I'm curious and am now wondering if I'm missing something. All the talk above mentions other tools, spreadsheets, etc. Does Pralana Gold not do all this in spectacular fashion? It accounts for everything mentioned above - taxes, RMD, SS, ROR, etc. - and does the math to present what might be optimal for a Roth conversion but no one seems to be using the functionality. So, am I missing something? I base a lot of decisions off of the inclusive math contained within Pralana Gold.
@motogopher. I agree, Pralana does account for all the factors that I think should be considered, but we need to keep in mind that it is optimizing the wealth at the end of your plan and sometimes that is not what we prefer. I have run scenarios that optimize my end of plan wealth but the breakeven compared to another sceario is in my 90's. So, I may adjust variables such as expected life expectancies, ROR, Asset Allocation etc.. to see how sensitive Roth conversions are when I change these assumptions. For example, if you assume either you or your spouse dies much earlier (not likely you will both die at the same time), you may also get a different answer because the tax brackets go from married filing jointly to single. In the end, it is a great tool, but we need to consider the interaction between all these assumptions we make in our plans that will not likely play out.
The external spreadsheet I use for any given year simply calculates the taxes based on other income such as from investments, so my actual conversion amount does not exceed the target bracket. Pralana is not that granular for the actual year I am converting. My spreadsheet also helps me look closer at capital gains and IRMMA.
@golich428 Greg - Agree all the variables you point out are important to consider, but I'm not sure I understand the point of adjusting them as much as you imply. In order to get to a confident yes/no decision on a conversion, wouldn't it be best to configure PRC with your "known and best guess" variables to arrive at that decision? I'm not sure how (or why) you'd decide a final age, ROR, asset allocation plan and then keep changing it? It feels like the tail waging the dog until you see what you want to see. If your goal is to generate a number of scenarios to see the outcomes, I understand that, but ultimately most of us are trying to just get the an answer - based on everything I know or my best estimates, do I convert or not and how much?
I'm also curious....how often does your spreadsheet contradict or agree with PRC and to what degree?
@giovanelli766 Isn't this based on an assumption everyone is eligible to contribute to an HSA?
@nc-cpl You are 100% correct, I just assume EVERYBODY is just like me 😎. You need to be in a high deductible health plan and not on Medicare.
Yes and no answers are not to be found in retirement planning. As someone who is more than guilty of going into the weeds, talking about technical stuff and referencing numerous research articles (once again I confess I do this simply because I find it very fun, yes I am one sick puppy 🤒), all the spreadsheets and software simulations (PRC being one of the best, and best value) in the world will not give you a concrete answer about anything. The future is unknowable but you can follow trends and look at the past for guidance to make sure you are at least on the correct path. I don't think you can get away from reevaluating your overall situation on an annual basis (I don't mean rebalancing you stock/bond ratio). World events, war, pandemic, inflation, off the wall politicians, no way you can predict that stuff. For me Roth conversions are about short to mid term decisions. Max out the 12% tax bracket before it goes up to 15%, big drops in the stock market, reducing RMDs, reducing social security taxes, etc. is what I look at when considering Roth conversions. Hope that helps.
I am not changing assumptions for the purpose of searching for a predetermined solution. The point I was trying to make is that base case assumptions (expected case) is only one path of many that we may realize. Our assumptions are just that - assumptions. I like to think in terms of how much uncertainty there is around my base case assumptions as well as explore the interactions of different assumptions. The tool allows us to see how our Roth conversions might change if one of our assumptions is different than our base case. For example, seeing the impact of pre-mature death of a spouse on future taxes may change the decision on how much Roth conversions to do today. Then again it may not, but at least I know it. I also like to do this, so it is not a burden or waste of time for me.
The purpose of my spreadsheet is not designed to agree with Pralana, I only use it to better keep my current years conversions within the target bracket considering "actual" not forecast investment and other income on both Federal and State taxes. It just gives me a bit more granularity. I use Pralana as a good guide for multi-year trends. When I have checked Pralana against actual taxes or my spreadsheet, they are remarkably close - I am confident in Pralana.
@golich428 I understand. I think at the core of Motographers question - he's wondering if (or why) people aren't gearing their planning based on PRC's results, and why they seem to be relying on other spreadsheets to do things like Roth conversions vs trusting what PRC reveals. More broadly, do they lack confidence in PRC such that they aren't planning their retirement actions based on it? Personally, I'm using it to plan my retirement spending, conversions, etc. I looked around for a comprehensive, robust tool for a long time and settled on PRC. I trust that it incorporates all the necessary variables, makes adjustments, considers taxes, etc. in ways I could never engineer on my own.
I too have experimented with different scenarios in order to see different outcomes, but at the end of the day you need to put a stake in the ground to plan around, so I model my planning around my "best guess variables." If we're thrown a big curveball in the future, I can always update PRC and see if (or how) I need to modify my existing plan. For me personally, if I were to keep testing different outcomes based on largely unknown variables, I'd likely get caught up in "analysis paralysis" and either do nothing or question which plan to follow.
Stuart - ever consider a survey of repeat (at least one paid update) users? Lots of interesting feedback to be mined I suspect.
@nc-cpl I think much of this discussion comes down to personal preferences rather than a debate over the right or wrong amount of detail to get into when doing retirement planning. I view retirement planning as a decision-making process. I try to focus more of my energy on strategic decisions (e.g. how much of my portfolio to convert from traditional to Roth, how and when to take a pension, etc.). These two decisions are interdependent. Depending on when and how I take my pension will impact how much of a Roth conversion I can do. This is what I mean by considering the interaction between assumptions.
We make decisions every day. Some are simple, such as what to eat for lunch. Some are a little more complex and require some data and thought such as where we should go for vacation. But if you get it wrong it is not going to impact your life much. Now there are strategic decisions such as retirement planning that are complex, important and could have unintended consequences. The "strategic" decisions require a good decision-making process. You can’t control the outcome, but you can influence it. The process we each use will be different due to our personal preferences and financial situation.
This has been a great discussion. But getting back to the title of this thread, generally speaking I think it is a good idea to do Roth conversions in a down market. The big picture reason for doing Roth conversions is to save on taxes in the future (when $0 are due) compared to letting the amount of taxes you would have paid now to do the conversion, to remain invested and allow its value to grow into the future and hopefully be greater than the value of future tax savings with a Roth conversion. In a down market the value of the things being converted (stocks in the IRA for example) is less, so the amount of taxes to be paid now will also be less, hopefully resulting in better value in the future (not having to pay taxes on the hopefully larger gain in the Roth). As mentioned earlier, PRC and other retirement simulations only determine the end of life (EOL) values and indicate breakeven ages (which are usually in the late 80’s to early 90’s). Based on my playing around with PRC and reading discussions on various other blog, books, and research papers on Roth conversions, my conclusion is that if there is an advantage to Roth conversions on EOL values, it is usually fairly small. So from an EOL perspective, not a big deal and not a big thing to worry about. For me, like I said before, I look at the tax savings from reducing RMD’s, SS taxes, the ability of taking money out of a Roth if needed without being pushed into a high tax bracket, as being reasons for doing Roth conversions. Any of that make any sense? 🤪
@giovanelli766, it makes sense.
As much as I hate paying the taxes on my Roth conversions now and the "breakeven" age is not particularly attractive, having more of my assets in a Roth should provide more options for managing future tax liabilities and if I do not end up spending the money, it can be left to my children tax free. I would be doing Roth conversions this year regardless of what the market is doing. However, after the decline I can convert more shares and that should result in a higher Roth account balance for the same tax payment assuming the market recovers.
@golich428 Understood, however in my case I have no heirs and was planning to use a substantial portion of my TIRA to do QCD's to offset RMD's, so knowing how much to convert (if any) gets a a bit trickier. I don;t want to convert and pay ANY tax on money I will eventually give to charity - that makes no sense. Not to mention we are still working so not in a low enough bracket (yet).
As always @golich428 is spot on. It's more than just a mathematical question, or doing simple RMD math. When I'm working with clients, the first thing to establish is what are their goals. Do they want to leave money to heirs tax free? That can be an emotional driver that overrides the math, as just one example out of many.
PRC is a *planning* tool, which takes beginning of year numbers and certain further assumptions to build an optimized roadmap for the current and future years, including *suggested* Roth conversions. But as we well know, especially in these times, things may not go as we planned in the assumptions.
For that reason, it's best to take a look at the current situation late in the year, and do conversions based on what has *really* happened, if at all. Max out that tax marginal tax bracket if there's some cap space there, definitely at 12% (which will likely become 15% in 2026) and maybe up to 22% (because otherwise in later years, you may be paying even more for an extended period of time).
Using the new PRC features to do mid-year course correction can help tighten things up, thanks for those, Stuart! Plugging those in and then re-running the Roth optimization tool can help as well.
You might even want to do them mid-year or earlier than December. For example when the market drops precipitously, to take advantage of that as others have said. There's some risk there, i.e you end up in a higher tax bracket than you had planned (that scratch-off was a big winner, the lost uncle in Ethiopia turned out to be real and left you a boatload of money, etc...). But hey, who's going to complain about those things? I'd gladly pay the taxes on those scenarios 🙂
With everything down across the board, I began reconsidering whether doing some Roth conversions might now be a good move. Most endorse the idea (and warn on taxes), and we all know to take the money from another account and not the IRA to pay the taxes. BUT, one article stood out, making the case that depending on the source of the funds to pay the taxes is invested, it may not produce the tax savings you're hoping for in doing the conversion in the first place. Would be interested in 1) to hear from others as to what they think of the reasoning presented, and 2) do you know of a really solid calculator for planning a conversion (PRC indicates "no benefit," but its also looking at my portfolio as of 1/1 and not not where it stands as of today)
https://www.advisorperspectives.com/articles/2020/07/02/roth-conversion-in-a-down-market-think-again
Be very, very careful about digesting articles like this and running with the advice. Especially "guest" articles like this one, where the host has that disclaimer saying "um, these views are not necessarily our own..." I see that a lot on sites like Seeking Alpha - rando articles by rando people who are often misinformed, under educated on the top, unqualified, or with a specific agenda or bias. Down markets can be an excellent time to do Roth conversions! (but do them strategically and intelligently)
In this case, I was pretty shocked at the premise of the article - that someone who's savvy enough to do Roth conversions would then break a fundamental rule and do something nonsensical like sell down/devalued shares in their brokerage account to pay the taxes. Of course you wouldn't do that, with very few exceptions (i.e. it's a position you wanted to exit anyway and you'd like the tax break/loss harvesting).
Any time you see "Hey I read this cool article and here's stuff you should do" (a lot of that here) take it with a grain of salt and carefully consider whether it works for *your* specific situation. I've had clients come to me with big messes to unravel because they read an article somewhere. Especially if they're older ones, because our world has sure changed 🙂
