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Roth Conversion Question

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(@wtbivings)
Active Member Customer
Joined: 1 year ago
Posts: 9
Topic starter  

I am a new user and have a question about Roth conversions. When I run the optimization it suggests zero conversions. User defined limits are all set to unlimited. Any manuel changes to the tax bracket column yields negative savings. Am I doing something wrong?


   
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(@hines202)
Reputable Member Customer
Joined: 3 years ago
Posts: 331
 

Perhaps the tool isn't seeing conversions to your advantage. For example, if you have enough in Roth, brokerage, savings then SS, pension, annuity or other income to cover your anticipated expenses, there's no reason to convert and take on that tax expense.


   
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(@ricke)
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Joined: 3 years ago
Posts: 69
 

The optimizer does work, though it only searches the ordinary income tax bracket, so will not be as fine tuned as you can do yourself. Both manual and the optimizer require manual entry for LTCG bracket, IRMAA tier and maximum FPL multiple.

Try it manually to make sure you are doing it correctly. Set conversions to Enabled, and for the first year, set which account has priority, pick a tax bracket, etc. In the table on the right, it should tell you the conversion amount and below the table on the right, it shows you the change in the value at the end.

If you have heirs or at least want to account for embedded taxes that have to be paid when the IRA is distributed, then also make sure you have entered a tax rate on the Financial Assets - Management tab under "Effective Tax Rate for Converting Absolute Dollars to Effective Dollars" and under the graph on the Analysis-Roth Conversions tab, click the button so that it is showing Effective $, not Absolute $.


   
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(@wtbivings)
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Joined: 1 year ago
Posts: 9
Topic starter  

@hines202 I am modeling my passing in 5 years and my wife living to 100. I entered 5 years as the duration of the conversions. Intuitively I am wondering why it would not use this period to convert, since the tax rates will be higher when she is widowed. Seems like this should benefit the long-term value of the account. Frustrating not knowing the logic behind the no conversion results.


   
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 NC
(@nc-cpl)
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Joined: 3 years ago
Posts: 246
 

@ricke Richard - your responses out here suggest you have a financial background. 👍 Would that be correct?


   
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(@ricke)
Trusted Member Customer
Joined: 3 years ago
Posts: 69
 

@nc-cpl

Nice of you to think I have a background here, but no. We had an AUM financial advisor for a while that collected plenty of fees while taking more risk than the market (every time there was a market drop, we were down worse) and yet hugely underperforming it. Looking back at our records, we took home a 19% gain while the S&P plus Total Bond would have been up over 80%. It's surprising, you don't want to change because you keep hoping that next year, next month or tomorrow that his stuff will start to outperform, but tomorrow never came.

That was plenty of motivation to learn. So we fired him and I dove in head first to right the ship and help us plan. The good news is that anyone using Pralana is well on the road to avoiding our mistake. If you want more theoretical discussions than you see here, I would also recommend reading at bogleheads.org.


   
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(@hines202)
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Joined: 3 years ago
Posts: 331
 

@ricke What a great story! That needs to be on the front page of the WSJ. When I started down the path of becoming an advisor/planner, I thought you had to do AUM, it's just the norm. Then I quickly realized I would be charging people for not doing any work, as I believe in the Boglehead simple investing methodology, boring and passive. Too many are just using this as an opportunity to gamble with other people's money, and it just doesn't work out over the long haul.


   
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(@hines202)
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Joined: 3 years ago
Posts: 331
 

@wtbivings Hi Troy, I'm sorry to hear that you feel you have a short timeline. In this case, your reasons for converting aren't purely long-term mathematical, which is what the optimizer will try to optimize.

I'd follow @ricke advice and tune it to show you how to tune it in for your preferred scenario, trying to find the sweet spot between not hurting yourself too much in taxes in the next five years and paying as much as possible to limit what your spouse will have to pay.

For sure use PRC as a rough guide, but each December get with myself or another advice-only flat-fee advisor to dial your conversions and taxes in exactly, to check the IRMAA, capital gains, ACA, SS, and other guidelines that factor in. If you're eligible for Roth contributions for 2022, max those out for both of you so she's got that tax-free income.


   
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(@ricke)
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Joined: 3 years ago
Posts: 69
 

@wtbivings

Your logic sounds right, between tax rates going up in 2026 and your modeling case of a short life/long life combination, that should favor Roth Conversions if you are in the zone where they can help at all. Some folks don't have enough in tax deferred to make large enough RMDS to make a difference (say < $500K IRA balance single, $1M MFJ), some are in very high (35-37%) brackets throughout and nothing they do will make much difference, some have already claimed SS and conversions increase the taxes on SS so fast that conversions are unattractive, some folks will never be out of the 12% bracket, some plan to give the IRA to charity or have heirs in low brackets.

If none of those cases sound like you, then my guess is you haven't got something set up quite right. Are you able to get the Roth conversion module to work by forcing it in the year-by-year manual mode?


   
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(@wtbivings)
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Joined: 1 year ago
Posts: 9
Topic starter  

It works in manual mode, but always yields a negative impact regardless of inputs. My marginal tax bracket averages about 28%. I do have over $1M in tax deferred account and I am on SS disability benefits. Tabular Projections shows I have about $200k over the next 5 years that I could convert without increasing my marginal bracket for those years


   
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(@hines202)
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Joined: 3 years ago
Posts: 331
 

@wtbivings Don't forget that negative result is compared to the current baseline. So, if you start with conversions disabled (no conversions) and optimize, that's the best possible result regarding your end-of-life bottom line net worth. However, if you then accept that and then start playing with the manual controls for tax brackets, FPL, etc then the result will be compared to the optimized result, which could be negative, but compared to no conversions, it would be positive.


   
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(@ricke)
Trusted Member Customer
Joined: 3 years ago
Posts: 69
 

@wtbivings

Like @hines202 said, it's a good idea to Disable Roth Conversions, then go to Run Analysis and Update Active Analysis, then come back to the Analysis-Roth Conversion tab. At that point, the graph represents no conversions and the What If Savings - Baseline is zero. Then Enable Roth Conversions and select No Conversions for all but the first year. Check to make sure the entry for the first year in the upper left is first year you want to make conversion. The example case that comes with Pralana has that first year as 2040! In that first year try a small conversion - say the 10% bracket, the 0% LTCG bracket or if you are on ACA, then a low FPL multiple. If everything gives a negative value, is it because your spouse is still working? If so, set the starting year for Roth Conversions to the first year of retirement.


   
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(@wtbivings)
Active Member Customer
Joined: 1 year ago
Posts: 9
Topic starter  

Do I have to click a button somewhere to get it to produce results for that first year (see attached)?


   
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 WTS
(@wts)
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Joined: 1 year ago
Posts: 30
 

@wtbivings It shows tax bracket is the limiting factor. Try picking a higher tax bracket.


   
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(@ricke)
Trusted Member Customer
Joined: 3 years ago
Posts: 69
 

@wtbivings

You are projecting that in 2030, you will be in the 25% bracket, so telling the program to convert to the top of the 10% bracket and limit it to not paying any LTCG is not going to give you any conversions. Start by setting the LTCG to No Limit, IRMAA to No Limit and the tax bracket to 25% in 2030. It will fill the 25% bracket with Roth Conversions and report the impact on your savings at the end of the simulation.


   
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