Spent about an hour entering prelim info. Some of the results aren’t as expected so far, but I need to find all the right toggles, and I know I don’t have assets, income or expenses right yet. I’m really looking forward to using Pralana Online, love the “tabular” and “graphical” views. I tried Roth optimization and got unexpected results, very aggressive and I have same returns for tIRA and Roth, so not sure what’s causing it. Tried Mode 2 also, still very aggressive. I was hoping to see an IRMAA limited conversion plan, but haven’t figured out how yet.
Some pointers:
Set a tax rate for any residual t-IRA balance when you pass under Build-Financial Assets-Management-Effective Tax Rate. In our case, that will probably be somewhere around 22-24%.
Set returns for stocks & bonds at Build-Financial Assets -Advanced Portfolio Modeling-Rates of Return and tell the program to use asset rates of return, not account based rates of return at Build-Financial Assets-Management-Account Growth Settings.
I strongly recommend Mode 2 as that lets you do Roth Conversions while holding your asset allocation constant, Mode 1 is only appropriate if you hold the same allocation in all accounts. For Mode 2, there are tabs to fill out including portfolio allocation and the order of priority of which account should hold stocks. It asks for what % stocks to hold in each account. I understand that it will try to hold those until it can't based on your portfolio allocation and the priority you set. However, I just enter 100% stocks for taxable and Roth and 100% bonds for IRAs and that works fine. On the Account Prioritization tab, I put taxable at the top of the list as I want it 100% stocks for tax efficiency.
Then go to the Growth Taxation Tab and you have to do a little math. Look at your stock dividend yield from your 1099 to get a breakdown between your qualified vs. non-qualified dividends. Then apportion that as a percentage of the total projected return. For instance, I project 5% real return and 3% inflation, for a total return of 8%. My funds' average dividends are 1.6%, with 1.2% qualified and 0.4% non-qualified. So I break out the taxation of the expected return as 1.6/8 = 20% qualified dividends taxed as LTCGs, 0.4/8 = 5% non-qualified dividends taxed as simple interest and 75% of the gain would be taxed as LTCG when/if sold.
A tip when entering the unrealized capital gains on Account Initial Balances is to think about whether you will ever need to sell your taxable assets with the highest gains. I made an estimate of the total draw we might need from taxable and just look at the percentage gains that we have in that portion of taxable. That avoids overstating capital gains taxes.
I would run the Roth Optimizer and then go to Analyze - Historical Analysis and run a historical analysis. That will set a baseline that is convenient to use for comparison when you start trying to manually tune your Roth Conversion plan.
The Roth Conversion optimizer only checks conversions to the top of each ordinary income tax bracket for each year. Though it seems "obvious" that you should be able to do better by tuning things to avoid IRMAA tiers and the like, I've found that it's difficult to beat the program's plan by very much as limiting conversions in one year often causes a problem in another year. If you want to over-ride and limit to a particular IRMAA tier or avoid paying LTCG taxes or limit to an ACA FPL in a given year, just enter the year(s) and select those as limits. When doing my own planning, I look very closely at individual IRMAA tiers to make sure that not only does it provide some benefit, but that it's a reasonable sized benefit - Roth Conversions can hurt you in a 1965 type of scenario where you convert in good times but later live in bad times for an extended period.
A cool feature of the program is you can actually look at the magnitude of the penalty you would have suffered if we get a replay of bad historical times. Under historical analysis, you can select, say, 1965 as the starting year and the program switches from showing you the results of your idyllic smooth growth and instead all the year by year account balances, gains and losses, etc. will switch to show what would have happened in that historical starting year - absolutely a unique feature. You can compare the terminal wealth you would have had in those bad times with and without Roth Conversions, to demonstrate to yourself that you do want to be a bit careful and not chase every $.
