In 2025, I will be a few dollars into the 22% bracket. Not much, maybe $1000 or so. When I optimize Roth conversions, Pralana uses 22% as the bracket for 2025, and recommends over $100K in conversions, even though the table shows "headroom in tax bracket: 15,000". What is PRC doing here?
Bump. Why is Pralana recommending such an aggressive Roth conversion?
@gianmatt96 Because it's seeing a larger benefit over the course of time before you need the money, in terms of tax-free growth at your specified asset allocation and projected asset returns. Meaning paying the taxes now on that big conversion pays off. I see the 96 in your userid, if that's your birth year you're in your late 20s so that's not surprising. Remember you can't use the money in the Roth for some time, per the five-year clocks that are involved.
@hines202 That is not my birth year. I'm 65. 🙂
Instead of having 72K in taxable income this year, Pralana is suggesting that I convert nearly my entire IRA balance over the next three years, pushing taxable income all the way up to 185K. That seems insane to me. It is suggesting that I trade three years of vastly higher taxes for later years of much lower taxes (since my income will basically consist of SS and relatively modest withdrawals.) But that is a pretty big leap of faith to take.
@gianmatt96 I've moved to the online version a while ago so I don't exactly remember what the Gold/Excel shows, but in the online version there's a graph that shows the baseline (which you should use as no conversions) versus the optimized conversions. That graph shows the overall justification. You should see the red (conversions) line trending lower than the blue baseline line for the years you're paying the taxes, then when the tax-free growth in the Roth exceeds that you should see the red line cross over and go above the blue line.
I review that with clients when we're talking about this. Sometimes the ROI is very late in life. If they're doing conversions to leave tax free inheritance to their heirs, that's fine. But if it's for their own financial benefit, they then wonder why they'd sacrifice spendable income in their younger go-go years for some advantage close to their expiration.
Take it with a grain of salt, and if it's too rich for your blood, just tamp it down into your comfort zone. If your effective tax rate in RMD ages isn't egregious, maybe it's not such a big deal to do the conversions at all, or if they aren't a critical component to your success rate (i.e. at 100% without any conversions). Maybe just top out whatever is left in your marginal bracket when you do your pre-tax assessment each early December.
Dumping your entire tax deferred balance in three years does not sound likely to be the optimum. A common reason for that kind of pathological answer is if people are holding different asset allocations in different accounts so entered different returns for different types of accounts. Then the program will seek to get your assets out of the lower returning accounts and into higher returning ones. Of course, that's not how the real world works, the program is changing your asset allocation by dumping your accounts with bonds in order to load up on accounts that have stocks.
The solution is to use Advanced Portfolio Modeling-Asset Allocation/Location and select Mode 2. Then enter returns for stocks, bonds, etc., your overall portfolio allocation and the order of accounts that the program should favor for holding stocks. This will hold your portfolio level asset allocation constant while still allowing you to preferentially put bonds in tax deferred/stocks in Roth/taxable.
@ricke Ah, I think that is it. My taxable account is mostly money market and therefore has the lowest return of all the accounts. I will play around with Mode 2 and see what happens. Thank you!
Yes, Mode 2 is one of those impressive features where Pralana leaves the competition in the dust. I think you'll see that when you use Mode 2, the answer will make a lot more sense and won't have you converting everything.
@ricke Wow, using Mode 2 made a big difference. Not only did it eliminate the huge conversions, it showed that doing any conversions at all would be of limited benefit to me, therefore there's no reason to go overboard with them.
This is a perfect example of how one has to learn the nuances of a financial planning tool before taking any action on the results.
