Does the Roth optimization tool check against any earnings or incomes when it selects the optimum tax rate? For example, if my salary places me in the 32% tax bracket, it should not suggest that I use 28% as my Roth conversion level, and identify headroom.
The optimizer allows you to select two time periods and then in each, it will test all the ordinary income tax brackets, add in your income, expenses, etc. each year and for each time period, it will find which ordinary income bracket gives the best lifetime result. So if you are in the 32% bracket, it may find that converting to the 24/28% bracket is best because then it only converts in years you aren't working. If you have a situation like that, then on the next run, you might exclude the high income years from consideration to start with since Roth Conversions wouldn't make sense then.
Note that while the optimizer is fast and gets you pretty close, selecting things year by year gets you a more refined plan (though of course the years far in the future will change as markets and life happen). For instance, setting things up manually, I find we should convert to the top of the 24% for a couple of years, then one IRMAA tier below the top, then the top of the base IRMAA tier for a few years, then a year at the top of the 0% LTCG bracket, then no more conversions once SS starts until RMDs start and then a few years at whatever bracket/IRMAA tier the RMDs put us in. Fortunately, since Stuart built in handy drop downs, it's pretty quick to try different combinations of ACA FPL, LTCG taxation, IRMAA Tier and Tax bracket to tune up your plan manually.
@ricke Thank you for your reply. I totally agree and expect it to work in that manner.
I have am using a single time period, if I must use two time periods, I missed that in the documentation (which should I place the change, filing status or pre-retirement and then retirement?). During my time in question, I have 3 changes: a change in income due to employment/retirement transition; a change in filing status MFJ to S; and the start of RMDs.
The tool optimizes across all of these periods and actions; the Roth conversions during the employment phase - which overlaps the filing status change, is where the issue occurs. It uses two different brackets neither of which is applicable given the earnings and filing status.
@ricke post and advice are gold. I'd take the Roth optimization roadmap from PRC as a general guideline. PRC bases things on the start of year data. So, it's going to be close if your data is correct and your projections relatively on-point. But you absolutely have to do a concrete exercise toward the end of the year, when you have enough info to be precise about your income and tax situation to dial it in with precision.
I had a client last year that was about to do a big Roth conversion to top off his 24% bracket. We ran it through a high-precision tax tool and found the conversion would have been much more expensive than he anticipated - he would have blown through his ACA premium tax credit brackets and had to pay thousands back. He'd had an unanticipated windfall later in the year that wasn't in the prc projections he'd set out early in the year.
We found the exact sweet spot, smaller Roth conversion, giving back some of the premium tax credit, but best overall monetary benefit. So, be wary of those side effects outside of your marginal tax bracket - things like IRMAA for Medicare, your LTC tax brackets, how much it affects your Social Security taxation, and the ACA premium tax credits.
@hines202 Yes, the steps and actions are the key points I try to model, trying to take advantage of various tax bracket benefits that exist today (prior to the change with TCJA). I do not think I have a unique case, and if not using optimize is the way forward, so be it.
The optimizer did its thing for me, I just found it wasn't finding all the nuances I wanted to see, so I just do it manually as a matter of course. I would try making a manual plan and see if you can figure out if Pralana was misbehaving or was just finding that you shouldn't make Roth conversions.
At one time I thought we would do ACA, I learned just enough to know that it really adds complexity to cash management, Roth Conversions, etc.
Retirement and retirement planning is not for the faint of heart. You get out of life what you put in to it. If it were easy everyone would be doing it. I laugh in the face of complexity. I think that's enough 😝. I know everybody's situation is different, but the ACA subsidies are the best deal in town (assuming you don't have access to other health insurance such as through an employer). Congress extended the expanded ACA subsidies through 2025. The expanded subsidies start at 150% and below of the federal poverty level. So for a couple filing jointly for 2023 health coverage, the poverty level is $18,310. 150% is $27,465. So if your modified adjusted gross income (MAGI) is below $27,465 you get the expanded subsidies for a Silver plan (has to be a Silver plan). The price of health coverage through the exchange obviously depends on your location, but for us two in 2023 health coverage came in at close to $30,000/yr. for a Silver plan. We set (estimated) our MAGI at $27,000 (145% of poverty level which will come from my regular IRA) and we got a Silver plan through the exchange (with the expanded subsidy) at a cost of $95/month with $0 deductibles and $3,000 total family out of pocket. That has saved us many $1,000's. Since the standard deduction for a couple is $27,700, no Fed/State tax's will be due for us, or at least not a lot depending how much interest we earn on CD's and T-bills, or I can just not take the full $27,000 out of my regular IRA. So between the extended subsidies and standard deduction tax savings, we will save about $10,000 for 2023. Plan to repeat in 2024 & 2025, after which I will be on Medicare. https://www.aarp.org/politics-society/advocacy/info-2022/affordable-care-act-subsidies-extended.html
Obviously for this to work you need access to tax free money from a saving account, cash in a taxable account, and most importantly from a Roth IRA, for any expenses above $27,000 for a couple. The ACA subsidies are based soley on MAGI. So having contributed money to a Roth or converted regular IRA money into a Roth in the past would have been a big help, which is was for us. So, the decision of whether or not to covert regular IRA money into a Roth comes down to money saved, we don't have heirs. Using the extended ACA subsidies by far saves us more money then money saved by converting, or even putting money into a HSA for that given year. My chosen health care provider does not offer HSA compatible plans for MAGI below 250% of the poverty level. So it sounds complex at first, but after rolling it around a bit in your head its not that complicated. You only need to know two things, what the 150% of the poverty level is for your situation, and where to get tax free cash, easy as pie 😎
@ricke I have modified my inputs and think there is an issue in the tax bracket calculation.
My sample use case, applies $250K as earned income - well into the MFJ 24% and when filing status changes to Single, the bracket does NOT go to 35%, it goes to 32%! I think this is an error.
I think one of the sub-forums is for bug reports or if you want to share more specific information to help Stuart debug without showing numbers in a public forum, he has bug report e-mail.
