The Roth Optimizer allows (actually, requires) me to input which spouse's account to first, or only, or proportional. But, shouldn't actually be an OUTPUT of the optimizer rather than an input? To truly optimize, do I manually have to try out different inputs on this line, for each year in which a conversion may take place?
@jason-blattyprotonmail-com It's all taxable income no matter which you take (convert) from, so there's no real mathematical 'optimization' to be done in this regard., other than if there's a big age difference when RMDs hit (you'll see the tool account for this in the math). The choice is there because sometimes couples have a preference as to which to tap, per their own mutual agreement or whatever.
It's all taxable income no matter which you take (convert) from, so there's no real mathematical 'optimization' to be done in this regard.
[EDIT: just fleshing out Bill's comment] If spouses differ significantly in age, the divisors that determine RMDs will differ, which means that making a Roth conversion from the account of the older one (with the lower divisor) will reduce future total RMDs to a greater extent (which might help avoid a higher tax bracket later). So there is a bit of optimization that can be done, although Pralana is not needed to make the decision.
In general, you want to protect money from taxes as long as possible. Once money comes out of the t-IRA as an RMD, you will have more money in your taxable account - that generates dividends, causing annual tax drag. Over time, that really adds up, so you should generally convert the older person's IRA first.
If you are the same age and one of you still working, you might consider converting the smaller account first. I'm still working enough to put us over the limit for Roth Contributions, but my 401k will land us in the 24% bracket eventually, so we converted into the 24% bracket now to wipe out my wife's t-IRA. Then we make a non-deductible contribution to her t-IRA and then Roth Convert it each year.
The Roth Optimizer allows (actually, requires) me to input which spouse's account to first, or only, or proportional. But, shouldn't actually be an OUTPUT of the optimizer rather than an input?
FYI, I just added a FAQ Q&A for this and related questions that come up from time-to-time. (More > Resources > FAQ):
| Q: Does "Optimize Roth Conversions" evaluate all permutations of the ordinary tax brackets during the conversion years? Can it also optimize for other inputs such as account priority and maximum LTCG tax brackets, etc? | |
A: No and no. The algorithm currently used is described in the user manual. A 'brute force' evaluation of all permutations would require:
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We could modify the current algorithm to evaluate permutations of account used, but that would increase the current run time dramatically for 2-person plans.
Tip: If you want to shorten the Optimizer run time and speed up the scenario projections recalculation whenever you change any input, make sure you create a 'No Conversions' year when you no longer want to do conversions. Otherwise, Pralana will evaluate the R/C amount for every year until the last person dies.
