I'm new to Pralana, so I may not be understanding all of the facets of the online tool, but I did not see a way to ask for a withdrawal optimization that would keep my federal income tax below a specified threshold while meeting the entered expenses. If I understand correctly, it seems that the current withdrawal optimizations focus on draining one account at a time in specific order as to optimize the end of life portfolio balance. Instead, I was hoping to see an analysis that pulled from a possible combination of taxable, tax-deferred, and tax free accounts to meet my income and tax goals while maximizing the end of life portfolio balance.
Thanks!
Mark
@mdeuser You are correct that the account-withdrawal optimizer (AWO) doesn't support tax or income restrictions, nor does it solve for drawing from various accounts in the perfect mix for tax efficiency for any given year, nor for the collection of years. As the manual points out, even extending to three time periods would lead to tens of thousands of permutations, and doing as you say would be millions. (That kind of complex optimization you want I think is restricted to certain CPA-level tax software.)
However, the Pralana Roth conversion optimizer (RCO) does allow for various income restrictions on a year-by-year basis: overall-tax bracket restrictions, income restrictions for purposes of ACA (as multiple of FPL), income restrictions for purposes of IRMAA, and restrictions to stay in a particular LTCG bracket. (However, this can be finnicky; for instance if you set FPL*3, say, but still don't qualify for ACA in a given year, Pralana goes on to ignore your request to restrict your income for FPL that particular year since its moot.)
What I do personally is eyeball the tax graphs after an optimization and tweak things using scheduled withdrawals for any years that look grossly inefficient.
On a broader note, I think users need to remember that Pralana optimization--be it roth or withdrawal or even ss or retirement age--is really just a crude swipe to help decide to answer a few long range planning questions. I don't mean "crude" as an insult-- sometimes simple methods are "good enough" to answer certain focused questions. Pralana optimization is absolutely is not a fine-tuned carving knife that really optimizes in the way folks think. That is one reason that the graphs are just as important to interpret as the results, and I think that step should be stated in the manual. (I'm not saying you're viewing things this way Mdeuser, just making a general point from various user questions.)
I think it is unwise to have a goal of restricting taxes in every year. Like a balloon, squeezing tax liability at one point in time will cause it to bubble out at another and may face even worse tax rates overall.
To prove or disprove the wisdom of trying to force a maximum a maximum annual amount of taxes, I would start with running the "Optimize Withdrawal Order" Analyzer and Roth Conversion Analyzer. Then if there is a specific year that you think the program is paying "too much" in taxes, you can manually select an account and withdrawal amount under Scheduled Withdrawals to try to lower the tax or set different Roth Conversion restriction. I'm guessing that you generally find that your attempts to restrict the tax rate are either not possible (maybe RMDs + SS + dividends exceed your target tax rate) or hurt your final estate wealth (or spend rate for variable spending strategies).
If you do some investigation, please give us feedback on what you found, maybe this is something the rest of us should check on in our planning.
To prove or disprove the wisdom of trying to force a maximum a maximum annual amount of taxes, I would start with running the "Optimize Withdrawal Order" Analyzer and Roth Conversion Analyzer. Then if there is a specific year that you think the program is paying "too much" in taxes, you can manually select an account and withdrawal amount under Scheduled Withdrawals to try to lower the tax or set different Roth Conversion restriction. I'm guessing that you generally find that your attempts to restrict the tax rate are either not possible (maybe RMDs + SS + dividends exceed your target tax rate) or hurt your final estate wealth (or spend rate for variable spending strategies).
Rick, we're two peas in a pod. I suggested that very thing in my reponse to Mdesuer! I've been crudely experimenting with that method, and it does seem to generate slightly better results. After optimizing withdrawal and Roth (iterating in the usual way), I peaked at the tax graphs, noticing where things "shot" into high brackets in a way that looked unnecessary, where my eyes told me "this could be evened out". Then, for those few years, I used scheduled withdrawals or limits in the optimizer, and it did seem to generate slightly higher end $s.
However, I go back to what I said to Mdeseuer: the optimizer isn't a fine-tuned instrument. It's designed to be 'good enough' to make decisions about Roth and Withdrawal Order. And none of my fiddling changed the major results. Another way of putting it: if the results had been that bad , Pralana would have not chosen it.
@jkandell @ricke Thanks a lot for the great suggestions! I had not thought about lowering a specific year's taxable income by manually creating a Scheduled Withdrawal from my Roth account for each year in question. That really helped flatten out the tax curve in the Tax Projections graph.
My real interest is in calculating how much of my Roth I should convert to set me up with taxable, tax-deferred and tax-free account balances such that when SS, RMDs and QCDs kick in, I'll stay within a desired marginal tax bracket. To take a shot at this, I've set my Simple Portfolio Model with all accounts having the same return rates (to avoid the swaying the Roth Conversion Optimizer into overly aggressive conversions - per the manual/Rick), ran the Roth Conversion Optimizer (RCO), used the Tax Projection graph to identify years with larger than desired taxes, and then manually entered some judicious Scheduled Withdrawals from my Roth. I then manually adjusted the RCO's conversion parameters to whether it made sense to convert more or less. I think this should get me "close enough" so that I avoid unnecessary Roth conversion.
Pralana is quite the powerful tool.
Thanks again!
@mdeuser, I wonder if there is a word for the unique stress one feels seeing an odd year or so burst forth into those higher brackets! It's just a chart but I feel it in my stomach.
Like others implied, be careful about the tail wagging the dog in terms of chasing tax brackets, ACA subsidies, etc. You may be hurting yourself in the big picture by narrowing your focus on those things. Plus, with a long-term planning tool, and all the chaos we're seeing now, there's no way to know what the future holds in terms of taxation, health care, etc. Do your homework to explore these things, but always compare to another scenario where you're not narrowly focused, compare scenario results side by side, and make your call.
