i-orp and roth conversions

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kvolkman
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i-orp and roth conversions

Post by kvolkman »

I have always planned on doing Roth coversions in retirement before starting SS income, and perhaps after.

I have been running i-orp (extended) with various inputs, and the results about Roth conversions confuse me. i-orp's optimal solution always models roth conversions ending earlier than I expected, and converting less of the IRA to Roth.

I turned off ACA and SS income. Still happens. I have varied retirement age, planning horizon, and starting savings balances. For example, start with $1.5 million, two-thirds of that IRA, enter 62 as the age of retirement, and it will show 4 years of conversions worth $225k that end at age 65. It cannot be due to IRMAA. Most variations show only 3 or 4 years of conversions.

Some of the solutions are bizarre. Retire at 63, for example, with $3,000,000 (two-thirds in IRA) and no social security income, and the solution is three years of conversions ($350k, $230k, $130), and then no more conversions ever. Eh?

Why would the optimal solution be only three or four years of conversions? With no SS income, and planning until age 105, I would think it would be optimal to keep converting IRA to Roth for years, as long as you stay in your target tax bracket.
tibbitts
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Re: i-orp and roth conversions

Post by tibbitts »

kvolkman wrote: Sat Oct 23, 2021 8:39 pm I have always planned on doing Roth coversions in retirement before starting SS income, and perhaps after.

I have been running i-orp (extended) with various inputs, and the results about Roth conversions confuse me. i-orp's optimal solution always models roth conversions ending earlier than I expected, and converting less of the IRA to Roth.

I turned off ACA and SS income. Still happens. I have varied retirement age, planning horizon, and starting savings balances. For example, start with $1.5 million, two-thirds of that IRA, enter 62 as the age of retirement, and it will show 4 years of conversions worth $225k that end at age 65. It cannot be due to IRMAA. Most variations show only 3 or 4 years of conversions.

Some of the solutions are bizarre. Retire at 63, for example, with $3,000,000 (two-thirds in IRA) and no social security income, and the solution is three years of conversions ($350k, $230k, $130), and then no more conversions ever. Eh?

Why would the optimal solution be only three or four years of conversions? With no SS income, and planning until age 105, I would think it would be optimal to keep converting IRA to Roth for years, as long as you stay in your target tax bracket.
If you look at the return assumptions for the various accounts and adjust those you may get a less, but still somewhat aggressive, conversion plan. By default I agree the conversions will be very aggressive. And you can add limits for taxes as well. But I ended up making a conversion about half as aggressive as iORP suggested initially, because you also have the concern that if you don't do that, you'll never actually reduce your deferred balance. Obviously everything depends on luck in terms of sequence and amount of returns. You especially need to get the (presumably) higher-returning investments out of deferred accounts if you're ever going to escape the "problem" of critical mass - unless you get (un?)lucky of course.
smitcat
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Re: i-orp and roth conversions

Post by smitcat »

kvolkman wrote: Sat Oct 23, 2021 8:39 pm I have always planned on doing Roth coversions in retirement before starting SS income, and perhaps after.

I have been running i-orp (extended) with various inputs, and the results about Roth conversions confuse me. i-orp's optimal solution always models roth conversions ending earlier than I expected, and converting less of the IRA to Roth.

I turned off ACA and SS income. Still happens. I have varied retirement age, planning horizon, and starting savings balances. For example, start with $1.5 million, two-thirds of that IRA, enter 62 as the age of retirement, and it will show 4 years of conversions worth $225k that end at age 65. It cannot be due to IRMAA. Most variations show only 3 or 4 years of conversions.

Some of the solutions are bizarre. Retire at 63, for example, with $3,000,000 (two-thirds in IRA) and no social security income, and the solution is three years of conversions ($350k, $230k, $130), and then no more conversions ever. Eh?

Why would the optimal solution be only three or four years of conversions? With no SS income, and planning until age 105, I would think it would be optimal to keep converting IRA to Roth for years, as long as you stay in your target tax bracket.
"Why would the optimal solution be only three or four years of conversions? With no SS income, and planning until age 105, I would think it would be optimal to keep converting IRA to Roth for years, as long as you stay in your target tax bracket."
Because there are a number of limitations to that calculator with the limited inputs. You would also need to check the math on taxes with seperate tax software IORP as it does not have enough data to calculate your total taxes.
If you assigned the Roth accounts returns to be higher than the TIRA that would be the largest reason. I would use tools like the RPM or Pralana to evaluate Roth conversions but be aware they require much more detailed inputs, much more time to run and more time to understand them.
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djmbob
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Re: i-orp and roth conversions

Post by djmbob »

Now I am a bit confused. I ran i-ORP last week and on the Assumptions page it says:

"Excludes IRA to Roth IRA conversions. At least one quantitative study reports that conversions offer little economic advantage but their dramatic increase in taxes paid in early retirement tends to panic the novice."

:?:

Cheers,
Ray
N.Y.Cab
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Re: i-orp and roth conversions

Post by N.Y.Cab »

It could be assuming that the current 22% and 24% tax brackets will expire at the end of 2025. I put salary in earned income then set retirement age to current age and got the same early conversion strategy.
smitcat
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Re: i-orp and roth conversions

Post by smitcat »

djmbob wrote: Sun Oct 24, 2021 7:24 am Now I am a bit confused. I ran i-ORP last week and on the Assumptions page it says:

"Excludes IRA to Roth IRA conversions. At least one quantitative study reports that conversions offer little economic advantage but their dramatic increase in taxes paid in early retirement tends to panic the novice."

:?:

Cheers,
Ray
You are reading the opinions of the owner/inventor of IORP.
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Wiggums
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Re: i-orp and roth conversions

Post by Wiggums »

With 2/3rds of the portfolio in tax deferred accounts and sizable portfolio, Roth conversions are helpful when tax status changes from MFJ to single. So even if the Roth conversion itself is break even, there might be other benefits as part of the overall estate plan.
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iceport
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Re: i-orp and roth conversions

Post by iceport »

kvolkman wrote: Sat Oct 23, 2021 8:39 pm I have been running i-orp (extended) with various inputs, and the results about Roth conversions confuse me.
i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.

It used to tell me to convert my entire tax-deferred balance to Roth on Day 1 of retirement, incurring a humongous 6-figure tax bill. Then they started adding in constraints to that madness. Then some more. Last time I checked (a while ago), you could essentially constrain the analysis by hand to give you exactly the conversion result you think is best.

So much for i-orp adding any real value.

I really don't know what i-orp is good for, but in my experience it's certainly not good for providing any valuable advice on Roth conversions...

Try this for a much better starting place: https://www.bogleheads.org/wiki/Roth_IRA_conversion
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
colejr
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Re: i-orp and roth conversions

Post by colejr »

It might help to look at the output a little closer. The two parts I find most useful are the "Real Withdrawal Report" and the "Federal Tax Bracket Report", the latter is in nominal, not real dollars, so can be a bit confusing at first. In general, i-ORP will only convert enough to avoid higher future tax brackets. (Higher than the conversion rate). For example, it will convert into the 24% bracket, if necessary to avoid the future 25% bracket.

i-ORP is an incredible program, but it does have a few quirks. It reverts rates back to pre-TCJA in 2026. Changing the life expectancy can greatly change the suggested level of conversion. Personally, I use the SOA longevity Illustrator (https://www.longevityillustrator.org), setting the last to die at the 10% survival year and vary the first to die from 75% survival to 10% survival. IORP also makes some simplifying assumptions: it doesn't get IRRMA quite right and it always assumes 85% of you SS is taxable. I haven't checked NIIT. If any of these affect you, you'll need to verify by hand.
chassis
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Re: i-orp and roth conversions

Post by chassis »

I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.

I have come to like the RPM spreadsheet. It addresses Roth conversions.

In i-orp, RPM and my own home-grown spreadsheet, Roth conversions make me poorer. They are not a desirable thing to do for me. I think this is the case for most people. Roth conversions benefit a small cohort of people, the benefits are very small as a percentage of net worth, and the benefits accrue very late in life - 80s or 90s years of age.

Roth conversions for most people are needless machinations of one's own financial accounts. Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure.
smitcat
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Re: i-orp and roth conversions

Post by smitcat »

chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.

I have come to like the RPM spreadsheet. It addresses Roth conversions.

In i-orp, RPM and my own home-grown spreadsheet, Roth conversions make me poorer. They are not a desirable thing to do for me. I think this is the case for most people. Roth conversions benefit a small cohort of people, the benefits are very small as a percentage of net worth, and the benefits accrue very late in life - 80s or 90s years of age.

Roth conversions for most people are needless machinations of one's own financial accounts. Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure.
"I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view."
I agree IORP has limits but you can easily set an estate amount for plan end in IORP.

"Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure."
Conversions work for us - and we do not fit this description.
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

I don't think i-orp deserves some of these negative comments. While it's missing some pieces of the tax code (IRMAA is based off current year instead of 2 years prior, no NIIT or Supplemental Medicare Taxes, no AMT), I find that I can get results for Roth conversions that are pretty similar to Pralana Gold and RPM. It just works different, expressing excess savings as extra disposable income instead of as a big estate.

I think the most common error is people entering different stock/bond allocations in different accounts, you have to enter your average allocation for each account. Also make sure you enter stock and bond percentages for both the first and last data point for the glide path. For some reason, my recollection is the program will put everything in bonds if you don't specifically tell it how much to put in stocks.
chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.
You simply enter the desired estate value as a "Plan Surplus". In my case, I iterated to tune the "Plan Surplus" so that the disposable income comes out to a bit more than our expected needs.
iceport wrote: Sun Oct 24, 2021 1:48 pm i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.
Not sure what you are doing that is confusing the program but I've never had that problem. If you enter a Plan Surplus, then you should leave the Roth Conversions unconstrained.
Tdubs
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Re: i-orp and roth conversions

Post by Tdubs »

It might help if you told us your inputs--all of them. The rate of conversion is very sensitive to your expected returns in each of your accounts. If, for example, you put in that your Roth will be 100% equities with an expected return of 10% and your traditional IRA will be 50-50 with a return of 5%, the model is going to move as much money as possible into the Roth very quickly.

Try putting in that you will have the same allocation in each account and the exact same return. What happens then?
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

Tdubs wrote: Sun Oct 24, 2021 5:38 pm It might help if you told us your inputs--all of them. The rate of conversion is very sensitive to your expected returns in each of your accounts. If, for example, you put in that your Roth will be 100% equities with an expected return of 10% and your traditional IRA will be 50-50 with a return of 5%, the model is going to move as much money as possible into the Roth very quickly.

Try putting in that you will have the same allocation in each account and the exact same return. What happens then?
Yep, this is exactly why you really have to use the same stock/bond allocation in each account (even if that's not how you actually set things up), otherwise it very efficiently seeks out the biggest stock percentage account and maximizes that.
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billthecat
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Re: i-orp and roth conversions

Post by billthecat »

chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.

I have come to like the RPM spreadsheet. It addresses Roth conversions.

In i-orp, RPM and my own home-grown spreadsheet, Roth conversions make me poorer. They are not a desirable thing to do for me. I think this is the case for most people. Roth conversions benefit a small cohort of people, the benefits are very small as a percentage of net worth, and the benefits accrue very late in life - 80s or 90s years of age.

Roth conversions for most people are needless machinations of one's own financial accounts. Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure.
I found RPM just too overwhelming. Are there any alternatives?
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
smitcat
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Re: i-orp and roth conversions

Post by smitcat »

billthecat wrote: Sun Oct 24, 2021 6:07 pm
chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.

I have come to like the RPM spreadsheet. It addresses Roth conversions.

In i-orp, RPM and my own home-grown spreadsheet, Roth conversions make me poorer. They are not a desirable thing to do for me. I think this is the case for most people. Roth conversions benefit a small cohort of people, the benefits are very small as a percentage of net worth, and the benefits accrue very late in life - 80s or 90s years of age.

Roth conversions for most people are needless machinations of one's own financial accounts. Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure.
I found RPM just too overwhelming. Are there any alternatives?
Pralana - it requires just about the same amount of time and input as RPM maybe more.
The problem is you cannot easily solve a complex challenge/problem with simple inputs and less time.
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iceport
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Re: i-orp and roth conversions

Post by iceport »

Exchme wrote: Sun Oct 24, 2021 5:20 pm
iceport wrote: Sun Oct 24, 2021 1:48 pm i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.
Not sure what you are doing that is confusing the program but I've never had that problem. If you enter a Plan Surplus, then you should leave the Roth Conversions unconstrained.
I'm not sure, either. After reading your post, I thought I'd give it another try. Spent some time figuring out what to input, then hit the "Run ORP" button.

Guess what. It won't even accept my 6-figure TDA balance, and wants me to divide it by 1000. (And when I do that, it wants me to do it again!)

Honestly, I don't think I've ever gotten this thing to spit out anything of any value whatsoever, and now I can't even get it to spit out its usual gibberish...

What a waste of time.
Last edited by iceport on Sun Oct 24, 2021 6:13 pm, edited 1 time in total.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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billthecat
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Re: i-orp and roth conversions

Post by billthecat »

smitcat wrote: Sun Oct 24, 2021 6:09 pm
billthecat wrote: Sun Oct 24, 2021 6:07 pm
chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.

I have come to like the RPM spreadsheet. It addresses Roth conversions.

In i-orp, RPM and my own home-grown spreadsheet, Roth conversions make me poorer. They are not a desirable thing to do for me. I think this is the case for most people. Roth conversions benefit a small cohort of people, the benefits are very small as a percentage of net worth, and the benefits accrue very late in life - 80s or 90s years of age.

Roth conversions for most people are needless machinations of one's own financial accounts. Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure.
I found RPM just too overwhelming. Are there any alternatives?
Pralana - it requires just about the same amount of time and input as RPM maybe more.
The problem is you cannot easily solve a complex challenge/problem with simple inputs and less time.
Well, only 9% of my NW is in tax-deferred (and it's 100% total bond), so maybe in my case it's not even worth pursuing and I should just leave it to RMDs.
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

iceport wrote: Sun Oct 24, 2021 6:10 pm
Exchme wrote: Sun Oct 24, 2021 5:20 pm
iceport wrote: Sun Oct 24, 2021 1:48 pm i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.
Not sure what you are doing that is confusing the program but I've never had that problem. If you enter a Plan Surplus, then you should leave the Roth Conversions unconstrained.
I'm not sure, either. After reading your post, I thought I'd give it another try. Spent some time figuring out what to input, then hit the "Run ORP" button.

Guess what. It won't even accept my 6-figure TDA balance, and wants me to divide it by 1000. (And when I do that, it wants me to do it again!)

Honestly, I don't think I've ever gotten this thing to spit out anything of any value whatsoever, and now I can't even get it to spit out its usual gibberish...

What a waste of time.
Yes, it works in 1,000's.
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iceport
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Re: i-orp and roth conversions

Post by iceport »

Exchme wrote: Sun Oct 24, 2021 6:25 pm
iceport wrote: Sun Oct 24, 2021 6:10 pm
Exchme wrote: Sun Oct 24, 2021 5:20 pm
iceport wrote: Sun Oct 24, 2021 1:48 pm i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.
Not sure what you are doing that is confusing the program but I've never had that problem. If you enter a Plan Surplus, then you should leave the Roth Conversions unconstrained.
I'm not sure, either. After reading your post, I thought I'd give it another try. Spent some time figuring out what to input, then hit the "Run ORP" button.

Guess what. It won't even accept my 6-figure TDA balance, and wants me to divide it by 1000. (And when I do that, it wants me to do it again!)

Honestly, I don't think I've ever gotten this thing to spit out anything of any value whatsoever, and now I can't even get it to spit out its usual gibberish...

What a waste of time.
Yes, it works in 1,000's.
Not for me. I entered everything in 1000s. It won't take the TDA balance. And it's not like it's an unusually large or small balance... mid-six figures. So I first entered the first three digits of the balance. Then I tried putting a decimal place in front of those, like it suggested. Still won't take it.

I'm amazed this thing actually works for other people...
Last edited by iceport on Sun Oct 24, 2021 6:41 pm, edited 1 time in total.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
marcopolo
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Re: i-orp and roth conversions

Post by marcopolo »

iceport wrote: Sun Oct 24, 2021 1:48 pm
kvolkman wrote: Sat Oct 23, 2021 8:39 pm I have been running i-orp (extended) with various inputs, and the results about Roth conversions confuse me.
i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.

It used to tell me to convert my entire tax-deferred balance to Roth on Day 1 of retirement, incurring a humongous 6-figure tax bill. Then they started adding in constraints to that madness. Then some more. Last time I checked (a while ago), you could essentially constrain the analysis by hand to give you exactly the conversion result you think is best.

So much for i-orp adding any real value.

I really don't know what i-orp is good for, but in my experience it's certainly not good for providing any valuable advice on Roth conversions...

Try this for a much better starting place: https://www.bogleheads.org/wiki/Roth_IRA_conversion
I agree with this assessment.
I think the people always recommending I-ORP for Roth Conversion analysis either do not fully understand the problem that needs to be solved, or do not fully understand what I-ORP is designed to optimize. There is essentially no way to get an accurate plan out of I-ORP for Roth Conversions because it was not really designed for that.
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
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Re: i-orp and roth conversions

Post by marcopolo »

Exchme wrote: Sun Oct 24, 2021 5:20 pm I don't think i-orp deserves some of these negative comments. While it's missing some pieces of the tax code (IRMAA is based off current year instead of 2 years prior, no NIIT or Supplemental Medicare Taxes, no AMT), I find that I can get results for Roth conversions that are pretty similar to Pralana Gold and RPM. It just works different, expressing excess savings as extra disposable income instead of as a big estate.

I think the most common error is people entering different stock/bond allocations in different accounts, you have to enter your average allocation for each account. Also make sure you enter stock and bond percentages for both the first and last data point for the glide path. For some reason, my recollection is the program will put everything in bonds if you don't specifically tell it how much to put in stocks.

chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.
You simply enter the desired estate value as a "Plan Surplus". In my case, I iterated to tune the "Plan Surplus" so that the disposable income comes out to a bit more than our expected needs.
iceport wrote: Sun Oct 24, 2021 1:48 pm i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.
Not sure what you are doing that is confusing the program but I've never had that problem. If you enter a Plan Surplus, then you should leave the Roth Conversions unconstrained.
So, if you have to tell I-ORP a very different asset location than you actually have in your portfolio, such that accounts appear to grow at different rates than they actually do, how can you possibly expect it to give you an accurate answer as to what to do with asset location in your portfolio going forward?!?
Once in a while you get shown the light, in the strangest of places if you look at it right.
2pedals
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Re: i-orp and roth conversions

Post by 2pedals »

billthecat wrote: Sun Oct 24, 2021 6:13 pm
smitcat wrote: Sun Oct 24, 2021 6:09 pm
billthecat wrote: Sun Oct 24, 2021 6:07 pm
chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.

I have come to like the RPM spreadsheet. It addresses Roth conversions.

In i-orp, RPM and my own home-grown spreadsheet, Roth conversions make me poorer. They are not a desirable thing to do for me. I think this is the case for most people. Roth conversions benefit a small cohort of people, the benefits are very small as a percentage of net worth, and the benefits accrue very late in life - 80s or 90s years of age.

Roth conversions for most people are needless machinations of one's own financial accounts. Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure.
I found RPM just too overwhelming. Are there any alternatives?
Pralana - it requires just about the same amount of time and input as RPM maybe more.
The problem is you cannot easily solve a complex challenge/problem with simple inputs and less time.
Well, only 9% of my NW is in tax-deferred (and it's 100% total bond), so maybe in my case it's not even worth pursuing and I should just leave it to RMDs.
Could be a good plan for that reason, maybe save it for the unexpected end-of-life expenses. Some items that might affect your decision are:
  • How much of your NW is Roth for possible lumpy expenses and can you avoid unusual tax income spikes?
  • Are you married and expect to be single, "sooner rather than later"?
  • Are you expected to have higher marginal tax brackets in the future (such as social income, pensions, RMDs, etc)?
2pedals
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Re: i-orp and roth conversions

Post by 2pedals »

marcopolo wrote: Sun Oct 24, 2021 6:41 pm
iceport wrote: Sun Oct 24, 2021 1:48 pm
kvolkman wrote: Sat Oct 23, 2021 8:39 pm I have been running i-orp (extended) with various inputs, and the results about Roth conversions confuse me.
i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.

It used to tell me to convert my entire tax-deferred balance to Roth on Day 1 of retirement, incurring a humongous 6-figure tax bill. Then they started adding in constraints to that madness. Then some more. Last time I checked (a while ago), you could essentially constrain the analysis by hand to give you exactly the conversion result you think is best.

So much for i-orp adding any real value.

I really don't know what i-orp is good for, but in my experience it's certainly not good for providing any valuable advice on Roth conversions...

Try this for a much better starting place: https://www.bogleheads.org/wiki/Roth_IRA_conversion
I agree with this assessment.
I think the people always recommending I-ORP for Roth Conversion analysis either do not fully understand the problem that needs to be solved, or do not fully understand what I-ORP is designed to optimize. There is essentially no way to get an accurate plan out of I-ORP for Roth Conversions because it was not really designed for that.
I really don't have a problem with I-ORP. It does what it says it does. I think the issue with it is people don't understand how to use it for practical use. I think Roth conversions are a difficult problem to solve and optimizers can blow up on you since conversion-spending-optimized results can be highly sensitive to the input. One thing I don't like about it is, I can't control the spending by saying I want to spend X amount each year and try to optimize on that. I like Pralana Gold much better, but it does have a learning curve on how to use.
marcopolo
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Re: i-orp and roth conversions

Post by marcopolo »

2pedals wrote: Sun Oct 24, 2021 8:18 pm
marcopolo wrote: Sun Oct 24, 2021 6:41 pm
iceport wrote: Sun Oct 24, 2021 1:48 pm
kvolkman wrote: Sat Oct 23, 2021 8:39 pm I have been running i-orp (extended) with various inputs, and the results about Roth conversions confuse me.
i-orp recommendations on Roth conversions have always confused me. I think they're essentially worthless. In fact, due primarily to the nonsensical results, I've abandoned any hope that i-orp produces any useful Roth conversion recommendations.

It used to tell me to convert my entire tax-deferred balance to Roth on Day 1 of retirement, incurring a humongous 6-figure tax bill. Then they started adding in constraints to that madness. Then some more. Last time I checked (a while ago), you could essentially constrain the analysis by hand to give you exactly the conversion result you think is best.

So much for i-orp adding any real value.

I really don't know what i-orp is good for, but in my experience it's certainly not good for providing any valuable advice on Roth conversions...

Try this for a much better starting place: https://www.bogleheads.org/wiki/Roth_IRA_conversion
I agree with this assessment.
I think the people always recommending I-ORP for Roth Conversion analysis either do not fully understand the problem that needs to be solved, or do not fully understand what I-ORP is designed to optimize. There is essentially no way to get an accurate plan out of I-ORP for Roth Conversions because it was not really designed for that.
I really don't have a problem with I-ORP. It does what it says it does. I think the issue with it is people don't understand how to use it for practical use. I think Roth conversions are a difficult problem to solve and optimizers can blow up on you since conversion-spending-optimized results can be highly sensitive to the input. One thing I don't like about it is, I can't control the spending by saying I want to spend X amount each year and try to optimize on that. I like Pralana Gold much better, but it does have a learning curve on how to use.
I agree it is not the fault of I-ORP. It was not really designed for Roth Conversion analysis. Somehow people latched onto it as a solution for that. Then people started noticing odd behavior. When pointed out why it behaves like it does (a by-product of the optimization it was designed to do), the proponents either ignored the problems, or came up with work-arounds that helps a little, but does not really solve the underlying problem. It really is the wrong tool for this particular job.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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billthecat
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Re: i-orp and roth conversions

Post by billthecat »

2pedals wrote: Sun Oct 24, 2021 7:59 pm
billthecat wrote: Sun Oct 24, 2021 6:13 pm
smitcat wrote: Sun Oct 24, 2021 6:09 pm
billthecat wrote: Sun Oct 24, 2021 6:07 pm
chassis wrote: Sun Oct 24, 2021 2:41 pm I don't like i-orp. The premise is that the estate will be spent down by plan end. That's not a useful premise in my view.

I have come to like the RPM spreadsheet. It addresses Roth conversions.

In i-orp, RPM and my own home-grown spreadsheet, Roth conversions make me poorer. They are not a desirable thing to do for me. I think this is the case for most people. Roth conversions benefit a small cohort of people, the benefits are very small as a percentage of net worth, and the benefits accrue very late in life - 80s or 90s years of age.

Roth conversions for most people are needless machinations of one's own financial accounts. Maybe the benefit for these people is to sound smart at cocktail parties when they share the brilliant financial moves they are making? Not sure.
I found RPM just too overwhelming. Are there any alternatives?
Pralana - it requires just about the same amount of time and input as RPM maybe more.
The problem is you cannot easily solve a complex challenge/problem with simple inputs and less time.
Well, only 9% of my NW is in tax-deferred (and it's 100% total bond), so maybe in my case it's not even worth pursuing and I should just leave it to RMDs.
Could be a good plan for that reason, maybe save it for the unexpected end-of-life expenses. Some items that might affect your decision are:
  • How much of your NW is Roth for possible lumpy expenses and can you avoid unusual tax income spikes?
  • Are you married and expect to be single, "sooner rather than later"?
  • Are you expected to have higher marginal tax brackets in the future (such as social income, pensions, RMDs, etc)?
  • 6% of NW is in Roth. I'm not retired yet but in retirement I don't foresee any income spikes - just a flow of dividends/interest and draws as necessary, plus social security.
  • Not married.
  • Compared to now while I'm still working, I don't expect to have higher marginal tax rates in the future. As between early retirement and regular retirement (i.e., when I start taking social security), hard to say. (less dividends, but adding social security) I do expect 85% of my social security to be taxable. No pension.
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
2pedals
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Re: i-orp and roth conversions

Post by 2pedals »

billthecat wrote:
  • 6% of NW is in Roth. I'm not retired yet but in retirement I don't foresee any income spikes - just a flow of dividends/interest and draws as necessary, plus social security.
  • Not married.
  • Compared to now while I'm still working, I don't expect to have higher marginal tax rates in the future. As between early retirement and regular retirement (i.e., when I start taking social security), hard to say. (less dividends, but adding social security) I do expect 85% of my social security to be taxable. No pension.
IMHO, No need for you to think or worry about Roth conversions. I think it will not change things for you in a meaningful way.
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

Let's go through some errors I've made in using i-orp, maybe it will help others.

-Forgot to enter our ages - program bombs out completely

-I have a bit of after tax money in my IRA, I always enter it backwards. The program wants to know how much after tax money is there (for me this is like 1% of the total), I manage to enter how much pre-tax money is there. The program then sees that the money can be converted for nearly free and converts it all immediately. Of course I curse the program, no me.

-After tax account cost basis. See my comment about backwards thinking on the IRA.

-Plan Surplus - folks that complain about the program draining their account haven't found the Plan Surplus, where you enter your desired estate value.

-Social security - the program wants the PIA amount that you would get at full retirement age, not what you will get if you change the claim age, it does that automatically.

-ACA Income Limit and Premium Tax Credit.
--Even though the meaning is pretty clear that the Income Limit should be the 4 x Federal Poverty Level and the Premium Tax Credit should be the amount you look up on healthcare.gov for the subsidy amount, I still managed to do it backwards.
--When selecting this, you may get warnings that the run doesn't work. In some cases when I review the output, the run still seems OK in spite of the warnings, other times it does look wrong.

A typical ACA warning looks like:
"ORP's computed estate of $10000K exceeds your planned estate of $7000K. This indicates that ACA constrained spending is conflcting with ORP's constant spending assumption. Essentially this means that you don't have enough tax free income to pull off whatever it you are up to. Consider delaying retirement. This is discussed in the ACA section of ORP's help document."

The warning makes little sense - you have more money than you asked for, so you are out of money? Not sure if it's a cash crunch so it can't limit income enough to get ACA credits or what.

--The program will limit income to get you a Premium Tax Credit even if it doesn't make sense. For instance, if there is a time where only one of you is on ACA and the other Medicare, the premium credit may in reality be too small to pursue, but I don't think there is a way to make the program ignore it in that case.

-IRA to Roth Conversions. I really do get nonsense results if I both specify ACA and a Roth Conversion limit. I get the ACA warning above and the Plan Surplus target is not met. If I set Roth Conversions to "7-Unlimited Conversions" I still get the ACA warning, but at least the results seem to add up, are reasonably plausible and the Plan Surplus value is met.

-Glide Path. I think this is very confusing.
--As mentioned above, you have to use the same allocation in all accounts or the program simply snoops to find the biggest stock allocation and makes that account grow, meaning your total asset allocation doesn't stay constant over time.
--You have to enter a stock/bond percentage for each account, for both the start and end. If you leave either the start or end completely blank for both stocks and bonds, you get 100% stocks for that time period and the program will take false actions favoring that account.
--It's supposed to figure out the Cash holding as 100% - Stocks - Bonds. However, if you really wanted zero stocks and so leave stocks blank or enter zero, you instead get 100% stocks! You have to enter some small number like 0.01% for stocks to get it to understand.

-Rates of return. I have managed to forget to enter rates of return, I believe the program uses it's default if these entries are blank

Again, the program has some tax simplifications that also hurt its applicability. IRMAA is based on income in the current year instead of 2 years prior, it lacks NIIT, Supplemental Medicare Taxes, AMT, heirs taxes. It also lacks inherited IRAs and HSAs that have different tax treatments.

But it's free, quick, gives you a feeling as to whether Roth conversions may make sense and gives ideas on a withdrawal plan. Also, many people are just not number crunchers that are going to tackle complex models like RPM or Pralana Gold. In my own case, I've done a lot of optimization in other programs. Then I looked at the wild variability of historical returns, and it makes me think that I'm not getting much real world improvement from the time spent optimizing a static model. Maybe the best we can do in the real world is be in the ball park and re-do our plan each year.
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Re: i-orp and roth conversions

Post by marcopolo »

Exchme wrote: Mon Oct 25, 2021 9:46 am Let's go through some errors I've made in using i-orp, maybe it will help others.

-Forgot to enter our ages - program bombs out completely

-I have a bit of after tax money in my IRA, I always enter it backwards. The program wants to know how much after tax money is there (for me this is like 1% of the total), I manage to enter how much pre-tax money is there. The program then sees that the money can be converted for nearly free and converts it all immediately. Of course I curse the program, no me.

-After tax account cost basis. See my comment about backwards thinking on the IRA.

-Plan Surplus - folks that complain about the program draining their account haven't found the Plan Surplus, where you enter your desired estate value.

-Social security - the program wants the PIA amount that you would get at full retirement age, not what you will get if you change the claim age, it does that automatically.

-ACA Income Limit and Premium Tax Credit.
--Even though the meaning is pretty clear that the Income Limit should be the 4 x Federal Poverty Level and the Premium Tax Credit should be the amount you look up on healthcare.gov for the subsidy amount, I still managed to do it backwards.
--When selecting this, you may get warnings that the run doesn't work. In some cases when I review the output, the run still seems OK in spite of the warnings, other times it does look wrong.

A typical ACA warning looks like:
"ORP's computed estate of $10000K exceeds your planned estate of $7000K. This indicates that ACA constrained spending is conflcting with ORP's constant spending assumption. Essentially this means that you don't have enough tax free income to pull off whatever it you are up to. Consider delaying retirement. This is discussed in the ACA section of ORP's help document."

The warning makes little sense - you have more money than you asked for, so you are out of money? Not sure if it's a cash crunch so it can't limit income enough to get ACA credits or what.

--The program will limit income to get you a Premium Tax Credit even if it doesn't make sense. For instance, if there is a time where only one of you is on ACA and the other Medicare, the premium credit may in reality be too small to pursue, but I don't think there is a way to make the program ignore it in that case.

-IRA to Roth Conversions. I really do get nonsense results if I both specify ACA and a Roth Conversion limit. I get the ACA warning above and the Plan Surplus target is not met. If I set Roth Conversions to "7-Unlimited Conversions" I still get the ACA warning, but at least the results seem to add up, are reasonably plausible and the Plan Surplus value is met.

-Glide Path. I think this is very confusing.
--As mentioned above, you have to use the same allocation in all accounts or the program simply snoops to find the biggest stock allocation and makes that account grow, meaning your total asset allocation doesn't stay constant over time.
--You have to enter a stock/bond percentage for each account, for both the start and end. If you leave either the start or end completely blank for both stocks and bonds, you get 100% stocks for that time period and the program will take false actions favoring that account.
--It's supposed to figure out the Cash holding as 100% - Stocks - Bonds. However, if you really wanted zero stocks and so leave stocks blank or enter zero, you instead get 100% stocks! You have to enter some small number like 0.01% for stocks to get it to understand.

-Rates of return. I have managed to forget to enter rates of return, I believe the program uses it's default if these entries are blank

Again, the program has some tax simplifications that also hurt its applicability. IRMAA is based on income in the current year instead of 2 years prior, it lacks NIIT, Supplemental Medicare Taxes, AMT, heirs taxes. It also lacks inherited IRAs and HSAs that have different tax treatments.

But it's free, quick, gives you a feeling as to whether Roth conversions may make sense and gives ideas on a withdrawal plan. Also, many people are just not number crunchers that are going to tackle complex models like RPM or Pralana Gold. In my own case, I've done a lot of optimization in other programs. Then I looked at the wild variability of historical returns, and it makes me think that I'm not getting much real world improvement from the time spent optimizing a static model. Maybe the best we can do in the real world is be in the ball park and re-do our plan each year.
You keep saying that as if this fixes the problem.

Let's consider a not too uncommon couple, with a 60/40 stock/bond allocation for their portfolio.
30% in TDA, 30% in Roth, and 40% in Taxable account.
To be tax efficient, they keep all bonds in their TDA, stocks fill the Roth, and taxable holds both stocks and bonds.

Let's say the TDA holds $1M in bonds. The couple are 55, early retired and wondering whether they should do Roth conversions.
They are told I-ORP is a great tool for that analysis, but you have to lie to it and tell it your accounts all have the same AA.
So, they believe it, and set it up that way.

They use the default return and inflation setting, giving 1% real for bonds, and 5% real for stocks
So, a 3.4% real return for the 60/40 portfolio.

What they see is that their TDA will grow to ~$1.8m (in real terms) by the time RMDs hit, so they better get started with some hefty Roth Conversions

In reality, because they kept bonds in their TDA, the account will only grow to ~$1.2m in real terms by the time RMDs start, requiring much smaller (if any) Roth Conversions.

Sure, it is less worse than actually telling I-ORP how your portfolio is structured, because then it will be even more aggressive and convert all your TDA to Roth very quickly. But, just because it is less terrible does not make it a good tool for this particular analysis.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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iceport
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Re: i-orp and roth conversions

Post by iceport »

Okay, the technical glitch I ran into yesterday was somehow resolved, and I was able to enter data and run the program.

With my true asset allocation/location specifics, it tells me to liquidate tax-deferred account within the first few years, sending me to the top of the 24% tax bracket, though I'm starting from the bottom of the 22% bracket with base income. That's bogus. Then it wants me to liquidate the Roth next, in about 10 years or so. That leaves me with only taxable and 100% equity for the bulk of the plan period. Bogus. (As expected!)

Then, using the informal hack recommended by Exchme to use the same asset allocation in each account, it still sends me to the top of the 24% tax bracket the first two years with large Roth conversions. I consider that to be faulty advice. (Though I must say, that's far better than it used to be. At least I don't have to liquidate my entire tax-deferred balance in one year. :oops: )

Unfortunately, i-ORP claims prominently that producing a tax-efficient Roth conversion strategy is one of its specialties!

i-ORP wrote:The Optimal Retirement Planner Computes:
  1. The plan's maximum, annual disposable income, instead of the plan's final surplus or deficit.
  2. The annual tax-efficient amount and order of withdrawals from retirement savings accounts.
  3. Optimal, tax efficient IRA to Roth IRA partial conversions.

None of the others do any of this.
Honestly, I don't know what this program is good for. There's never been a single instance when I've given it a try that it's produced results that I consider anything close to approximating good advice.

Fortunately, I have a decent base level of understanding of what constitutes a reasonable Roth conversion strategy. I feel sorry for folks who don't, and then follow the bogus advice of i-ORP and go on to incur huge tax bills early in retirement for no good reason.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

marcopolo wrote: Mon Oct 25, 2021 1:39 pm You keep saying that as if this fixes the problem.
I agree that i-orp is very oversimplified and I agree with what you are saying that it cannot do tax efficient asset placement (bonds in IRA, stocks in Roth). The only consumer level tool I'm aware that can do tax efficient placement right now is the RPM beta and that just came out a few months ago. I had been trying with Pralana Gold doing numerous iterative adjustments, but it was very slow and tiresome, so I was thrilled when the RPM beta came out. I seem to recall that someone - I think it was you? had built a set of linked RPM sheets some time ago that would do it - wow, talk about a huge task!

But RPM and Pralana are not for everybody and as good as the RPM beta is, it still lacks parts important parts of the tax code that I wanted to include. For my own analysis, I added the bits of the tax code (cash spend down, dividends, existing capital gains, capital gains taxation, NIIT, Supplemental Medicare Taxes, simplified AMT, ACA subsidy amounts if eligible, gifts to heirs) and set up linked sheets for my heirs in order to capture heir taxation of the inherited IRA, gifts while alive, and their different tax brackets and expected earnings.

I then looked at the Roth plan for both the tax efficient asset placement and equal allocations in all accounts, correcting for the allocation bias associated with sticking the government with bonds that the tax efficient placement creates. In the case I looked at most, as expected, tax efficient asset placement was better, but then I changed my return assumptions and equal allocation in all accounts was better - (I didn't actually think that was even theoretically possible for equal allocation to beat tax efficient allocation. Some time in the future I'll look some more and see if that result is due to some mistake I made or whether it is real, due to some nook or cranny of the tax code. Certainly it can't be a general result, it makes no sense)

In any case I looked at, no algorithm would have found the optimum - it could be caused by avoiding an IRMAA tier in 2037 or the SS tax hump in 2030 or capital gains tax phase in or something for your heirs decades from now or getting an ACA credit at some point. As I built the sheet, every time I added a nuance of the tax code, it changed the best result. The results certainly were not the classic expectation of constant marginal ordinary income tax rates through time.

Then I looked at a historical based spreadsheet that I had put together a few years ago that lacks tax efficient placement and heir taxes but gives a feel for variability that the world gives us in returns. It frankly makes a mockery of my attempts to find the optimum. If markets go up extra fast, you wish you had done more conversions first, if markets head down, then you regret pre-paying taxes on phantom gains. Certainly the out-year effects that were driving the static return model meant nothing. And of course market returns are just one variable - life expectancies, catastrophic events, heir earnings changes, tax law changes are all out there churning the future too.

Maybe I'm just frustrated by the amount of time I spent to find what seems obvious in hindsight - future events drive the result.

So my feeling is tool shortcomings seem much less important than future events and the tool only has to get the first year directionally correct to be better than doing nothing and that may be as good as it gets.
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

iceport wrote: Mon Oct 25, 2021 3:07 pm Okay, the technical glitch I ran into yesterday was somehow resolved, and I was able to enter data and run the program.

With my true asset allocation/location specifics, it tells me to liquidate tax-deferred account within the first few years, sending me to the top of the 24% tax bracket, though I'm starting from the bottom of the 22% bracket with base income. That's bogus. Then it wants me to liquidate the Roth next, in about 10 years or so. That leaves me with only taxable and 100% equity for the bulk of the plan period. Bogus. (As expected!)

Then, using the informal hack recommended by Exchme to use the same asset allocation in each account, it still sends me to the top of the 24% tax bracket the first two years with large Roth conversions. I consider that to be faulty advice. (Though I must say, that's far better than it used to be. At least I don't have to liquidate my entire tax-deferred balance in one year. :oops: )

Unfortunately, i-ORP claims prominently that producing a tax-efficient Roth conversion strategy is one of its specialties!

i-ORP wrote:The Optimal Retirement Planner Computes:
  1. The plan's maximum, annual disposable income, instead of the plan's final surplus or deficit.
  2. The annual tax-efficient amount and order of withdrawals from retirement savings accounts.
  3. Optimal, tax efficient IRA to Roth IRA partial conversions.

None of the others do any of this.
Honestly, I don't know what this program is good for. There's never been a single instance when I've given it a try that it's produced results that I consider anything close to approximating good advice.

Fortunately, I have a decent base level of understanding of what constitutes a reasonable Roth conversion strategy. I feel sorry for folks who don't, and then follow the bogus advice of i-ORP and go on to incur huge tax bills early in retirement for no good reason.
Sounds like you still don't have the input right. If you are 100% equity in taxable and didn't intend to be, then that's the problem, it's simply snooping for the highest stock allocation. As I said above, you have to fill out both the start and end allocation of the glide path for each type of account or it will give you 100% stocks.
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iceport
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Re: i-orp and roth conversions

Post by iceport »

Exchme wrote: Mon Oct 25, 2021 3:41 pm
iceport wrote: Mon Oct 25, 2021 3:07 pm Okay, the technical glitch I ran into yesterday was somehow resolved, and I was able to enter data and run the program.

With my true asset allocation/location specifics, it tells me to liquidate tax-deferred account within the first few years, sending me to the top of the 24% tax bracket, though I'm starting from the bottom of the 22% bracket with base income. That's bogus. Then it wants me to liquidate the Roth next, in about 10 years or so. That leaves me with only taxable and 100% equity for the bulk of the plan period. Bogus. (As expected!)

Then, using the informal hack recommended by Exchme to use the same asset allocation in each account, it still sends me to the top of the 24% tax bracket the first two years with large Roth conversions. I consider that to be faulty advice. (Though I must say, that's far better than it used to be. At least I don't have to liquidate my entire tax-deferred balance in one year. :oops: )

Unfortunately, i-ORP claims prominently that producing a tax-efficient Roth conversion strategy is one of its specialties!

i-ORP wrote:The Optimal Retirement Planner Computes:
  1. The plan's maximum, annual disposable income, instead of the plan's final surplus or deficit.
  2. The annual tax-efficient amount and order of withdrawals from retirement savings accounts.
  3. Optimal, tax efficient IRA to Roth IRA partial conversions.

None of the others do any of this.
Honestly, I don't know what this program is good for. There's never been a single instance when I've given it a try that it's produced results that I consider anything close to approximating good advice.

Fortunately, I have a decent base level of understanding of what constitutes a reasonable Roth conversion strategy. I feel sorry for folks who don't, and then follow the bogus advice of i-ORP and go on to incur huge tax bills early in retirement for no good reason.
Sounds like you still don't have the input right. If you are 100% equity in taxable and didn't intend to be, then that's the problem, it's simply snooping for the highest stock allocation. As I said above, you have to fill out both the start and end allocation of the glide path for each type of account or it will give you 100% stocks.
I hold 100% equities in taxable, by choice.

Did you catch the part where I (falsely) use the same AA for all accounts, and I still get bad advice?

Do I need to stand on my right leg and face west when I hit the "Run" button?
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
marcopolo
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Re: i-orp and roth conversions

Post by marcopolo »

Exchme wrote: Mon Oct 25, 2021 3:36 pm
marcopolo wrote: Mon Oct 25, 2021 1:39 pm You keep saying that as if this fixes the problem.
I agree that i-orp is very oversimplified and I agree with what you are saying that it cannot do tax efficient asset placement (bonds in IRA, stocks in Roth). The only consumer level tool I'm aware that can do tax efficient placement right now is the RPM beta and that just came out a few months ago. I had been trying with Pralana Gold doing numerous iterative adjustments, but it was very slow and tiresome, so I was thrilled when the RPM beta came out. I seem to recall that someone - I think it was you? had built a set of linked RPM sheets some time ago that would do it - wow, talk about a huge task!

But RPM and Pralana are not for everybody and as good as the RPM beta is, it still lacks parts important parts of the tax code that I wanted to include. For my own analysis, I added the bits of the tax code (cash spend down, dividends, existing capital gains, capital gains taxation, NIIT, Supplemental Medicare Taxes, simplified AMT, ACA subsidy amounts if eligible, gifts to heirs) and set up linked sheets for my heirs in order to capture heir taxation of the inherited IRA, gifts while alive, and their different tax brackets and expected earnings.

I then looked at the Roth plan for both the tax efficient asset placement and equal allocations in all accounts, correcting for the allocation bias associated with sticking the government with bonds that the tax efficient placement creates. In the case I looked at most, as expected, tax efficient asset placement was better, but then I changed my return assumptions and equal allocation in all accounts was better - (I didn't actually think that was even theoretically possible for equal allocation to beat tax efficient allocation. Some time in the future I'll look some more and see if that result is due to some mistake I made or whether it is real, due to some nook or cranny of the tax code. Certainly it can't be a general result, it makes no sense)

In any case I looked at, no algorithm would have found the optimum - it could be caused by avoiding an IRMAA tier in 2037 or the SS tax hump in 2030 or capital gains tax phase in or something for your heirs decades from now or getting an ACA credit at some point. As I built the sheet, every time I added a nuance of the tax code, it changed the best result. The results certainly were not the classic expectation of constant marginal ordinary income tax rates through time.

Then I looked at a historical based spreadsheet that I had put together a few years ago that lacks tax efficient placement and heir taxes but gives a feel for variability that the world gives us in returns. It frankly makes a mockery of my attempts to find the optimum. If markets go up extra fast, you wish you had done more conversions first, if markets head down, then you regret pre-paying taxes on phantom gains. Certainly the out-year effects that were driving the static return model meant nothing. And of course market returns are just one variable - life expectancies, catastrophic events, heir earnings changes, tax law changes are all out there churning the future too.

Maybe I'm just frustrated by the amount of time I spent to find what seems obvious in hindsight - future events drive the result.

So my feeling is tool shortcomings seem much less important than future events and the tool only has to get the first year directionally correct to be better than doing nothing and that may be as good as it gets.
This is a lot more nuanced answer, and I largely agree with you. It is a very difficult problem to solve.

I just don't think essentially telling people "the tool is great, you are just not entering the right inputs" serves them well.

I don't fault the tool or its creator. I just think some people have tried to imbue it with some magical abilities it does not have, and have ignored the limitations. I believe this has led to a general over zealous pushing of Roth Conversion even in situation where they are likely to do more harm than good.
Once in a while you get shown the light, in the strangest of places if you look at it right.
WhiteMaxima
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Re: i-orp and roth conversions

Post by WhiteMaxima »

I will at least do Roth conversion upto 12% tax bracket (next is 24% doubled) and move to a very low cost area to live. Do it until 72 and see what's next.
Tdubs
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Re: i-orp and roth conversions

Post by Tdubs »

marcopolo wrote: Mon Oct 25, 2021 4:00 pm
Exchme wrote: Mon Oct 25, 2021 3:36 pm
marcopolo wrote: Mon Oct 25, 2021 1:39 pm You keep saying that as if this fixes the problem.
I agree that i-orp is very oversimplified and I agree with what you are saying that it cannot do tax efficient asset placement (bonds in IRA, stocks in Roth). The only consumer level tool I'm aware that can do tax efficient placement right now is the RPM beta and that just came out a few months ago. I had been trying with Pralana Gold doing numerous iterative adjustments, but it was very slow and tiresome, so I was thrilled when the RPM beta came out. I seem to recall that someone - I think it was you? had built a set of linked RPM sheets some time ago that would do it - wow, talk about a huge task!

But RPM and Pralana are not for everybody and as good as the RPM beta is, it still lacks parts important parts of the tax code that I wanted to include. For my own analysis, I added the bits of the tax code (cash spend down, dividends, existing capital gains, capital gains taxation, NIIT, Supplemental Medicare Taxes, simplified AMT, ACA subsidy amounts if eligible, gifts to heirs) and set up linked sheets for my heirs in order to capture heir taxation of the inherited IRA, gifts while alive, and their different tax brackets and expected earnings.

I then looked at the Roth plan for both the tax efficient asset placement and equal allocations in all accounts, correcting for the allocation bias associated with sticking the government with bonds that the tax efficient placement creates. In the case I looked at most, as expected, tax efficient asset placement was better, but then I changed my return assumptions and equal allocation in all accounts was better - (I didn't actually think that was even theoretically possible for equal allocation to beat tax efficient allocation. Some time in the future I'll look some more and see if that result is due to some mistake I made or whether it is real, due to some nook or cranny of the tax code. Certainly it can't be a general result, it makes no sense)

In any case I looked at, no algorithm would have found the optimum - it could be caused by avoiding an IRMAA tier in 2037 or the SS tax hump in 2030 or capital gains tax phase in or something for your heirs decades from now or getting an ACA credit at some point. As I built the sheet, every time I added a nuance of the tax code, it changed the best result. The results certainly were not the classic expectation of constant marginal ordinary income tax rates through time.

Then I looked at a historical based spreadsheet that I had put together a few years ago that lacks tax efficient placement and heir taxes but gives a feel for variability that the world gives us in returns. It frankly makes a mockery of my attempts to find the optimum. If markets go up extra fast, you wish you had done more conversions first, if markets head down, then you regret pre-paying taxes on phantom gains. Certainly the out-year effects that were driving the static return model meant nothing. And of course market returns are just one variable - life expectancies, catastrophic events, heir earnings changes, tax law changes are all out there churning the future too.

Maybe I'm just frustrated by the amount of time I spent to find what seems obvious in hindsight - future events drive the result.

So my feeling is tool shortcomings seem much less important than future events and the tool only has to get the first year directionally correct to be better than doing nothing and that may be as good as it gets.
This is a lot more nuanced answer, and I largely agree with you. It is a very difficult problem to solve.

I just don't think essentially telling people "the tool is great, you are just not entering the right inputs" serves them well.

I don't fault the tool or its creator. I just think some people have tried to imbue it with some magical abilities it does not have, and have ignored the limitations. I believe this has led to a general over zealous pushing of Roth Conversion even in situation where they are likely to do more harm than good.
James Welch, the creator of I-ORP, is pretty clear on the limited value of conversions. When I use I-ORP and hold investment returns equal across all accounts, I find that he is right. I'll get a very small bump in my annual income with conversions, somewhere on the order of $1,000 annually. So, if conversions are being oversold, it isn't by him. From ORP I've concluded that it's worth converting up to the top of the 12/15 percent brackets and call it a day. The benefits of converting across the 22 percent and higher brackets are just to small to get worked up about.

Google: James Welch, "Measuring the Consequences of IRA to Roth IRA Conversions." Also see his article, "A 3-Step Procedure for
Computing Sustainable Retirement Savings Withdrawals."
Woodshark
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Re: i-orp and roth conversions

Post by Woodshark »

Honestly, I don't know what this program is good for. There's never been a single instance when I've given it a try that it's produced results that I consider anything close to approximating good advice.
I agree with this statement. Hoping to gain some insight on Roth conversions, I ran i-orp several times over the years, both pre and post retirement. None ever made sense to me. I cannot remember the exact wording but the last time I ran it, it returned with something close to " We cannot do projections within your tax brackets. Please contact us directly for further analysis."
marcopolo
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Re: i-orp and roth conversions

Post by marcopolo »

Tdubs wrote: Mon Oct 25, 2021 4:44 pm
marcopolo wrote: Mon Oct 25, 2021 4:00 pm
Exchme wrote: Mon Oct 25, 2021 3:36 pm
marcopolo wrote: Mon Oct 25, 2021 1:39 pm You keep saying that as if this fixes the problem.
I agree that i-orp is very oversimplified and I agree with what you are saying that it cannot do tax efficient asset placement (bonds in IRA, stocks in Roth). The only consumer level tool I'm aware that can do tax efficient placement right now is the RPM beta and that just came out a few months ago. I had been trying with Pralana Gold doing numerous iterative adjustments, but it was very slow and tiresome, so I was thrilled when the RPM beta came out. I seem to recall that someone - I think it was you? had built a set of linked RPM sheets some time ago that would do it - wow, talk about a huge task!

But RPM and Pralana are not for everybody and as good as the RPM beta is, it still lacks parts important parts of the tax code that I wanted to include. For my own analysis, I added the bits of the tax code (cash spend down, dividends, existing capital gains, capital gains taxation, NIIT, Supplemental Medicare Taxes, simplified AMT, ACA subsidy amounts if eligible, gifts to heirs) and set up linked sheets for my heirs in order to capture heir taxation of the inherited IRA, gifts while alive, and their different tax brackets and expected earnings.

I then looked at the Roth plan for both the tax efficient asset placement and equal allocations in all accounts, correcting for the allocation bias associated with sticking the government with bonds that the tax efficient placement creates. In the case I looked at most, as expected, tax efficient asset placement was better, but then I changed my return assumptions and equal allocation in all accounts was better - (I didn't actually think that was even theoretically possible for equal allocation to beat tax efficient allocation. Some time in the future I'll look some more and see if that result is due to some mistake I made or whether it is real, due to some nook or cranny of the tax code. Certainly it can't be a general result, it makes no sense)

In any case I looked at, no algorithm would have found the optimum - it could be caused by avoiding an IRMAA tier in 2037 or the SS tax hump in 2030 or capital gains tax phase in or something for your heirs decades from now or getting an ACA credit at some point. As I built the sheet, every time I added a nuance of the tax code, it changed the best result. The results certainly were not the classic expectation of constant marginal ordinary income tax rates through time.

Then I looked at a historical based spreadsheet that I had put together a few years ago that lacks tax efficient placement and heir taxes but gives a feel for variability that the world gives us in returns. It frankly makes a mockery of my attempts to find the optimum. If markets go up extra fast, you wish you had done more conversions first, if markets head down, then you regret pre-paying taxes on phantom gains. Certainly the out-year effects that were driving the static return model meant nothing. And of course market returns are just one variable - life expectancies, catastrophic events, heir earnings changes, tax law changes are all out there churning the future too.

Maybe I'm just frustrated by the amount of time I spent to find what seems obvious in hindsight - future events drive the result.

So my feeling is tool shortcomings seem much less important than future events and the tool only has to get the first year directionally correct to be better than doing nothing and that may be as good as it gets.
This is a lot more nuanced answer, and I largely agree with you. It is a very difficult problem to solve.

I just don't think essentially telling people "the tool is great, you are just not entering the right inputs" serves them well.

I don't fault the tool or its creator. I just think some people have tried to imbue it with some magical abilities it does not have, and have ignored the limitations. I believe this has led to a general over zealous pushing of Roth Conversion even in situation where they are likely to do more harm than good.
James Welch, the creator of I-ORP, is pretty clear on the limited value of conversions. When I use I-ORP and hold investment returns equal across all accounts, I find that he is right. I'll get a very small bump in my annual income with conversions, somewhere on the order of $1,000 annually. So, if conversions are being oversold, it isn't by him. From ORP I've concluded that it's worth converting up to the top of the 12/15 percent brackets and call it a day. The benefits of converting across the 22 percent and higher brackets are just to small to get worked up about.

Google: James Welch, "Measuring the Consequences of IRA to Roth IRA Conversions." Also see his article, "A 3-Step Procedure for
Computing Sustainable Retirement Savings Withdrawals."
I agree with this. I was referring to some of the more over zealous proponents of Roth Conversions on this forum.
But, the point i was making above is that even the modest benefit you are seeing is likely over stating the case if you actually hold your bonds in TDA, but have to tell I-ORP that returns are equal.
Once in a while you get shown the light, in the strangest of places if you look at it right.
chassis
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Re: i-orp and roth conversions

Post by chassis »

Tdubs wrote: Mon Oct 25, 2021 4:44 pm
marcopolo wrote: Mon Oct 25, 2021 4:00 pm
Exchme wrote: Mon Oct 25, 2021 3:36 pm
marcopolo wrote: Mon Oct 25, 2021 1:39 pm You keep saying that as if this fixes the problem.
I agree that i-orp is very oversimplified and I agree with what you are saying that it cannot do tax efficient asset placement (bonds in IRA, stocks in Roth). The only consumer level tool I'm aware that can do tax efficient placement right now is the RPM beta and that just came out a few months ago. I had been trying with Pralana Gold doing numerous iterative adjustments, but it was very slow and tiresome, so I was thrilled when the RPM beta came out. I seem to recall that someone - I think it was you? had built a set of linked RPM sheets some time ago that would do it - wow, talk about a huge task!

But RPM and Pralana are not for everybody and as good as the RPM beta is, it still lacks parts important parts of the tax code that I wanted to include. For my own analysis, I added the bits of the tax code (cash spend down, dividends, existing capital gains, capital gains taxation, NIIT, Supplemental Medicare Taxes, simplified AMT, ACA subsidy amounts if eligible, gifts to heirs) and set up linked sheets for my heirs in order to capture heir taxation of the inherited IRA, gifts while alive, and their different tax brackets and expected earnings.

I then looked at the Roth plan for both the tax efficient asset placement and equal allocations in all accounts, correcting for the allocation bias associated with sticking the government with bonds that the tax efficient placement creates. In the case I looked at most, as expected, tax efficient asset placement was better, but then I changed my return assumptions and equal allocation in all accounts was better - (I didn't actually think that was even theoretically possible for equal allocation to beat tax efficient allocation. Some time in the future I'll look some more and see if that result is due to some mistake I made or whether it is real, due to some nook or cranny of the tax code. Certainly it can't be a general result, it makes no sense)

In any case I looked at, no algorithm would have found the optimum - it could be caused by avoiding an IRMAA tier in 2037 or the SS tax hump in 2030 or capital gains tax phase in or something for your heirs decades from now or getting an ACA credit at some point. As I built the sheet, every time I added a nuance of the tax code, it changed the best result. The results certainly were not the classic expectation of constant marginal ordinary income tax rates through time.

Then I looked at a historical based spreadsheet that I had put together a few years ago that lacks tax efficient placement and heir taxes but gives a feel for variability that the world gives us in returns. It frankly makes a mockery of my attempts to find the optimum. If markets go up extra fast, you wish you had done more conversions first, if markets head down, then you regret pre-paying taxes on phantom gains. Certainly the out-year effects that were driving the static return model meant nothing. And of course market returns are just one variable - life expectancies, catastrophic events, heir earnings changes, tax law changes are all out there churning the future too.

Maybe I'm just frustrated by the amount of time I spent to find what seems obvious in hindsight - future events drive the result.

So my feeling is tool shortcomings seem much less important than future events and the tool only has to get the first year directionally correct to be better than doing nothing and that may be as good as it gets.
This is a lot more nuanced answer, and I largely agree with you. It is a very difficult problem to solve.

I just don't think essentially telling people "the tool is great, you are just not entering the right inputs" serves them well.

I don't fault the tool or its creator. I just think some people have tried to imbue it with some magical abilities it does not have, and have ignored the limitations. I believe this has led to a general over zealous pushing of Roth Conversion even in situation where they are likely to do more harm than good.
James Welch, the creator of I-ORP, is pretty clear on the limited value of conversions. When I use I-ORP and hold investment returns equal across all accounts, I find that he is right. I'll get a very small bump in my annual income with conversions, somewhere on the order of $1,000 annually. So, if conversions are being oversold, it isn't by him. From ORP I've concluded that it's worth converting up to the top of the 12/15 percent brackets and call it a day. The benefits of converting across the 22 percent and higher brackets are just to small to get worked up about.

Google: James Welch, "Measuring the Consequences of IRA to Roth IRA Conversions." Also see his article, "A 3-Step Procedure for
Computing Sustainable Retirement Savings Withdrawals."
Agree with this and @tdubs comment on overzealous promoters of Roth conversions on this site and FIRE.

James Welch holds similar views that Professor McQuarrie holds, which is that Roth conversion benefits, if any exist at all, are paltry and accrue to the investor very late in life. Roth conversions are generally oversold/overpromoted by people who do Roth conversions.

Roth conversions make one poorer, in the majority of cases.
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iceport
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Re: i-orp and roth conversions

Post by iceport »

chassis wrote: Mon Oct 25, 2021 5:10 pm James Welch holds similar views that Professor McQuarrie holds, which is that Roth conversion benefits, if any exist at all, are paltry and accrue to the investor very late in life. Roth conversions are generally oversold/overpromoted by people who do Roth conversions.
That's quite surprising to me, because the program has always recommended outlandishly aggressive Roth conversions for me. More so in the past, but even today it recommended converting from the bottom of the 22% bracket up to the top of the 24% bracket, and then left a few more years before the specified SS claiming age with no conversions. The more logical solution would be to spread out the Roth conversions across more years.

There's obviously some fundamental flaw in the analysis when it comes to Roth conversions — and probably other aspects as well, if you can't input real world data without getting gibberish back.

If I have to pretend I'm using the same AA in all accounts, how valuable can any of the results be?
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Tdubs
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Re: i-orp and roth conversions

Post by Tdubs »

iceport wrote: Mon Oct 25, 2021 5:27 pm
chassis wrote: Mon Oct 25, 2021 5:10 pm James Welch holds similar views that Professor McQuarrie holds, which is that Roth conversion benefits, if any exist at all, are paltry and accrue to the investor very late in life. Roth conversions are generally oversold/overpromoted by people who do Roth conversions.
That's quite surprising to me, because the program has always recommended outlandishly aggressive Roth conversions for me. More so in the past, but even today it recommended converting from the bottom of the 22% bracket up to the top of the 24% bracket, and then left a few more years before the specified SS claiming age with no conversions. The more logical solution would be to spread out the Roth conversions across more years.

There's obviously some fundamental flaw in the analysis when it comes to Roth conversions — and probably other aspects as well, if you can't input real world data without getting gibberish back.

If I have to pretend I'm using the same AA in all accounts, how valuable can any of the results be?
Yes, Welch's article on the subject is pretty clear that benefits are limited. See, "Measuring the Financial Consequences of IRA to Roth IRA Conversions," Journal of Personal Finance . 2016, Vol. 15 Issue 1, p 47-55.

If you have trouble finding a copy, send me a message.
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

iceport wrote: Mon Oct 25, 2021 3:47 pm
Exchme wrote: Mon Oct 25, 2021 3:41 pm
iceport wrote: Mon Oct 25, 2021 3:07 pm Okay, the technical glitch I ran into yesterday was somehow resolved, and I was able to enter data and run the program.

With my true asset allocation/location specifics, it tells me to liquidate tax-deferred account within the first few years, sending me to the top of the 24% tax bracket, though I'm starting from the bottom of the 22% bracket with base income. That's bogus. Then it wants me to liquidate the Roth next, in about 10 years or so. That leaves me with only taxable and 100% equity for the bulk of the plan period. Bogus. (As expected!)

Then, using the informal hack recommended by Exchme to use the same asset allocation in each account, it still sends me to the top of the 24% tax bracket the first two years with large Roth conversions. I consider that to be faulty advice. (Though I must say, that's far better than it used to be. At least I don't have to liquidate my entire tax-deferred balance in one year. :oops: )

Unfortunately, i-ORP claims prominently that producing a tax-efficient Roth conversion strategy is one of its specialties!

i-ORP wrote:The Optimal Retirement Planner Computes:
  1. The plan's maximum, annual disposable income, instead of the plan's final surplus or deficit.
  2. The annual tax-efficient amount and order of withdrawals from retirement savings accounts.
  3. Optimal, tax efficient IRA to Roth IRA partial conversions.

None of the others do any of this.
Honestly, I don't know what this program is good for. There's never been a single instance when I've given it a try that it's produced results that I consider anything close to approximating good advice.

Fortunately, I have a decent base level of understanding of what constitutes a reasonable Roth conversion strategy. I feel sorry for folks who don't, and then follow the bogus advice of i-ORP and go on to incur huge tax bills early in retirement for no good reason.
Sounds like you still don't have the input right. If you are 100% equity in taxable and didn't intend to be, then that's the problem, it's simply snooping for the highest stock allocation. As I said above, you have to fill out both the start and end allocation of the glide path for each type of account or it will give you 100% stocks.
I hold 100% equities in taxable, by choice.

Did you catch the part where I (falsely) use the same AA for all accounts, and I still get bad advice?

Do I need to stand on my right leg and face west when I hit the "Run" button?
You are right, I did not read carefully enough that you did try the equal allocation in all accounts and you don't think the advice to do conversion for 2 years to the top of the 24% bracket is sound. I presume you have done enough work with other tools to refute the program's recommendation? If that was not with the new RPM beta, can you tell us about the tool you are using that give you better advice? To me the only tools worth talking about are the ones doing year by year analysis and the ones I've tried are i-orp, Pralana Gold and RPM, I would love to hear about experiences with others.

Until the beta version of RPM came out this summer that allowed you to hold the portfolio level stock/bond allocation constant and use rules to hold varying amounts of stocks vs bonds in different accounts, all those programs had the exact same limitation and the advice to use equal asset allocations in all accounts to at least get a plausible answer was widely advised by many here. That advice frustrated me too, so I spent countless hours in Pralana Gold manually fiddling with its 4 allowed re-allocations at the account level to try to hold the portfolio level allocation constant, but that is no fun at all. I've traded e-mails with the Pralana developer and he is working on adding it, so maybe we will see it for 2022. I was thrilled when the RPM beta came out and as I said in a neighboring post, I upgraded its tax package in my copy as off the shelf it has plenty of gaps too.

I don't mean to say i-orp is doing things right, in fact I listed a whole bunch of missing bits of the tax code and other limitations, but being so critical about controlling portfolio level asset allocation with different account level allocations when no free/low cost program had solved it until a couple months ago seems really harsh. Every program has limitations and the first thing I do is read, try different things, compare to other programs to see if I can live with the limitations, particularly for free stuff. Rather than trashing a freely offered service, I try to envision who might get value from it - my perception for i-orp is it might be a starting point for folks starting out in their retirement planning journey that need ideas or people with no spreadsheet skill and no desire to get into the weeds with numbers.
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Lee_WSP
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Re: i-orp and roth conversions

Post by Lee_WSP »

Exchme wrote: Mon Oct 25, 2021 3:36 pm
marcopolo wrote: Mon Oct 25, 2021 1:39 pm You keep saying that as if this fixes the problem.
I agree that i-orp is very oversimplified and I agree with what you are saying that it cannot do tax efficient asset placement (bonds in IRA, stocks in Roth). The only consumer level tool I'm aware that can do tax efficient placement right now is the RPM beta and that just came out a few months ago. I had been trying with Pralana Gold doing numerous iterative adjustments, but it was very slow and tiresome, so I was thrilled when the RPM beta came out. I seem to recall that someone - I think it was you? had built a set of linked RPM sheets some time ago that would do it - wow, talk about a huge task!

But RPM and Pralana are not for everybody and as good as the RPM beta is, it still lacks parts important parts of the tax code that I wanted to include. For my own analysis, I added the bits of the tax code (cash spend down, dividends, existing capital gains, capital gains taxation, NIIT, Supplemental Medicare Taxes, simplified AMT, ACA subsidy amounts if eligible, gifts to heirs) and set up linked sheets for my heirs in order to capture heir taxation of the inherited IRA, gifts while alive, and their different tax brackets and expected earnings.

I then looked at the Roth plan for both the tax efficient asset placement and equal allocations in all accounts, correcting for the allocation bias associated with sticking the government with bonds that the tax efficient placement creates. In the case I looked at most, as expected, tax efficient asset placement was better, but then I changed my return assumptions and equal allocation in all accounts was better - (I didn't actually think that was even theoretically possible for equal allocation to beat tax efficient allocation. Some time in the future I'll look some more and see if that result is due to some mistake I made or whether it is real, due to some nook or cranny of the tax code. Certainly it can't be a general result, it makes no sense)

In any case I looked at, no algorithm would have found the optimum - it could be caused by avoiding an IRMAA tier in 2037 or the SS tax hump in 2030 or capital gains tax phase in or something for your heirs decades from now or getting an ACA credit at some point. As I built the sheet, every time I added a nuance of the tax code, it changed the best result. The results certainly were not the classic expectation of constant marginal ordinary income tax rates through time.

Then I looked at a historical based spreadsheet that I had put together a few years ago that lacks tax efficient placement and heir taxes but gives a feel for variability that the world gives us in returns. It frankly makes a mockery of my attempts to find the optimum. If markets go up extra fast, you wish you had done more conversions first, if markets head down, then you regret pre-paying taxes on phantom gains. Certainly the out-year effects that were driving the static return model meant nothing. And of course market returns are just one variable - life expectancies, catastrophic events, heir earnings changes, tax law changes are all out there churning the future too.

Maybe I'm just frustrated by the amount of time I spent to find what seems obvious in hindsight - future events drive the result.

So my feeling is tool shortcomings seem much less important than future events and the tool only has to get the first year directionally correct to be better than doing nothing and that may be as good as it gets.
I've said it a few dozen times already, but I'll say it again.

The benefit of the Roth while alive is the difference between the tax rates paid today and the tax rates paid tomorrow multipied by that amount which would have been subject to the higher tax tomorrow.

In other words, in most cases it's an average difference of a few percentage points applied to only say fifty thousand dollars repeated over ten years. Conversions on top of RMDs yield even smaller returns than those done pre RMDs.
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billthecat
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Re: i-orp and roth conversions

Post by billthecat »

Tdubs wrote: Mon Oct 25, 2021 4:44 pm
marcopolo wrote: Mon Oct 25, 2021 4:00 pm
Exchme wrote: Mon Oct 25, 2021 3:36 pm
marcopolo wrote: Mon Oct 25, 2021 1:39 pm You keep saying that as if this fixes the problem.
I agree that i-orp is very oversimplified and I agree with what you are saying that it cannot do tax efficient asset placement (bonds in IRA, stocks in Roth). The only consumer level tool I'm aware that can do tax efficient placement right now is the RPM beta and that just came out a few months ago. I had been trying with Pralana Gold doing numerous iterative adjustments, but it was very slow and tiresome, so I was thrilled when the RPM beta came out. I seem to recall that someone - I think it was you? had built a set of linked RPM sheets some time ago that would do it - wow, talk about a huge task!

But RPM and Pralana are not for everybody and as good as the RPM beta is, it still lacks parts important parts of the tax code that I wanted to include. For my own analysis, I added the bits of the tax code (cash spend down, dividends, existing capital gains, capital gains taxation, NIIT, Supplemental Medicare Taxes, simplified AMT, ACA subsidy amounts if eligible, gifts to heirs) and set up linked sheets for my heirs in order to capture heir taxation of the inherited IRA, gifts while alive, and their different tax brackets and expected earnings.

I then looked at the Roth plan for both the tax efficient asset placement and equal allocations in all accounts, correcting for the allocation bias associated with sticking the government with bonds that the tax efficient placement creates. In the case I looked at most, as expected, tax efficient asset placement was better, but then I changed my return assumptions and equal allocation in all accounts was better - (I didn't actually think that was even theoretically possible for equal allocation to beat tax efficient allocation. Some time in the future I'll look some more and see if that result is due to some mistake I made or whether it is real, due to some nook or cranny of the tax code. Certainly it can't be a general result, it makes no sense)

In any case I looked at, no algorithm would have found the optimum - it could be caused by avoiding an IRMAA tier in 2037 or the SS tax hump in 2030 or capital gains tax phase in or something for your heirs decades from now or getting an ACA credit at some point. As I built the sheet, every time I added a nuance of the tax code, it changed the best result. The results certainly were not the classic expectation of constant marginal ordinary income tax rates through time.

Then I looked at a historical based spreadsheet that I had put together a few years ago that lacks tax efficient placement and heir taxes but gives a feel for variability that the world gives us in returns. It frankly makes a mockery of my attempts to find the optimum. If markets go up extra fast, you wish you had done more conversions first, if markets head down, then you regret pre-paying taxes on phantom gains. Certainly the out-year effects that were driving the static return model meant nothing. And of course market returns are just one variable - life expectancies, catastrophic events, heir earnings changes, tax law changes are all out there churning the future too.

Maybe I'm just frustrated by the amount of time I spent to find what seems obvious in hindsight - future events drive the result.

So my feeling is tool shortcomings seem much less important than future events and the tool only has to get the first year directionally correct to be better than doing nothing and that may be as good as it gets.
This is a lot more nuanced answer, and I largely agree with you. It is a very difficult problem to solve.

I just don't think essentially telling people "the tool is great, you are just not entering the right inputs" serves them well.

I don't fault the tool or its creator. I just think some people have tried to imbue it with some magical abilities it does not have, and have ignored the limitations. I believe this has led to a general over zealous pushing of Roth Conversion even in situation where they are likely to do more harm than good.
James Welch, the creator of I-ORP, is pretty clear on the limited value of conversions. When I use I-ORP and hold investment returns equal across all accounts, I find that he is right. I'll get a very small bump in my annual income with conversions, somewhere on the order of $1,000 annually. So, if conversions are being oversold, it isn't by him. From ORP I've concluded that it's worth converting up to the top of the 12/15 percent brackets and call it a day. The benefits of converting across the 22 percent and higher brackets are just to small to get worked up about.

Google: James Welch, "Measuring the Consequences of IRA to Roth IRA Conversions." Also see his article, "A 3-Step Procedure for
Computing Sustainable Retirement Savings Withdrawals."
I don't know how common this is but in my case being in the 10/12% tax brackets is an illusion because my qualified dividends/capital gains straddle the cap gains 0/15% brackets. So, each dollar of conversion would push a dollar of qualified dividends/capital gains into being taxed too, for a combined marginal tax rate of 25/27% (until non-qualified income reaches $40,125, today).
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
mkc
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Re: i-orp and roth conversions

Post by mkc »

billthecat wrote: Mon Oct 25, 2021 10:32 pm
Tdubs wrote: Mon Oct 25, 2021 4:44 pm
marcopolo wrote: Mon Oct 25, 2021 4:00 pm
This is a lot more nuanced answer, and I largely agree with you. It is a very difficult problem to solve.

I just don't think essentially telling people "the tool is great, you are just not entering the right inputs" serves them well.

I don't fault the tool or its creator. I just think some people have tried to imbue it with some magical abilities it does not have, and have ignored the limitations. I believe this has led to a general over zealous pushing of Roth Conversion even in situation where they are likely to do more harm than good.
James Welch, the creator of I-ORP, is pretty clear on the limited value of conversions. When I use I-ORP and hold investment returns equal across all accounts, I find that he is right. I'll get a very small bump in my annual income with conversions, somewhere on the order of $1,000 annually. So, if conversions are being oversold, it isn't by him. From ORP I've concluded that it's worth converting up to the top of the 12/15 percent brackets and call it a day. The benefits of converting across the 22 percent and higher brackets are just to small to get worked up about.

Google: James Welch, "Measuring the Consequences of IRA to Roth IRA Conversions." Also see his article, "A 3-Step Procedure for
Computing Sustainable Retirement Savings Withdrawals."
I don't know how common this is but in my case being in the 10/12% tax brackets is an illusion because my qualified dividends/capital gains straddle the cap gains 0/15% brackets. So, each dollar of conversion would push a dollar of qualified dividends/capital gains into being taxed too, for a combined marginal tax rate of 25/27% (until non-qualified income reaches $40,125, today).
(Hopefully I edited the nested quotes correctly...)

The cap gains bracket straddle/combined marginal rate is not uncommon. We have the same scenario. I spent days back and forth with i-orp and RPM (mostly RPM and having to manually twiddle around to account for this cap gains tax issue). That's the one income and tax area that I don't think any of the calculators address easily or automatically.
Exchme
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Re: i-orp and roth conversions

Post by Exchme »

Lee_WSP wrote: Mon Oct 25, 2021 10:03 pm The benefit of the Roth while alive is the difference between the tax rates paid today and the tax rates paid tomorrow multipied by that amount which would have been subject to the higher tax tomorrow.


Yes, absolutely, it's only the dollars we are able to move from one tax rate to another that matter multiplied by the difference in tax rates for that money, so inherently it's a small portion of the total. It's hard to plan as the tax code is so quirky that the effective marginal tax rate is often much different than the tax bracket for ordinary income. For instance, billthecat's experience:
billthecat wrote: Mon Oct 25, 2021 10:32 pm I don't know how common this is but in my case being in the 10/12% tax brackets is an illusion because my qualified dividends/capital gains straddle the cap gains 0/15% brackets. So, each dollar of conversion would push a dollar of qualified dividends/capital gains into being taxed too, for a combined marginal tax rate of 25/27% (until non-qualified income reaches $40,125, today).
This agrees with what I see in my souped up RPM model that has more of the tax code in it. My optimum Roth conversions end up:

+ Converting to the top of the 24% bracket prior to age 63, presumably to minimize IRMAA later
+ Snagging an ACA premium credit for a year, or maybe two
+ Converting to the top of the 24% bracket year at age 65
+ Converting only to the top of the 12% bracket for a couple of years. Since that is 2026, I thought it was avoiding the reversion of the 22% bracket to 25% with expiration of the TCJA, but the plan stayed the same if I told it TCJA continued. So I think it is the capital gains phase in like billthecat saw that the program is trying to minimize.
+ Liquidating an inherited IRA rather than doing meaningful conversions for a couple of years to provide cash, thus minimizing lifetime capital gains taxes
+ Essentially stopping conversions once SS benefits kick in to avoid the SS tax hump for a couple years.

A lot of things about my optimum plan do not seem obvious. When I fiddle with the numbers, each year interacts with the others, giving me lots of false local optimums, that I only see aren't the best when I go back and make arbitrary step changes to other years. Bringing it back to this thread, it's beyond me how any computer program could find this plan, short of a lot of brute force. When I look at historical analyses, such improvements are very hard to capture in real life as the future keeps messing with our plans.

The question of the significance of doing even the theoretically optimum conversions is also in the eye of the beholder. If I ask what is the difference in value using inflation adjusted $ at the end of life + 10 years to liquidate the inherited IRA and look at my heirs' situation at that point, the benefit of Roth conversions is hundreds of thousands of $. Woo-hoo!

But if I instead ask how much more would I need in the account today, invested the same as the other money, in order to match the performance at that future death + 10 year point, it's a little over 3% of today's IRA balance. Being retired, I don't have another way to make that money (short of going back to w*rk, yuck), so it's worth trying to capture what I can, but it's not make or break.

I haven't looked as it doesn't apply to me, but for folks not doing estate planning for their heirs, I take prof McQ's analysis to mean that the benefit is small.

Since tax rates have three basic tiers (10/12, 22/24, 32+) and I can arbitrage some money between the tiers, I'm in the sweet spot where Roth conversions can help. Of course there are folks that even if they didn't plan, would be mostly below the 22/24 brackets and some that are always at 32+, they must look on in puzzlement as discussions go round and round on the subject.

Trying to drag my attention back to this thread, I'm learning to get over the fact that the available tools for evaluating Roth conversions are imperfect representations of an impossibly complex tax code in a world with an inherently opaque future when perfect conditions and perfect planning for Roth conversions give a few percent improvement. But it's a hard habit to break.
Topic Author
kvolkman
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Re: i-orp and roth conversions

Post by kvolkman »

I am the person who started this thread. I was looking for an intuitive, seat-of-the-pants understanding of i-orp's Roth conversion results. In maximizing lifetime spending, the i-orp linear regression solution results in way less Roth conversion that I had been planning.

Here is a bare-bones example that illustrates. In the tool, I clear the form so that it uses all defaults. Thus no pension, no social security income, and no ACA restrictions. We'll use $2.5 million in savings, and a $500k plan surplus. Add ages and account balances as follows:
Ages: 62, 62
Tax-deferred: 750, 750
Roth: 250, 250
After-tax: 500
After-tax cost basis: 500
Plan surplus: 500
Retire age: 63, 63
Conversions: 24% ceiling (or 32%, or unlimited; it doesn't matter, there is no change)
Allocation: Default. 100% stock for all accounts, no glidepath changes. There is NO difference between tax-deferred, Roth and after-tax.

The result is about $400k of conversions over 4 years from ages 63 to 66 ($93k, $99k, $105k, $112k).
I cannot imagine why it is not optimal to continue to convert a similar amount at age 67, 68, 69, etc.

INTERESTING VARIATIONS

1) Longer retirement: Increase the planning horizon to age 105. (The default is age 92.) It makes almost no difference. Result: $92k, $97k, $103k, $108k, $46k; ages 63-67. There was a long thread recently that Roth conversions always pay off if you wait long enough. Well, this model (a linear regression to maximize disposable income) suggests NOT.

2) Retire younger: Change the ages and the planning horizon, but NOT the duration of retirement. Instead of ages 63 to 105, use ages 43 to 85. STILL a 42-year retirement, just starting 20 years younger. All the same inputs as before, same starting balance, same ending balance.

The result is $1.7 million of conversions, continuing for 16 years, from ages 43 to 58 ($92k, $97k, $103k, $108k, $100k, $111k, $113k, $116k, $118k, $120k, $123k, $125k, $120k, $130k, $58k, $55k). Eh??
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Lee_WSP
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Location: Arizona

Re: i-orp and roth conversions

Post by Lee_WSP »

OP
It's a great tool and it's free. But you'll get much more intuitive results if you just create your own model of the rmd schedule and plugging in the average rmd into your retirement model.

Convert up to that marginal tax bracket or Irma's tier.
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: i-orp and roth conversions

Post by randomguy »

kvolkman wrote: Tue Oct 26, 2021 11:40 am I am the person who started this thread. I was looking for an intuitive, seat-of-the-pants understanding of i-orp's Roth conversion results. In maximizing lifetime spending, the i-orp linear regression solution results in way less Roth conversion that I had been planning.

Here is a bare-bones example that illustrates. In the tool, I clear the form so that it uses all defaults. Thus no pension, no social security income, and no ACA restrictions. We'll use $2.5 million in savings, and a $500k plan surplus. Add ages and account balances as follows:
Ages: 62, 62
Tax-deferred: 750, 750
Roth: 250, 250
After-tax: 500
After-tax cost basis: 500
Plan surplus: 500
Retire age: 63, 63
Conversions: 24% ceiling (or 32%, or unlimited; it doesn't matter, there is no change)
Allocation: Default. 100% stock for all accounts, no glidepath changes. There is NO difference between tax-deferred, Roth and after-tax.

The result is about $400k of conversions over 4 years from ages 63 to 66 ($93k, $99k, $105k, $112k).
I cannot imagine why it is not optimal to continue to convert a similar amount at age 67, 68, 69, etc.
I put in your numbers and a few guesses for the stuff not listed and I think I am seeing what you are describing. Lets break down what I think is happening
a) First couple years we spend down the taxable by doing ROTH conversions. Looks like we are basically converting to the top of the 12%.
b) now we are out of taxable money. So we start spending 40k from the IRA and 76k from the ROTH. It makes no sense to do roth conversions. You could just spend that IRA money and take less out of the ROTH. I think they are doing the low IRA withdrawals for IRMAA optimization. I think a lot of us would swap those (40k from ROTH and 76k from the TIRA) to deal with the risk of higher tax rates when a spouse dies.

1) I have a feeling the math in your setup is 12% now or 12% later so it just doesn't matter mathematically.

2) When you retire early, I am pretty sure they are using a ROTH pipeline to access the tax deferred money before 59. Otherwise it makes zero sense to add 70k to a ROTH and then spend 50k out of the roth versus just adding 20k and spending the 50k....
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: i-orp and roth conversions

Post by randomguy »

Lee_WSP wrote: Tue Oct 26, 2021 11:51 am OP
It's a great tool and it's free. But you'll get much more intuitive results if you just create your own model of the rmd schedule and plugging in the average rmd into your retirement model.

Convert up to that marginal tax bracket or Irma's tier.
Your results might be more intuitive but are they right? I don't have much faith in my intuitions ability to resolve the interactions of SS taxations, IRMAA, ACA cliffs, tax drag, upcoming tax law changes and the rest. What I don't know is if I-ORP can really do much better given the uncertainties of the problem.
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