Looking for advice on how to model our Retirement Plan, Roth Conversion Strategy if we are going to prioritize the Tax Adjusted Portfolio for one or more heirs?
Pralana seems to do a reasonable job modeling Retirement and Conversion Strategies for a Couple and/or Surviving Spouse.
Not quite sure how to Optimize a strategy for one or more heirs?
- Different Marginal Brackets for Heirs
- Perhaps different types of Accounts to be Inherited (e.g. Taxable, Roth, IRA) based on the Heir
How are others tackling this question?
Thanks
In terms of "low hanging fruit", that is one of the main reasons Pralana added an "effective" tax cut users enter in the build stage. (I wish it had a more descriptive name, like "legacy tax rate".) If your primary purpose is have more money for heirs after taxes, you should enter for this what the heirs' tax will be on what's left after you're gone (which could be zero to ten years in most cases). Assuming each child is equal, this would be a weighted average tax rate. Then when you're doing the optimizations like monte carlo or roth or withdrawal order, focus at the final "effective" total in making your decision. Pralana is very oriented toward this.
Having said this, the above is not the same as optimizing across the board for heirs in a holistic way, which is a different task going beyond any one of these optimizations. Maybe the most important would be the monte carlo final effective value, found in the tables next to the graph. But if you iterate between roth conversions, withdrawal order, and monte carlo--focusing on the effective end result in all cases--you should pretty far along.
I don't know if anyone has verified Pralana's effectiveness in deciding between keeping money in taxable (with a stepped up basis) versus conversions into Roths. But common sense would dictate that if your focus is heirs conversions as the "gold standard", as much as legally possible, and even at the expense of your own tax bracket.
ps. Another thread raised the topic of how Pralana might be improved for those interested in legacy. This post folds into that larger discussion, part of possible long-term improvements to Pralana.
I was the one who raised a similar topic in the Wish List section. It was in the context of modeling a legacy goal, but I think that can go hand in hand with optimizing for heirs, even if one does not have a legacy goal. I can see how there might be 2 "phases" of effective taxes for heirs - for example let's say the plan ends when the user is 95 and heir is 60, with an effective tax rate of 32%. But in the 10 years that follow, the heir might see a lower effective tax rate, and that is when inherited IRAs need to be distributed.
I was the one who raised a similar topic in the Wish List section. It was in the context of modeling a legacy goal, but I think that can go hand in hand with optimizing for heirs, even if one does not have a legacy goal. I can see how there might be 2 "phases" of effective taxes for heirs - for example let's say the plan ends when the user is 95 and heir is 60, with an effective tax rate of 32%. But in the 10 years that follow, the heir might see a lower effective tax rate, and that is when inherited IRAs need to be distributed.
Yes, sorry I forgot it was you.
I can see that getting very complicated. The whole issue of taxation of heirs' is very complex, given multiple heirs different situations, and the multitude of trusts and other instruments available. Even if Pralana did optimize for heirs, the worry is: given how far away that is (beyond the death of both plan participants), how much confidence can I have that the tax system won't change for my heirs? It already did in the last ten years with regard to inherited IRAs for instance, with the ten year stretch. I even worry about this with roth conversions within my own lifetime being so far into the future.
I wonder if all this is why I favor the "go to zero" actuarial type thinking, with charity/legacy given out within my lifetime.
