I just want to make sure I understand the recommended practice correctly.
For a Roth conversion
use mode 2 leaving the overall asset allocation the same
Allow for the changing of allocations in each account to account for the tax efficiency of each asset.
This make sense to me so you can see the effect of the conversion including the tax benefits realized by increasing the Roth account size and placing the higher gain assets in the Roth, the lower gain assets in the IRA and use the taxable for foreign investments and overflow from RMD withdrawals.
None of the tax benefits would be possible without the conversion so you would take credit for them as part of the conversion.
Am I looking at this correctly?
Yes, that's the idea.
If you have heirs that you intend to leave the residual IRA balance to, then make a stab at the tax rate they will face while they withdraw the inherited IRA. Enter the value on Build - Financial Assets - Effective Tax Rate.
If your heirs save the money they inherit from you, there are also benefits beyond the grave that Pralana doesn't address.
“Allow for the changing of allocations in each account to account for the tax efficiency of each asset.”
The user needs to define which asset % goes to which account. Pralana will not do it for you. Pralana does not have the concept of assets tax efficiency. Roth Conversion sells proportional amount of assets as defined in the tax-deferred accounts’ allocation, moves the cash to Roth and with this cash buys proportional amount of assets as defined in the Roth allocation. The user that defines the assets in each account hopefully considering tax efficiency.
“Use the taxable for foreign investments and overflow from RMD withdrawals.”
Taxable is not always the best location for foreign investments. It depends on qualify/non-qualify dividends and the foreign tax paid.
Overflow from RMD withdrawals is money that you may want to invest and need to decide in which asset.
Yes I did that, I have just seen conflicting opinions on how to evaluate the conversion. One school of though was to keep the allocation the same across all account using mode 1 and the other was evaluating the rebalance as part of the conversion using mode 2. The second method made more sense to me because you could not rebalance into Roth if it didn't exist or was too small. When I set up mode two I placed each asset class into the optimal account. Later in the plan the TIRA was starting to grow too large with my fixed income investments so some had to be moved to other accounts.
Yes, use Mode-2 if each account has different assets for tax efficiency or for other reasons. However, Mode-2 will try forcing the overall Asset Allocation that has higher priority over Asset Location, so your locations may not be perfect.
Mode-1 is not practical, for example, you do not want regular bonds in taxable.
Yes, use Mode-2 if each account has different assets for tax efficiency or for other reasons. However, Mode-2 will try forcing the overall Asset Allocation that has higher priority over Asset Location, so your locations may not be perfect.
Mode-1 is not practical, for example, you do not want regular bonds in taxable.
