Withdrawal order not optimal?
I completed my analysis, and PRC recommends that I convert my entire IRA to Roth within 3 or 4 years. But then, with the spending I have specified, the Roth is never spent at all. This isn't optimal for me, as I'm not maximizing my final balance for heirs. It makes no sense to pay taxes on the IRA and then never spend the Roth. Is there a way to optimize for my situation?
If PRC is recommending that you convert your entire IRA to a Roth IRA, then presumably that action yields the largest final balance either in terms of effective (after tax) dollars and possibly even absolute dollars, despite the additional taxes on the conversion. I don't understand why that's not maximizing the final balance to your heirs, particularly since they won't have to pay any taxes on distributions from a Roth IRA. Maybe I'm missing something here, so please elaborate on what I'm missing. In terms of other optimization options, I can't answer that without a better understanding of your objective.
this is one of the fuzzy aspects of financial planning. I am not trying to optimize a final balance for heirs. So paying the extra in tax takes away from my personal spending if the Roth goes unspent. Using the Roth to smooth over some higher tax years would seem to be a better option. Modeling that is the hard part.
I also found the Roth conversion recommendations to be very highly dependent upon the AA in Roth and IRA. Changing them around produced very different results. In my case my Roth is currently 100% stock. The IRA has a bond/stock mix.
I wonder if annual adjustment in the AA of the IRA is needed? I manage my Roth + IRA to a combined AA, keeping all bonds in IRA. Large Conversions can throw the IRA AA out of whack in just a year or 2.
When I first tried modeling Roth conversions in i-orp, the recommendation was the same… convert everything in about 5yrs. But when I manually updated the inputs after each conversion, the benefit disappeared after about 2yrs.
@frisch66 Well, absolutely, evaluation of Roth conversions takes asset allocations (AA) into account and if you have different AA for Roth accounts and TD accounts that will have an effect on the outcome. Further, the tool doesn't care whether you spend from the Roth account or not; it simply does the conversion math and shows you the long term savings profiles and identifies which is best in terms of overall savings. Armed with that information, you can then decide about how to spend it.
@frisch66 Regarding whether annual adjustment of AA for the IRA is needed, I'll have to leave that assessment to you. I have a hard time imagining, though, that the AA setting for a short period of time (such as during the short conversion period) makes any significant long term difference. If the conversion takes place in 2-5 years, I'd just suggest that you make sure to have the AA set where you want it for the long term AFTER the conversion has taken place.
Some folks are more meticulous and adjust/realign their AA quarterly, others do it as part of year-end housekeeping. As long as you're paying attention, it's a good thing.
Investment Advisor/Financial Counselor/Retirement Planner
Emancipare Investment Advisors LLC