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?
From my two cents, yes, you got it! The only tip I'd add is to run the Withdrawal Order Optimizer afterwards, (maybe even run the Roth optimizer a second time again after doing so) since the changes you make with conversions might change things there. And be sure to look at the graphs to see what year you break even: many times it just ain't worth it. (Bill Hines has some great posts about this.)
@jkandell Thank you, that is what I suspected but want to make sure. My TIRA is large enough that my RMD's would get painful in the future, especially if one of us were to pass significantly before the other. I did run the withdrawal optimizer and my break even point makes it well worth the conversions.
@redvudu Would you please elaborate on your PRC "break even point" analysis process? Thanks...
@bo3b I look at the graph on the Roth conversion chart and where the active line crossed above the base line I called my break even point. At this point you have a positive return moving forward. I made sure I set my base line was actually set with no conversions and ran a Monte Carlo prior to setting it. The results details by year page showed no conversions.
In my case it was between 72 and 73, before that the active line was below the base line.
My taxes are paid from a brokerage account where the stock has a low cost basis but little current growth and a 4% dividend.
Let me know if I missed something.
@redvudu That's basically the extent of what Pralana can tell you, yes. At 73 years old, it sounds like on its face it crosses soon enough you will see the benefits. This is assuming that the amount of $s is closer to 10% difference than 1%. As Gaby noted in your same question in another thread, Pralana doesn't really do complex tax efficiency analysis; so it's not like you can just literally take its recommendations. But it's still useful to get the answer you just did. Also, I caution that if it turns out in the coming decades that your Roth stock assets do worse than expected (and you can explore how that looks with historical analysis, especially starting certain years like 1965), you'll end up worse with Roth conversions even if they made sense based on expected returns.
FWIW, my case was a little easier: Once I built in QCDs, the roth didn't make sense, breaking even by small amounts in my wife's 90s. (We don't plan on heiring much to our child after death.) So just didn't seem worth the risks. If we were not to donate to charity, it made a modest difference, sort of 50/50 worth it.
Thanks for the input. With my plan for about 30 years I had the same thought on savings. I was looking for at least a 6 digit improvement before I went through the effort. Anything less seemed like it wasn't worth the effort for the amount of gain.
I accidentally made the same initial post 3x and didn't delete it on time.
I did both a historical looking at a number of different starting years, 1965 included and Monte Carlo analysis and both gave me results to assure me I should be fine. I did a stress test with one of us passing early and it didn't raise any major concerns other than greatly increased taxes.
Since we are self funding long term care my goal was to optimize my late live holdings and if we don't need it the kids will have less to deal with.
My plan is to convert about 2/3's of my TIRA so I have enough left to take advantage of low tax brackets during the RMD years and potential medical deductions if long term care is required.
