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Roth Conversions and ACA Subsides

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(@dfwbo)
New Member
Joined: 3 years ago
Posts: 2
Topic starter  

Hi,

I'm using a second scenario to analyze doing Roth Conversions and have set Assume ACA subsidies to Yes in Healthcare costs. I also set the Roth conversion limitation to 2x FPL, but optimize conversions still recommends doing large conversion which would eliminate my ACA subsidy after 3 years. When I go to review in tabular expenses it shows subsidies stopping at age 63. Any suggestions?

Thanks,

DFWBo


   
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(@smatthews51)
Member Admin
Joined: 4 years ago
Posts: 899
 

@dfwbo I really couldn't say for sure without your export file, but my guess would be that something other than the Roth conversion is taking your AGI above the 2x FPL level. Once that occurs, PRC goes full speed ahead with Roth conversions. You could try changing to 3x FPL at age 63 and see if that helps.

Stuart


   
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(@dfwbo)
New Member
Joined: 3 years ago
Posts: 2
Topic starter  

Thanks Stuart, still can't quite figure out why the ACA subsidies are dropping off and Conversions are recommended, how would I share with you to have a look, just using the data management "share" radio button?


   
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(@smatthews51)
Member Admin
Joined: 4 years ago
Posts: 899
 

@dfwbo Just create an export file and email it to me at mail@pralanaconsulting.com. Thanks!

Stuart


   
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(@abq-goldgmail-com)
Active Member
Joined: 5 months ago
Posts: 10
 

Newbie here. The Roth conversion tool is divine. It took me a while to realize that I should first run the Monte Carlo with Roth Conversion **disabled**, and then return to the Roth Conversion to play.


   
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(@smatthews51)
Member Admin
Joined: 4 years ago
Posts: 899
 

@abq-goldgmail-com Thanks, Eric!

Stuart


   
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(@abq-goldgmail-com)
Active Member
Joined: 5 months ago
Posts: 10
 

I want to mention an 'oddity' about Roth conversions for me that is not specifically related to Pralana.

Specific to me and my financial circumstances, I initially thought that Roth conversions were the promised land -- and they can be, if maximizing net worth at end of life is the #1 goal. I've slowly come around to a different understanding that pushed the needle towards less Roth. I realized that my top 3 money goals in order are

1. Money security. No matter how crazy the equity markets or the taxation scheme of the day

2. An inheritance amount that does not cause harm. This amounts to a ceiling

3. Best use of money not spent on (1) or (2). These are causes I choose, and the Gov is not one of them.

I'm very glad to have learned about Roth, and to have Pralana to guide me in Roth usage. But I've moderated my anticipated use of the option.


   
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(@hines202)
Honorable Member Customer
Joined: 4 years ago
Posts: 411
 

@abq-goldgmail-com Hi Eric, Roth conversions are really hyped, and they can be great for those with most/all of their money in pretax acccounts, to avoid a tax bomb at RMD time if those balances are large. I love that PRC shows the graph that clearly shows doing conversions results in less spendable assets over those years, as you're paying the taxes on the conversions, and when the cross-over point, or ROI is on the conversions. Lots of times it's quite late in life! Some don't want that effect. They're good for leaving heirs money they won't be taxed on, protecting a spouse from the single taxpayer widow/widower tax if one passes away, etc.

Also if you're planning to leave money behind, putting that in your cash ceiling isn't the best way, unless you think you'll pass within 5 years. I'd consider the actuarial spending strategy, which allows you to account for it that way. You can also put it as a QCD or something in the year you expect to pass, if it's from an IRA, or a Miscellaneous expense, but there are problems with those two approaches.


   
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(@hecht790)
Trusted Member Customer
Joined: 4 years ago
Posts: 43
 

If we are talking about heirs, then we should consider an alternative goal of maximizing saving not at death but 10 years after death (when the heirs will complete withdrawing and paying taxes for the inheritance). It is nice to leave nontaxable inheritance but, would your heirs prefer that over larger inheritance, even if they must pay taxes, if overall they gain money?

I believe this is a common scenario with many people and Pralana should consider this as an alternative goal.


   
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(@abq-goldgmail-com)
Active Member
Joined: 5 months ago
Posts: 10
 

@hecht790 Pralana has made this very easy to handle. In the analyze:Roth Conversions page, scroll down to the Roth Conversions Results graph. There you will be given a choice via buttons of 'effective' or 'absolute.' The help tip explains:

Conversion Rate for Calculation of Effective Savings

You should be cautious when comparing the value of a portfolio where investments are held mostly in taxable or tax-free accounts with one where investments are held mostly in tax-deferred accounts because the funds in tax-deferred accounts are not all yours. Some of that money belongs to Uncle Sam; he just has not collected it from you, yet. To help you with this, Pralana Online calculates the effective buying power of your portfolio as a function of its distribution across accounts with differing taxation properties. Money held in cash, taxable and Roth accounts is counted at full value; money held in the tax-deferred accounts is derated based on the Effective Tax Rate you expect to apply to those funds when withdrawn. If you plan to leave some or all your tax-deferred accounts to your heirs, the withdrawals are likely to be different than your own tax rates. Therefore, Pralana Online asks you to specify the effective tax rate to be used when determining the effective buying power of those accounts, and that is done via the setting on this page.

This setting is used to create the projections on the Analyze> Scenario Analysis Comparisons and Analyze > Roth Conversion pages, where you have the option to see the results graphed in terms of absolute or effective dollars.

For your case, you set the IRA to the tax bracket you anticipate your kids will be in. I found the setting in Build:Financial Assets:Management, in the 'effective tax rate' tab.

This post was modified 1 month ago by ERIC GOLD

   
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(@hecht790)
Trusted Member Customer
Joined: 4 years ago
Posts: 43
 

@abq-goldgmail-com

I was not aware of this option, will play with it; thank you Eric.


   
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(@ricke)
Trusted Member Customer
Joined: 4 years ago
Posts: 94
 

Yes, the Tax Rate for Conversion of Absolute $ to Effective $ is important to set thoughtfully. If you intend to leave the money to charity or set aside some for Long Term Care (since that would be a tax deductible way to get the money out of the t-IRA), then the portion used for those purposes would have no tax. But the portion that you might withdraw if you decided to live large would need to be at the marginal tax rate that that money would face. If you are leaving the t-IRA to heirs, then you have to estimate the tax rate your heirs would be subject to when they have to withdraw it in 10 years.

Making a decent estimate for this parameter closes the circle on the taxation. Approaches that don't look at taxes during the ultimate withdrawal tend to get hung up on the timing between paying the taxes with a Roth Conversion vs. getting lower tax brackets during RMDs. Worrying about when you or your heirs pay the tax only makes sense if someone solves the "taxes" part of the inevitable "death and taxes".

You will also notice an effect on the optimal amount of Roth Conversions based on several assumptions and interacts with other parts of your plan, so folks should investigate a range of outcomes:

  • Future tax increases
  • Assumed rate of return
  • Duration that one spouse outlives the other
  • Need for ACA premium credits competes for low tax space
  • Asset allocation Mode 1 (same in all accounts) or Mode 2 (allowing tax efficient placement of bonds preferentially in tax-deferred)
  • Claim age for SS

and more.


   
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