McQ wrote: ↑Sat Sep 25, 2021 12:51 pmHello Woodspinner: thanks for those questions, I learn more when I learn what my audience really cares about. Brief replies, mostly placeholders:WoodSpinner wrote: ↑Fri Sep 24, 2021 6:01 pm McQ,
I am looking forward to this discussion, many thanks for posting it here! I also appreciate the kind words!
What I would find interesting in a future iteration is to:
Thanks
- Include a series of Roth Conversions before RMDs begin an a better illustration of their affects over time. For instance, convert $100,000/year from 60-71 and then RMDs.
- Be able to demonstrate a mechanism to help determine if you are converting too much or too little given your assumptions. I think this would require a more dynamic approach to Tax Rates than the current model provides.
- Affect of turbo-charging the Conversions and RMDs by moving Equities from the TDA to a more optimal asset location for future growth. In other wards while keeping the same overall Equity/Bond allocation try and fill Roth with only Equities, Taxable with Equities and Bonds (if necessary) and TDA with Bonds and Equities ( if necessary).
WoodSpinner
1. This one doesn't actually make a difference (if tax is paid from the conversion). Imagine you converted $100,000 seven years earlier at age 64 all in the 24% bracket; you'd start with $100,000 in the counterfactual and $76,000 in the Roth, same as my age 71 example. Seven years later you'd have about $200,000 in the counterfactual and $152,000 in the Roth, because until RMDs begin, the two will always be in the ratio of 100/76, because both are in the same asset and tax is deferred on both.
So, there's no difference in pattern of outcomes if you convert $800,000 at age 71 or $100,000 a year for eight years; excepting the fact that you can't convert $800,000 at 24% in a single year.
If tax is paid from outside, the starting age does make a difference; I'll cover that in a later post.
Well one big difference of course is it is highly unlikely you could convert $800,000 in one year and stay within the 24% bracket. We see several posters a year that are contemplating truly massive conversions over very short periods of time without really understanding the full implications. I suspect that the Payback Period for a $800,000 conversion is much different than 8 x $100,000 conversions.
I agree that the general point that the conversion will Pay Off in time. Illustrating a series of conversions will increase the magnitude of the Deltas and be more realistic.
2. Not sure I will be able to get beyond the rule of thumb I gave you earlier, but I'll keep this idea in the back of my mind. Once I release the SS, it will be easy enough to supply the tax rate year by year rather than leaving it constant; then one can run sensitivity tests, per DSBH, with tax rates going up by yay much, going down by yay much; or going up and down versus going down and up. Pegging out the extremes will give you a sense of the robustness of the conversion amount.
At this point I am very comfortable with my approach discussed in Roth Conversion Metric thread.
That said, I suspect that pegging out extremes (e.g. converting $800,000) using actual tax rates might easily show that the Payback Period will extend beyond a lifetime.
3. Will do. In a first pass, I let the Roth and taxable earn 10% while the TDA counterfactual earns 6%1 (i.e., so much stock sculpted out of it that it earned a return more like the Vanguard Retirement Income fund, which is 30/70). Huge increase in the Roth surplus, of course; but depressed values in the TDA and the taxable. Still thinking about the proper conceptualization.
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Thanks again for posting! I would have enjoyed being one of your students. It’s nice to read an academic perspective that I can relate with.
WoodSpinner