, but I'd almost bet that @pb4uski increases the standard deduction by the CPI, which is what I think the law requires, usually rounded to an even number. Most of those sorts of limits adjust by the CPI, although some (IRMAA, AOTC, ACA) do not.
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pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Yes, I assume that the standard deduction and tax brackets increase for inflation.
Just trying to determine if I will ever fall in the 12% marginal tax rate based on my projection of the 2% increase in standard deduction and the top of the 12% marginal tax bracket each year.
Standard Deduction and 12% marginal tax bracket increase Projection:
Year Standard Deduction Top of 12% Marginal Tax Bracket
2023 $26,300 $85,221
2024 $26,826 $86,925
2025 $27,363 $88,664
2026 $27,910 $90,437
2027 $28,468 $92,246
2028 $29,037 $94,091
2029 $29,618 $95,973
2030 $30,210 $97,892
2031 $30,815 $99,850
2032 $31,431 $101,847
2033 $32,060 $103,884
2034 $32,701 $105,962
2035 $33,355 $108,081
2036 $34,022 $110,242
2037 $34,702 $112,447
2038 $35,396 $114,696
2039 $36,104 $116,990
2040 $36,826 $119,330
2041 $37,563 $121,717
2042 $38,314 $124,151
2043 $39,080 $126,634
2044 $39,862 $129,167
2045 $40,659 $131,750
2046 $41,472 $134,385
2047 $42,302 $137,073
2048 $43,148 $139,814
2049 $44,011 $142,610
2050 $44,891 $145,463
2051 $45,789 $148,372
2052 $46,705 $151,339
2053 $47,639 $154,366
2054 $48,592 $157,453
2055 $49,563 $160,602
2056 $50,555 $163,814
2057 $51,566 $167,091
2058 $52,597 $170,433
2059 $53,649 $173,841
2060 $54,722 $177,318
TheWizard
Thinks s/he gets paid by the post
Don't forget the reversion to the 15% bracket (and others) in 2026, I think...
Dash man
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Yes, the brackets revert back in 2026. We use that reversion in our calculations for Roth conversions.
I recently saw a good interview of Michael Kitces where he in part was discussing Roth conversions. I was happy to hear him confirm our strategy of large conversions before RMDs even if pushing us higher into IRMAA brackets. The upcoming change in tax brackets is a big motivator for us.
https://youtu.be/tFbLyVySJMc
Ok. Let me try to accommodate that in my spreadsheet. I am trying to figure out when I need to start Roth conversions in retirement. Don't realize our tax system is so complicated.
Starting the year you have completely retired (and maybe the year in which you do retire, depending on that year's income) the answer to that question should be "as soon as possible". In other words, why wait?
SecondCor521
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
One reason might be if one is in a relatively high bracket after retiring for whatever reason. Perhaps a business buyout, or an inherited IRA that needs to be drained in 5 or 10 years.
Or perhaps there are juicy tax credits that have income cutoffs to qualify. (Which ends up looking like a surprisingly high marginal rate at a surprisingly modest AGI.) Perhaps ACA, or AOTC, or a combination.
Even so, smaller Roth conversions might still be feasible and worthwhile. They are in my case.
That was a great discussion on Roth conversions. Thanks for sharing the link to the video.
Yes, if there is a specific answer to "why wait?" then waiting could be correct. Otherwise, ....
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
When you should start is when you are in lower tax brackets than when you are collecting pensions, SS and RMDs which is typically when you first stop working.
Plan to retire at age 57. Roth IRA will be $28K (wife and I) at that point.
Will use "Rule of 55" to withdraw from 401K and dividend income to bridge the gap to age 60.
Pension kicks in at 60.
SS kicks in at 70.
RMD kicks in at 72.
So, Roth conversions should begin at age 57-60? However, my wife pension and SS will kick in when I'm 59. There is no way as a couple we can avoid the 22% marginal tax rate. The 22% tax bracket is where we will be in throughout retirement.
So, if I want to execute Roth conversions, I will have to fill up the 22% tax bracket and maybe up to the max of the 24% tax bracket for large Roth conversions.
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Doing a Roth conversion and paying the conversion tax from cash on hand could be favorable even if the conversion is done at a 24% marginal rate and later you would incur a 22% marginal rate (add whatever state tax to those numbers). See that link for more details.
Some competing "other considerations":
- tax rates scheduled to increase under current law; the survivor having to pay single tax rates instead of MFJ, vs.
- nobody predicted the 2018 tax cuts so maybe again...?; incurring large medical expenses in later life so itemized deductions are large enough that you drop to the 12%/15% rates.
Or maybe the standard deduction increases along with the top of the 12%/15% tax bracket increases may put us (my wife and I) in the 12%/15% tax bracket. However, I don't see that happening for us until after RMD age (72).
That's also a possibility. Countering that could be SS increases due to the COLAs, RMD increases, interest/dividend increases, etc., even if there are no COLAs on the pensions.
What's that saying? Oh, yeah, "It’s Difficult to Make Predictions, Especially About the Future."
I really appreciate all your feedback on this topic. Trying to learn as much as possible on this topic (Roth conversions).
