Regardless of what options I select on the Planning Roth Conversions screen, if I select "OPTIMIZE" for any of the three (lets assume Scenario 1 is Tax Bracket Restricted, 2 is Fixed Duration and 3 is Non Conversion Planned), PRC will override everything and choose the best of the three (including the Max Tax bracket for Tax Bracket restricted and the percentage of account)? Is this a correct?
Also, I notice that if I tweak the Asset Allocation, the Roth Conversion optimization results can swing pretty dramatically (even going from an "all in" conversion recommendation to a "do not convert" recommendation). Is this nrmal behavior?
Lastly, for me, it is recommending (again, using OPTIMZE feature) that spouse and I convert 95% of our TIRA's over just a three year period. Amounts north of $500k converted each year for three consecutive years. Why would it not spread it out over, say , 6 or 7 years which represent our "gap years' (after leaving jobs but before SS and RMD's)? Is it effectively trying to "condense" our conversions to get all the pain out of the way in as few years as possible and optimize growth potential?
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The Roth optimization algorithm will always use the Tax Bracket Restricted mode and then run through all conversion percentages (using the same value for you and your spouse). It'll then tell you if this results in an improvement to your final savings balance without doing any conversions.
Yes, absolutely, your asset allocation can have a huge effect on Roth conversions. As an easy example, imagine that you have just two asset classes: cash with a ROR of 0% and stocks with a ROR of 10%. Then, imagine that your tax-deferred account is allocated 100% to stocks and your Roth account is allocated 100% to cash. I'm fairly certain that a Roth conversion would yield poor long-term results in this scenario. But, if you changed the tax-deferred allocation to 100% cash and the Roth allocation to 100% stocks, that would yield a very different long-term result.
Finally, PRC uses the tax bracket restricted method for analyzing Roth conversions and it runs through all combinations of tax brackets and the percentage of the accounts to be converted. In evaluating each of these combinations, it uses the same values in each year of the modeling period; it doesn't have the sophistication of varying the tax bracket on any given test case. Therefore, yes, it might very well determine that the best overall case is one that does all of the conversions over a 3-year period. It isn't specifically trying to condense your conversions to get the pain out of the way as quickly as possible and then optimize long-term growth potential; however, that may very well be the explanation for why that particular test case yields the best long-term result.
Following up on this topic...what would explain significant differences in the outcomes of two Roth conversion scenarios, both utilizing the Optimize function? Scenario 1 (Tax bracket restricted at 35%) shows a conversion of 95% of TD account, where as Scenario 3 optimizes it at 60% converted (also max tax bracket of 35%).
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