How I use I-ORP, and who shouldn't

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: How I use I-ORP, and who shouldn't

Post by FiveK »

Exchme wrote: Mon Feb 22, 2021 1:23 pm One issue that bothers me is I don't think iORP is doing the 2 year look back on IRMAA tiers. It is recommending Roth conversions up to the top of the 24% bracket for the years we are 63 and 64 and then much less starting at age 65. But then it displays low IRMAA tiers at age 65 and 66, that wouldn't correspond to the age 63 and 64 conversions. Since it never asked for age 63 and 64 income (we might have been older), I don't think it can account for that. I didn't realize it was blind to NIIT as well.
Perhaps gneeby will comment?
2pedals
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Joined: Wed Dec 31, 2014 11:31 am

Re: How I use I-ORP, and who shouldn't

Post by 2pedals »

I use I-ORP but have found the following things not ideal when planning for Roth conversions.
  • I do not use different allocations for tax-deferred, Roth and taxable, unlike how I approach all equity in Roth in real life up to a limit dollar amount.
  • I think lumpy expenses can be a big player. I expect see a lot of this in retirement. :oops:
  • I also think end of life expenses can be costly. :shock:
  • If one hopes to leave a significant legacy, step up basis and taxes on tax-deferred for the heir is not accounted for.
I have not seen a planner that will cover all of the above. So I think a common sense approach may work best. Such as if you Roth accounts are low relative to tax-deferred (<50%), annual partial Roth conversions should be prioritized when marginal taxes brackets are expected to be low in early retirement prior to SS income.

I am a bigger fan of bigfoot48's Retirement Portfolio Model. RPM's presentation of the charts and tables resonates better with me.
Exchme
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Re: How I use I-ORP, and who shouldn't

Post by Exchme »

So after being unsure if RPM was finding a global optimum and getting answers from i-ORP I didn't fully understand, I bought Pralana Gold. My hope was the more rigorous tax calculation (handling NIIT and IRMAA) and built in optimizer would do the trick. All the programs have the same asset allocation issue in that they favor Roth conversions if the stock allocation of Roth is higher than the t-IRA. So in all cases, you have to set the asset allocation to an average value.

I'm still a newbie user of P-G, but the optimizer seems to find worse results than just forcing to a tax bracket limit, so not sure what to think about that. By using a tax bracket limit, I got something that looks about like both RPM and i-ORP and passes my "reasonableness" test of being close to the same average tax rate throughout life. (Pralana Gold has a lot of other features that I haven't even explored, so not complaining, it's definitely a full featured tool if you feel you need one).

The perfect program would have a way to provide a target global average asset allocation and then have it recommend the allocation in each account each year as it did the conversions. Maybe professional money managers have that, but it's seemingly elusive in the free and low cost programs.

Really though, the big uncertainties are not in the programs, but in life. Our life expectancies, future market returns and of course tax laws are far more uncertain than the results from any of these tools.
gneeby
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Re: How I use I-ORP, and who shouldn't

Post by gneeby »

FiveK wrote: Sat Feb 27, 2021 2:48 pm
Exchme wrote: Mon Feb 22, 2021 1:23 pm One issue that bothers me is I don't think iORP is doing the 2 year look back on IRMAA tiers. It is recommending Roth conversions up to the top of the 24% bracket for the years we are 63 and 64 and then much less starting at age 65. But then it displays low IRMAA tiers at age 65 and 66, that wouldn't correspond to the age 63 and 64 conversions. Since it never asked for age 63 and 64 income (we might have been older), I don't think it can account for that. I didn't realize it was blind to NIIT as well.
Perhaps gneeby will comment?
This is a known bug for which a fix is underway. However a formulation wrinkle has been encountered which is holding thing up. In the mean time the traditional technique has been employed which is to document the failing in the help file.

In the words of Ronald Regan, "I'm working on it."
mfFrom35k
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Joined: Mon Sep 21, 2020 6:24 am

Re: How I use I-ORP, and who shouldn't

Post by mfFrom35k »

:?:
Trying out I-ORP this weekend from https://www.i-orp.com/Plans/extended.html but keep running into this error:

Error 502
Ray ID: 6580b3153a6619db •
2021-05-31 13:55:23 UTC
Bad gateway
You
Browser Working
Newark
Cloudflare Working
www.i-orp.com
Host Error

Any suggestions?
Silk McCue
Posts: 8951
Joined: Thu Feb 25, 2016 6:11 pm

Re: How I use I-ORP, and who shouldn't

Post by Silk McCue »

mfFrom35k wrote: Mon May 31, 2021 8:58 am :?:
Trying out I-ORP this weekend from https://www.i-orp.com/Plans/extended.html but keep running into this error:

Error 502
Ray ID: 6580b3153a6619db •
2021-05-31 13:55:23 UTC
Bad gateway
You
Browser Working
Newark
Cloudflare Working
www.i-orp.com
Host Error

Any suggestions?
I haven't been to the site in quite some time but just ran my numbers again without issue.

Cheers
Bogletechs
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Joined: Thu Oct 17, 2019 4:00 am

Re: How I use I-ORP, and who shouldn't

Post by Bogletechs »

mfFrom35k wrote: Mon May 31, 2021 8:58 am :?:
Trying out I-ORP this weekend from https://www.i-orp.com/Plans/extended.html but keep running into this error:

Error 502
Ray ID: 6580b3153a6619db •
2021-05-31 13:55:23 UTC
Bad gateway
You
Browser Working
Newark
Cloudflare Working
www.i-orp.com
Host Error

Any suggestions?


That happened to me once, I reported to the author :

"If one has a comma in "Phases > Identification (optional)" text box, then they get that confusing error."

You might try to look for similar issues... Changing your input fields as necessary.
SpideyIndexer
Posts: 866
Joined: Thu Apr 02, 2015 10:13 pm

Re: How I use I-ORP, and who shouldn't

Post by SpideyIndexer »

Peter Foley wrote: Fri Aug 18, 2017 10:28 am I too have run a number of scenarios in i-orp. Many scenarios were options I might consider with regard to our personal situation. Then I ran a couple abstract options with assets arrayed differently. (All of this was in advance of a presentation regarding Retirement Calculators by a member of the steering team at a MN Bogleheads Meeting.)

My conclusion was that if one has a very high ratio of tax exempt assets to taxable and Roth assets, the proposed Roth conversions were too aggressive.
If, however, the ratio of tax exempt to taxable and Roth were more balanced, let's say 50/50 or so, the result provided good guidance.

I also used the Retiree Portfolio Model, an excel spreadsheet developed by Bigfoot. I have a preference for this calculator for my situation.
It's been a while since the post I am quoting but....by "tax exempt assets", you mean for example muni bond and muni bond funds?" Or do you mean tax-deferred assets such as a traditional IRA or traditional 401(k)?
SpideyIndexer
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Joined: Thu Apr 02, 2015 10:13 pm

Re: How I use I-ORP, and who shouldn't

Post by SpideyIndexer »

Seems I can choose different allocations for TX, TD, and TF (tax-free=Roth) accounts. There is likely a bit of a modelling flaw. Normally, I would expect one to adjust one's tax-adjusted AA in one's comfort zone. (In other words, when converting bond-heavy TD investments to a stock-heavy Roth, one would make appropriate changes to keep total AA constant. Though this can be easier said than done and merits a thread of its own.) Anyway the glidepath feature for allocation of the 3 account types will let one get sorta close.)

I'm still getting the type of results as before. For a single deterministic run, large Roth conversions to quickly spend down TD account is better than none, by ~5% for the case of significant time difference between the death of the two spouses. However, for the Monte Carlo sims, the case of no conversions is better by 6.4 to 11% for the worse cases, depending on how early one spouse passes.

It still appears as long as one has sufficient savings, Roth conversions for a few years in early retirement are not terribly significant either way. Those further from retirement who have the benefit of time likely will see more benefits in optimizing asset location.

I don't know what I-ORP assumes for the tax code in 2025 and beyond: TCJA expiring per current laws, or not. Anyone know?
colejr
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Joined: Sat Mar 24, 2007 7:48 pm

Re: How I use I-ORP, and who shouldn't

Post by colejr »

SpideyIndexer wrote: Sun Sep 05, 2021 7:25 pm
I don't know what I-ORP assumes for the tax code in 2025 and beyond: TCJA expiring per current laws, or not. Anyone know?
It assumes TCJA expires and at least switches back to the old rates -- 15%, 25% etc. As far as other pre- TCJA details, I haven't checked.
SpideyIndexer
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Re: How I use I-ORP, and who shouldn't

Post by SpideyIndexer »

colejr wrote: Sun Sep 05, 2021 9:16 pm
SpideyIndexer wrote: Sun Sep 05, 2021 7:25 pm
I don't know what I-ORP assumes for the tax code in 2025 and beyond: TCJA expiring per current laws, or not. Anyone know?
It assumes TCJA expires and at least switches back to the old rates -- 15%, 25% etc. As far as other pre- TCJA details, I haven't checked.
Thanks, that's good. Though in that case, I'm surprised that I-ORP isn't making a stronger case for partial Roth conversions prior to 2025. I may need to submit a different set of inputs which are sensitive to marginal tax bracket rather than average tax rate in order to see the difference in tax code more clearly.
hvaclorax
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Re: How I use I-ORP, and who shouldn't

Post by hvaclorax »

I have a question. Sorry if already answered, I may have missed it.
I do Roth conversion just like most. I’ve noticed that the iORP suggested to do this right up to age 72 then the very next year starts to withdraw from the Roth. Why on earth would I pay the extra taxes only to spend down so soon? I might as well forgo the early conversion. What am I missing? I plan to not touch Roth till much later to take advantage of the time value of tax free growth.
Thanks, I’ve very much enjoyed this thread. HVAC
randomguy
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Joined: Wed Sep 17, 2014 9:00 am

Re: How I use I-ORP, and who shouldn't

Post by randomguy »

hvaclorax wrote: Fri Sep 17, 2021 8:39 am I have a question. Sorry if already answered, I may have missed it.
I do Roth conversion just like most. I’ve noticed that the iORP suggested to do this right up to age 72 then the very next year starts to withdraw from the Roth. Why on earth would I pay the extra taxes only to spend down so soon? I might as well forgo the early conversion. What am I missing? I plan to not touch Roth till much later to take advantage of the time value of tax free growth.
Thanks, I’ve very much enjoyed this thread. HVAC
Are you paying extra taxes or are you just paying them a year early? My experience has been it is largely the later. You are gaining a year of tax free growth but that is a pretty minor thing.

I think a lot of us (me included ) find the aggressive ROTH conversions counter intuitive as it feels like you are paying a lot more tax than you need to. Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal. I am sure the math of getting future gains in ROTH, less tax drag in taxable, reducing IRMAA, and less SS being taxed probably makes those large conversions work out.
Parkinglotracer
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Location: Upstate NY

Re: How I use I-ORP, and who shouldn't

Post by Parkinglotracer »

Timely update on this thread as I just spent a few hours looking at what I-ORP says to me as retired and turned 60 this year (Ok I should have looked earlier when in my 50's)

I salute the work done to make this tool available by Mr Welch.

My DW and I (both age 60) are lucky enough to have what we hope is "enough" (in the words of John Bogle.)

As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72.

A lot to consider and I appreciate Mr Welch's work.
smitcat
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Re: How I use I-ORP, and who shouldn't

Post by smitcat »

randomguy wrote: Fri Sep 17, 2021 9:18 am
hvaclorax wrote: Fri Sep 17, 2021 8:39 am I have a question. Sorry if already answered, I may have missed it.
I do Roth conversion just like most. I’ve noticed that the iORP suggested to do this right up to age 72 then the very next year starts to withdraw from the Roth. Why on earth would I pay the extra taxes only to spend down so soon? I might as well forgo the early conversion. What am I missing? I plan to not touch Roth till much later to take advantage of the time value of tax free growth.
Thanks, I’ve very much enjoyed this thread. HVAC
Are you paying extra taxes or are you just paying them a year early? My experience has been it is largely the later. You are gaining a year of tax free growth but that is a pretty minor thing.

I think a lot of us (me included ) find the aggressive ROTH conversions counter intuitive as it feels like you are paying a lot more tax than you need to. Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal. I am sure the math of getting future gains in ROTH, less tax drag in taxable, reducing IRMAA, and less SS being taxed probably makes those large conversions work out.
"Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal."
I am not aware of an example where that woudl make sense - do you know of any?
On Roth conversions the most basic idea it to have taxes be mostly equivalent over your years or to have an advantage to heirs.
smitcat
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Re: How I use I-ORP, and who shouldn't

Post by smitcat »

Parkinglotracer wrote: Fri Sep 17, 2021 10:07 am Timely update on this thread as I just spent a few hours looking at what I-ORP says to me as retired and turned 60 this year (Ok I should have looked earlier when in my 50's)

I salute the work done to make this tool available by Mr Welch.

My DW and I (both age 60) are lucky enough to have what we hope is "enough" (in the words of John Bogle.)

As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72.

A lot to consider and I appreciate Mr Welch's work.
"As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72."

When you have run a few dozen or more potential variables thru ORP I believe there will be some additional valuable data. Fortuneatly the IORP tool is real easy to use and very quick so how many of these variables have a decent liklihood or happening in the future compared to your existing base case?
- base case (Roth conversions) vs no Roth conversions
- market returns 50% higher or more
- market returns 50% lower or more
- future inflation rate is doubled
- future change in SS benefits
- age of demise for each spouse

I would also suggest you take the time and effort to run your best guess future scenario thru RPM and/or Pralana - each of these take much longer to load and understand (days vs hours) but I would make no moves on Roth conversions without these more detailed calculators.
marcopolo
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Re: How I use I-ORP, and who shouldn't

Post by marcopolo »

Parkinglotracer wrote: Fri Sep 17, 2021 10:07 am Timely update on this thread as I just spent a few hours looking at what I-ORP says to me as retired and turned 60 this year (Ok I should have looked earlier when in my 50's)

I salute the work done to make this tool available by Mr Welch.

My DW and I (both age 60) are lucky enough to have what we hope is "enough" (in the words of John Bogle.)

As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72.

A lot to consider and I appreciate Mr Welch's work.
This is almost certainly sub-optimal, and likely due to a quirk in I-ORP that has been discussed in many threads.
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: How I use I-ORP, and who shouldn't

Post by marcopolo »

smitcat wrote: Fri Sep 17, 2021 11:22 am
randomguy wrote: Fri Sep 17, 2021 9:18 am
hvaclorax wrote: Fri Sep 17, 2021 8:39 am I have a question. Sorry if already answered, I may have missed it.
I do Roth conversion just like most. I’ve noticed that the iORP suggested to do this right up to age 72 then the very next year starts to withdraw from the Roth. Why on earth would I pay the extra taxes only to spend down so soon? I might as well forgo the early conversion. What am I missing? I plan to not touch Roth till much later to take advantage of the time value of tax free growth.
Thanks, I’ve very much enjoyed this thread. HVAC
Are you paying extra taxes or are you just paying them a year early? My experience has been it is largely the later. You are gaining a year of tax free growth but that is a pretty minor thing.

I think a lot of us (me included ) find the aggressive ROTH conversions counter intuitive as it feels like you are paying a lot more tax than you need to. Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal. I am sure the math of getting future gains in ROTH, less tax drag in taxable, reducing IRMAA, and less SS being taxed probably makes those large conversions work out.
"Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal."
I am not aware of an example where that woudl make sense - do you know of any?
On Roth conversions the most basic idea it to have taxes be mostly equivalent over your years or to have an advantage to heirs.
A bit of a nit, and perhaps what you meant, but it is not the taxes you want level, but the tax rate.
Once in a while you get shown the light, in the strangest of places if you look at it right.
smitcat
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Joined: Mon Nov 07, 2016 9:51 am

Re: How I use I-ORP, and who shouldn't

Post by smitcat »

marcopolo wrote: Fri Sep 17, 2021 11:48 am
smitcat wrote: Fri Sep 17, 2021 11:22 am
randomguy wrote: Fri Sep 17, 2021 9:18 am
hvaclorax wrote: Fri Sep 17, 2021 8:39 am I have a question. Sorry if already answered, I may have missed it.
I do Roth conversion just like most. I’ve noticed that the iORP suggested to do this right up to age 72 then the very next year starts to withdraw from the Roth. Why on earth would I pay the extra taxes only to spend down so soon? I might as well forgo the early conversion. What am I missing? I plan to not touch Roth till much later to take advantage of the time value of tax free growth.
Thanks, I’ve very much enjoyed this thread. HVAC
Are you paying extra taxes or are you just paying them a year early? My experience has been it is largely the later. You are gaining a year of tax free growth but that is a pretty minor thing.

I think a lot of us (me included ) find the aggressive ROTH conversions counter intuitive as it feels like you are paying a lot more tax than you need to. Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal. I am sure the math of getting future gains in ROTH, less tax drag in taxable, reducing IRMAA, and less SS being taxed probably makes those large conversions work out.
"Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal."
I am not aware of an example where that woudl make sense - do you know of any?
On Roth conversions the most basic idea it to have taxes be mostly equivalent over your years or to have an advantage to heirs.
A bit of a nit, and perhaps what you meant, but it is not the taxes you want level, but the tax rate.
Yes - tax rates equivalent.
randomguy
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

smitcat wrote: Fri Sep 17, 2021 11:22 am

"Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal."
I am not aware of an example where that woudl make sense - do you know of any?
On Roth conversions the most basic idea it to have taxes be mostly equivalent over your years or to have an advantage to heirs.
If you are going to pay 22% now or later, shouldn't you pay it now? Pretty much the result comes about because by going into the 24% bracket now for like 5 years, I get to avoid paying IRMAA, some taxes on SS and LTGC and tax drag for 30 years later on. It is enough to make up for going into the slightly higher tax bracket (24% vs 22%) early on. My goal isn't to keep my taxes (or tax rate) the same. It is to maximize account values and spendable dollars.

Mathematically I believe it works out. Now if I feel comfortable writing those big checks is another question.....
smitcat
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Re: How I use I-ORP, and who shouldn't

Post by smitcat »

randomguy wrote: Fri Sep 17, 2021 2:04 pm
smitcat wrote: Fri Sep 17, 2021 11:22 am

"Paying 40k in taxes when you are 55 and 10k when your 75 doesn't feel optimal."
I am not aware of an example where that woudl make sense - do you know of any?
On Roth conversions the most basic idea it to have taxes be mostly equivalent over your years or to have an advantage to heirs.
If you are going to pay 22% now or later, shouldn't you pay it now? Pretty much the result comes about because by going into the 24% bracket now for like 5 years, I get to avoid paying IRMAA, some taxes on SS and LTGC and tax drag for 30 years later on. It is enough to make up for going into the slightly higher tax bracket (24% vs 22%) early on. My goal isn't to keep my taxes (or tax rate) the same. It is to maximize account values and spendable dollars.

Mathematically I believe it works out. Now if I feel comfortable writing those big checks is another question.....
"If you are going to pay 22% now or later, shouldn't you pay it now?"
If we knew with certain what our total tax impacts would be in the future and future portfolio earnings then ...yes - absolutely.

"My goal isn't to keep my taxes (or tax rate) the same. It is to maximize account values and spendable dollars."
Yes - agreed. Our goal is to maximize our after tax dollars (spendable) for us and/or our heirs adjusted for inflation.

"It is enough to make up for going into the slightly higher tax bracket (24% vs 22%) early on."
Not to mention that current law has these rates moving up as well.

"Mathematically I believe it works out. Now if I feel comfortable writing those big checks is another question....."
After running various potentail future scenarios with RPM and Pralana and rechecking our desired heirs most likely tax rates we will be writing a larger check for conversions this year as well.
But everyones numbers and goals are different - measure twice and cut once.
randomguy
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

smitcat wrote: Fri Sep 17, 2021 2:43 pm "If you are going to pay 22% now or later, shouldn't you pay it now?"
If we knew with certain what our total tax impacts would be in the future and future portfolio earnings then ...yes - absolutely.
I want to elaborate the early versus late taxes a little bit. Imagine we live in a world where you pay 10% on the first 100k of income and 20% on the next 100k. You want to convert 100k to a Roth and have a big pile of cash laying around to pay the taxes out of. You need 100k of income to pay the bills What is better over the next 4 years:

a) 200k of income year (100k spending+100k roth) 1: 30k of taxes
100k/year in years 2-4 : 10k taxes
total taxes - 60k

b) 125k/year of income (100k spending+25k ROTH) for 4 years= 15k of taxes/year
total taxes = 60k

There are slight differences (i.e. paying that 30k means your cash isn't gaining interest. You also aren't paying taxes on those gains. You will have less gains in your ROTH) but they are pretty close. The fact that he taxes aren't level doesn't matter since all the added income is in the same bracket. Now imagine that the tax code will charge you 2k (lets call it IRMAA) if you have income over 120k but that tax only kicks in during year 2,3,4. Now doing a) will save you a couple thousand dollars. Put that together and you can see how paying 30k+ in taxes for a few years and then 10k later works out.

The real world is obviously much, much more complicated than this simple example and you always run the chance of your assumptions being wrong. Maybe there is a big tax cut in 2025(or I move to a high/low tax state). Maybe I get some huge medical bills and can take the money out tax free. Maybe the change IRMAA calculations to include roth. You make your guesses and hope they work out.
Parkinglotracer
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Location: Upstate NY

Re: How I use I-ORP, and who shouldn't

Post by Parkinglotracer »

smitcat wrote: Fri Sep 17, 2021 11:32 am
Parkinglotracer wrote: Fri Sep 17, 2021 10:07 am Timely update on this thread as I just spent a few hours looking at what I-ORP says to me as retired and turned 60 this year (Ok I should have looked earlier when in my 50's)

I salute the work done to make this tool available by Mr Welch.

My DW and I (both age 60) are lucky enough to have what we hope is "enough" (in the words of John Bogle.)

As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72.

A lot to consider and I appreciate Mr Welch's work.
"As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72."

When you have run a few dozen or more potential variables thru ORP I believe there will be some additional valuable data. Fortuneatly the IORP tool is real easy to use and very quick so how many of these variables have a decent liklihood or happening in the future compared to your existing base case?
- base case (Roth conversions) vs no Roth conversions
- market returns 50% higher or more
- market returns 50% lower or more
- future inflation rate is doubled
- future change in SS benefits
- age of demise for each spouse

I would also suggest you take the time and effort to run your best guess future scenario thru RPM and/or Pralana - each of these take much longer to load and understand (days vs hours) but I would make no moves on Roth conversions without these more detailed calculators.
thank you - great idea - hope i have the focus to do those items you suggest.
smitcat
Posts: 13300
Joined: Mon Nov 07, 2016 9:51 am

Re: How I use I-ORP, and who shouldn't

Post by smitcat »

randomguy wrote: Fri Sep 17, 2021 3:41 pm
smitcat wrote: Fri Sep 17, 2021 2:43 pm "If you are going to pay 22% now or later, shouldn't you pay it now?"
If we knew with certain what our total tax impacts would be in the future and future portfolio earnings then ...yes - absolutely.
I want to elaborate the early versus late taxes a little bit. Imagine we live in a world where you pay 10% on the first 100k of income and 20% on the next 100k. You want to convert 100k to a Roth and have a big pile of cash laying around to pay the taxes out of. You need 100k of income to pay the bills What is better over the next 4 years:

a) 200k of income year (100k spending+100k roth) 1: 30k of taxes
100k/year in years 2-4 : 10k taxes
total taxes - 60k

b) 125k/year of income (100k spending+25k ROTH) for 4 years= 15k of taxes/year
total taxes = 60k

There are slight differences (i.e. paying that 30k means your cash isn't gaining interest. You also aren't paying taxes on those gains. You will have less gains in your ROTH) but they are pretty close. The fact that he taxes aren't level doesn't matter since all the added income is in the same bracket. Now imagine that the tax code will charge you 2k (lets call it IRMAA) if you have income over 120k but that tax only kicks in during year 2,3,4. Now doing a) will save you a couple thousand dollars. Put that together and you can see how paying 30k+ in taxes for a few years and then 10k later works out.

The real world is obviously much, much more complicated than this simple example and you always run the chance of your assumptions being wrong. Maybe there is a big tax cut in 2025(or I move to a high/low tax state). Maybe I get some huge medical bills and can take the money out tax free. Maybe the change IRMAA calculations to include roth. You make your guesses and hope they work out.
As mentioned above we vary a number of inputs around our most likely base plan. The outputs of these runs are mostly positive but some outliers are nuetral and some evenb go somewhat negative.

We figure all costs generated by conversions such as IRRMA, ACA, NIT etc into the model.
We have moved our residence to a no tax state for now.
Medical costs are paid by insurance.
We have not seen a situation where converting all of the pretax accounts would likely make sense.
You pay taxes early to avoid higher modeled tax rates later.

Using all of your accounts and incomes and your exact numbers you are attempting to stay out of higher tax brackets.
If your vary your most likely scenarios to account for some potential future market changes and all of them have a positive or nuetral outcome favoring converting then it makes sense.
- In general the lower your planned draw rate on the portfolio the more likely your Roth conversion plan makes sense.
- In general the closer you currently are to 'bumping your head' on the next tax rate before SS?pemnsions/etc the more likely your converversion plan makes sense into that tax rate.
- In general you model a lower future portfolio performance and the conversions still make sense the plan has more upside potential.
- In general if your heirs will very likely be in higher tax rates than you are converting at the plan has more upside potential.

With all this said - it really takes a while to model potential outcomes with RPM and Pralana. But the variable outcomes then begin to jump out at you which allows for a more informed decisions
Both good and bad, and both likely and unlikely, and everywhere in between.
smitcat
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Re: How I use I-ORP, and who shouldn't

Post by smitcat »

Parkinglotracer wrote: Fri Sep 17, 2021 4:05 pm
smitcat wrote: Fri Sep 17, 2021 11:32 am
Parkinglotracer wrote: Fri Sep 17, 2021 10:07 am Timely update on this thread as I just spent a few hours looking at what I-ORP says to me as retired and turned 60 this year (Ok I should have looked earlier when in my 50's)

I salute the work done to make this tool available by Mr Welch.

My DW and I (both age 60) are lucky enough to have what we hope is "enough" (in the words of John Bogle.)

As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72.

A lot to consider and I appreciate Mr Welch's work.
"As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72."

When you have run a few dozen or more potential variables thru ORP I believe there will be some additional valuable data. Fortuneatly the IORP tool is real easy to use and very quick so how many of these variables have a decent liklihood or happening in the future compared to your existing base case?
- base case (Roth conversions) vs no Roth conversions
- market returns 50% higher or more
- market returns 50% lower or more
- future inflation rate is doubled
- future change in SS benefits
- age of demise for each spouse

I would also suggest you take the time and effort to run your best guess future scenario thru RPM and/or Pralana - each of these take much longer to load and understand (days vs hours) but I would make no moves on Roth conversions without these more detailed calculators.
thank you - great idea - hope i have the focus to do those items you suggest.
There are also times when it makes sense to pay a good advisor a fixed fee to help solve a particular problem which has high $$ implications.
But not a guy that does AUM, or sells other products, or is doing this as a lark.
tibbitts
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Re: How I use I-ORP, and who shouldn't

Post by tibbitts »

Parkinglotracer wrote: Fri Sep 17, 2021 10:07 am Timely update on this thread as I just spent a few hours looking at what I-ORP says to me as retired and turned 60 this year (Ok I should have looked earlier when in my 50's)

I salute the work done to make this tool available by Mr Welch.

My DW and I (both age 60) are lucky enough to have what we hope is "enough" (in the words of John Bogle.)

As has been mentioned here the Extended ORP recommends aggressive ROTH conversions (to the tune of 100K a year) from ages 60-64 and paying higher taxes earlier (say 40K year) then paying less taxes (say 20K a year) when RMDs kick in at age 72.

A lot to consider and I appreciate Mr Welch's work.
Although until I tweaked my i-orp inputs it was extremely aggressive about conversions, what confirmed my decision to do fairly aggressive conversions (though much less than the default i-orp recommendations) was simply using an RMD calculator. I didn't want my deferred balances to grow indefinitely until RMDs, and based on historically average earnings (even with more fixed income shifted to deferred over time) they were going to do that without one or more of:

- converting every remaining year until RMDs at a slightly lower but still high marginal rate, plus higher IRMAA and maybe some other cliff-type expenses every year plus every year after RMDs;
or
- making large DAF contributions earlier than I wanted to;
or
- incurring unforeseen medical expenses;
or
- incurring unanticipated investment losses.

I can see less justification for larger conversions without the compounding problem, and that's mostly just a function of the total deferred balance and assumed future rate of return.
Exchme
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Re: How I use I-ORP, and who shouldn't

Post by Exchme »

I-orp is great for getting you into the mindset that there is real money at stake, getting you used to case studies, sorting the big variables from the small, getting a whole plan with minimal input. It allows you to spend your time analyzing whether the results makes sense, what other cases to run, etc. instead of fooling with the user interface.

The new beta version of the Boglehead's Retiree Portfolio Model has a feature that folks that are handy with spreadsheets and are planning Roth conversions really need to try, which is tax efficient asset placement. You can load your IRA with your bonds and stuff your stocks in your Roth & taxable. In my case, that really reduces the quantity of Roth conversions needed by slowing the IRA growth. In fact, I get a significant boost (by cutting future taxes) just from this location optimization, even without Roth conversions.
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

I get a significant boost (by cutting future taxes) just from this location optimization, even without Roth conversions.
With the wild market the last few years, I've seen this phenomena in my accounts as well. I was expecting to do another round of IRA to Roth conversions due to the outsized growth, but because Roth is all equities, and the bonds are stuffed in IRA, I don't need to convert anything. Just watch the Roth grow faster and tax free. I'm very glad my conversions are already in Roth!
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JohnSmith123
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Re: How I use I-ORP, and who shouldn't

Post by JohnSmith123 »

After spending hours and days in the extended I-orp and saving the parameters — how can I come back several months later and load all those parameters again? I can’t figure it out?
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

First, save/download the report.

The last few pages are your entries. Use them to fill out the worksheet next time and then change only the fields you want to evaluate.

I don't think you can "save" your inputs on the I-ORP server.

Does anyone else have a different experience? I repeat my worksheet a couple times each year, and this is how I've been doing it.
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yog
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Re: How I use I-ORP, and who shouldn't

Post by yog »

JohnSmith123 wrote: Sat Sep 18, 2021 9:42 am After spending hours and days in the extended I-orp and saving the parameters — how can I come back several months later and load all those parameters again? I can’t figure it out?
In I-ORP Extended be sure to create a Plan ID, and when you have all your parameters tweaked, press Save Form.

When returning to I-ORP, input the Plan ID and press the Reset Form button. It will bring back all your parameters.
hvaclorax
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Re: How I use I-ORP, and who shouldn't

Post by hvaclorax »

I think I already know but can one simply transfer bonds to tIRA while transferring same amount of stocks to Roth without selling? Same amounts just no buy/sell fees. (I am aware that some of us have very small buy/sell costs)
Thanks, HVAC
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

I don't know about individual bonds.

I was able to transfer mutual funds at Fidelity between Roth and IRA when I was converting.

I was not able to transfer CDs in kind (I wanted to move the CDs to IRA from Roth and trade for stock mutual funds), so I'm guessing the same will apply to bonds. For me it wasn't a big deal because the CDs in the Roth are maturing this year and I'll reinvest at that point.
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

In I-ORP Extended be sure to create a Plan ID, and when you have all your parameters tweaked, press Save Form.

When returning to I-ORP, input the Plan ID and press the Reset Form button. It will bring back all your parameters.
Thank you Yog! That worked great!

One caveat. The Plan ID is not saved in the download file. You'll need to keep a record of your Plan ID.
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FiveK
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Re: How I use I-ORP, and who shouldn't

Post by FiveK »

I-ORP's tendency at time to heavily front-load Roth conversions is often criticized. Some of that criticism might be merited if I-ORP isn't considering significant tax effects at high (e.g., NIIT, 20% LTCG bracket, etc.) or low (e.g., phase-in of SS benefit taxability, etc.) incomes.

But in between, it seems to have things covered reasonably well. Interesting to see the following example: Bogleheads® Chapter Series – Wade Pfau on Retirement Income Style Analysis, Tax Efficiency - YouTube (the link will take one directly to the start of the example discussion) in which (presumably using software different from I-ORP) a heavy front-load of Roth conversions was found best.

Haven't tried putting that example situation into I-ORP to see what it would do....
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

I had big conversions recommended by I-ORP, after having done about $60k in conversions already. But when I asked about this, the reason was that when all other things are equal, the conversions will be moved earlier to max compounding in the tax free Roth. That made sense to me.

And then the market continues a sharp climb after I completed most of my conversions, and whoa baby, did that make a big difference. (I packed the Roth with equities, and left bonds in tIRA).

Now that conversions may be changing, I'm glad I finished mine early because I needed years to finish without jumping my bracket too much.
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Re: How I use I-ORP, and who shouldn't

Post by marcopolo »

FiveK wrote: Mon Sep 27, 2021 1:00 am I-ORP's tendency at time to heavily front-load Roth conversions is often criticized. Some of that criticism might be merited if I-ORP isn't considering significant tax effects at high (e.g., NIIT, 20% LTCG bracket, etc.) or low (e.g., phase-in of SS benefit taxability, etc.) incomes.

But in between, it seems to have things covered reasonably well. Interesting to see the following example: Bogleheads® Chapter Series – Wade Pfau on Retirement Income Style Analysis, Tax Efficiency - YouTube (the link will take one directly to the start of the example discussion) in which (presumably using software different from I-ORP) a heavy front-load of Roth conversions was found best.

Haven't tried putting that example situation into I-ORP to see what it would do....
The detailed example that he walked through had the same growth rate (2% real) for all accounts. This might be modelling the scenario where all accounts are invested with the same asset allocation. I believe most of the criticism of I-ORP being overly aggressive in doing Roth Conversions is for the case where an investor keeps mostly bonds in tIRA (lower growth) and mostly equities in Roth (higher growth), but maintains a consistent asset allocation across their entire portfolio. I-ORP does not handle this scenario well, and i don't see anything in the linked presentation that addresses that. But, perhaps i misunderstood something.
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FiveK
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Re: How I use I-ORP, and who shouldn't

Post by FiveK »

marcopolo wrote: Mon Sep 27, 2021 4:02 am The detailed example that he walked through had the same growth rate (2% real) for all accounts. This might be modelling the scenario where all accounts are invested with the same asset allocation. I believe most of the criticism of I-ORP being overly aggressive in doing Roth Conversions is for the case where an investor keeps mostly bonds in tIRA (lower growth) and mostly equities in Roth (higher growth), but maintains a consistent asset allocation across their entire portfolio. I-ORP does not handle this scenario well, and i don't see anything in the linked presentation that addresses that. But, perhaps i misunderstood something.
Searching this thread for the word "aggressive" one can find various critiques, covering a variety of scenarios. There can indeed be legitimate reasons to doubt I-ORP's strategy when it's assumptions don't match an individual's reality. It's also true that a front-loaded Roth conversion strategy can in fact be best.
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

I believe Wade was keeping the complexity minimized so that the example was clear: many of us can manage our taxes best with some Roth conversions between retirement and RMDs.

The results get turbo-charged if you appropriately pack the Roth with equities and leave bonds in the tax deferred account.

There is always a trade-off when designing a tool. None can do everything, so I-ORP chose to focus on IRMMA, Social Security tax bomb, RMDs, and lifelong taxes. All issues that are difficult to model. I appreciate that.

The recommended way to use I-ORP is to model first with all accounts having the same asset allocation. This prevents a too aggressive tilt to conversions. Once the conversions are complete (or close to it) we can model with the tilt and turn off the Roth conversions so our withdrawals take into account the faster growth expected in Roth.

As always, try it. If you don't like what it says, that's your choice to pass on it. I ran my situation without Roth conversions, with modest conversions and unlimited conversions. I like the results of being aggressive. YMMV
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billthecat
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Re: How I use I-ORP, and who shouldn't

Post by billthecat »

marcopolo wrote: Mon Sep 27, 2021 4:02 am
FiveK wrote: Mon Sep 27, 2021 1:00 am I-ORP's tendency at time to heavily front-load Roth conversions is often criticized. Some of that criticism might be merited if I-ORP isn't considering significant tax effects at high (e.g., NIIT, 20% LTCG bracket, etc.) or low (e.g., phase-in of SS benefit taxability, etc.) incomes.

But in between, it seems to have things covered reasonably well. Interesting to see the following example: Bogleheads® Chapter Series – Wade Pfau on Retirement Income Style Analysis, Tax Efficiency - YouTube (the link will take one directly to the start of the example discussion) in which (presumably using software different from I-ORP) a heavy front-load of Roth conversions was found best.

Haven't tried putting that example situation into I-ORP to see what it would do....
The detailed example that he walked through had the same growth rate (2% real) for all accounts. This might be modelling the scenario where all accounts are invested with the same asset allocation. I believe most of the criticism of I-ORP being overly aggressive in doing Roth Conversions is for the case where an investor keeps mostly bonds in tIRA (lower growth) and mostly equities in Roth (higher growth), but maintains a consistent asset allocation across their entire portfolio. I-ORP does not handle this scenario well, and i don't see anything in the linked presentation that addresses that. But, perhaps i misunderstood something.
This is exactly my situation. Is there another tool that gives an accurate conversion plan with that setup? The tool at rightcapital.com seems good but it’s for financial planners, not individuals ($125/mo. subscription). I wish Schwab had such a tool.
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randomguy
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

FiveK wrote: Mon Sep 27, 2021 4:16 am
marcopolo wrote: Mon Sep 27, 2021 4:02 am The detailed example that he walked through had the same growth rate (2% real) for all accounts. This might be modelling the scenario where all accounts are invested with the same asset allocation. I believe most of the criticism of I-ORP being overly aggressive in doing Roth Conversions is for the case where an investor keeps mostly bonds in tIRA (lower growth) and mostly equities in Roth (higher growth), but maintains a consistent asset allocation across their entire portfolio. I-ORP does not handle this scenario well, and i don't see anything in the linked presentation that addresses that. But, perhaps i misunderstood something.
Searching this thread for the word "aggressive" one can find various critiques, covering a variety of scenarios. There can indeed be legitimate reasons to doubt I-ORP's strategy when it's assumptions don't match an individual's reality. It's also true that a front-loaded Roth conversion strategy can in fact be best.
I think a lot of people just don't like front loaded conversions because the tax bills are very large early on. I know that was my first thought when I saw it. I then started to think about it and came to the following conclusions
a) 22% now versus later makes no difference. So you might as well fill up the bracket anytime you go into the 22% bracket. A human might prefer to pay 8k in taxes every year when mathematically paying 12k in one year and 4 year in another works out the same.
b) 22% versus 24% isn't much of a difference. That opens up very large conversions.
c) Taxes on SS make it really easy to get a 22%+ tax rates even when in the 12% tax brackets.
d) filling up the 12% with OI and then paying LTGC is also very expensive. Paying 24% instead of 27% is a win.
e) paying 700-1800 in IRMAA for 25 years is a pretty substantial tax penalty.
f) Tax drag does add up. How much will depend on your return assumption. Waiting 10 years to do the conversions and paying 15% LTCG on that money versus doing the conversion today can be a higher tax burden

Depending on your income goals, all of this stuff can interact to favor huge conversions early on.

For the assumptions being made, I am pretty confident that the i-orp numbers are right. Now how these numbers change in the real world with variable returns AND different asset locations isn't as clear to me.
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Re: How I use I-ORP, and who shouldn't

Post by marcopolo »

billthecat wrote: Mon Sep 27, 2021 4:47 am
marcopolo wrote: Mon Sep 27, 2021 4:02 am
FiveK wrote: Mon Sep 27, 2021 1:00 am I-ORP's tendency at time to heavily front-load Roth conversions is often criticized. Some of that criticism might be merited if I-ORP isn't considering significant tax effects at high (e.g., NIIT, 20% LTCG bracket, etc.) or low (e.g., phase-in of SS benefit taxability, etc.) incomes.

But in between, it seems to have things covered reasonably well. Interesting to see the following example: Bogleheads® Chapter Series – Wade Pfau on Retirement Income Style Analysis, Tax Efficiency - YouTube (the link will take one directly to the start of the example discussion) in which (presumably using software different from I-ORP) a heavy front-load of Roth conversions was found best.

Haven't tried putting that example situation into I-ORP to see what it would do....
The detailed example that he walked through had the same growth rate (2% real) for all accounts. This might be modelling the scenario where all accounts are invested with the same asset allocation. I believe most of the criticism of I-ORP being overly aggressive in doing Roth Conversions is for the case where an investor keeps mostly bonds in tIRA (lower growth) and mostly equities in Roth (higher growth), but maintains a consistent asset allocation across their entire portfolio. I-ORP does not handle this scenario well, and i don't see anything in the linked presentation that addresses that. But, perhaps i misunderstood something.
This is exactly my situation. Is there another tool that gives an accurate conversion plan with that setup? The tool at rightcapital.com seems good but it’s for financial planners, not individuals ($125/mo. subscription). I wish Schwab had such a tool.
I have not found one. I brewed my own, based on the RPM spreadsheet, a while back. But, have not kept it up to date.
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: How I use I-ORP, and who shouldn't

Post by marcopolo »

LeeMKE wrote: Mon Sep 27, 2021 4:28 am I believe Wade was keeping the complexity minimized so that the example was clear: many of us can manage our taxes best with some Roth conversions between retirement and RMDs.

The results get turbo-charged if you appropriately pack the Roth with equities and leave bonds in the tax deferred account.

There is always a trade-off when designing a tool. None can do everything, so I-ORP chose to focus on IRMMA, Social Security tax bomb, RMDs, and lifelong taxes. All issues that are difficult to model. I appreciate that.

The recommended way to use I-ORP is to model first with all accounts having the same asset allocation. This prevents a too aggressive tilt to conversions. Once the conversions are complete (or close to it) we can model with the tilt and turn off the Roth conversions so our withdrawals take into account the faster growth expected in Roth.

As always, try it. If you don't like what it says, that's your choice to pass on it. I ran my situation without Roth conversions, with modest conversions and unlimited conversions. I like the results of being aggressive. YMMV
I believe we have discussed this before. This workaround helps, but does not really solve the problem.
The default rates of return in I-ORP are 7% for equities and 3% for bonds.
For a 60/40 AA, that equates to a 5.4% return rate.

If you have all bonds in your tIRA, a $1M tIRA will grow to $1.8M in 20 years, with tax brackets also growing at a similar rate, the RMD problem does not really get much worse. So, a modest amount of Roth Conversions probably eliminates any tax bombs.

If you have this setup, but have to tell I-ORP that your tIRA is really 60/40, then I-ORP figures in 20 years, it will grow to $2.86M, and now you would have a real problem with the tax bomb. So, I-ORP suggests much bigger Roth Conversions to head off this issue, rightfully so if this were really the case. But, it isn't, and the big Conversions are over done.

To be honest, i really don't have a problem with people using I-ORP, even with it quirks, to do this evaluation if they understand what is happening here.
What i do find unsettling is when some uninitiated person asks about doing Roth Conversions analysis, and I-ORP "evangelists" recommend using this tool without explaining at least the minimum need to do this work around (it is not really an obvious thing to do), and that even with that, the recommendation is likely to be somewhat skewed.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

Excellent thread. Hope I'm not too late to the game. I've been running i-ORP and, whether I specify unlimited Roth conversions or no conversions, the spendable income is about the same. In each case, the tool is clearly recommending that I make very large withdrawals from the tax deferred account for about 5 years (I'm 60 and newly retired) resulting in tax bills into the 6 figures for the first 3. I'm way too skittish to write those checks. Interestingly, i-ORP leaves money only in the taxable account (I specify 1M as an end value) at end of plan. It has me spending money from the Roth IRA and depleting it even in the unlimited conversion scenario where all those taxes were paid up front to convert into it.

I'm seeking some middle ground. I'd like to either do some Roth conversions or live off the tax deferred account in hopes of lessening the RMD blow to come.

Questions:
1) All things being equal, does i-ORP try to predict what the min/max amounts will be for future tax brackets based on historical creep or due to inflation? Does it also do the same with the standard deduction?
2) What do you typically use for a glidepath asset allocation for the "Plan End" entries? Do you keep it what it was at retirement for each account type or do you glide towards 100% fixed income?
3) Many here have 100% fixed income in tax deferred and 100% equities in Roth. If you are making large conversions into Roth, how do you maintain your overall asset allocation? Where do you make your adjustments?
Exchme
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Re: How I use I-ORP, and who shouldn't

Post by Exchme »

LMK5 wrote: Fri Jan 21, 2022 5:55 pm Excellent thread. Hope I'm not too late to the game. I've been running i-ORP and, whether I specify unlimited Roth conversions or no conversions, the spendable income is about the same. In each case, the tool is clearly recommending that I make very large withdrawals from the tax deferred account for about 5 years (I'm 60 and newly retired) resulting in tax bills into the 6 figures for the first 3. I'm way too skittish to write those checks. Interestingly, i-ORP leaves money only in the taxable account (I specify 1M as an end value) at end of plan. It has me spending money from the Roth IRA and depleting it even in the unlimited conversion scenario where all those taxes were paid up front to convert into it.

I'm seeking some middle ground. I'd like to either do some Roth conversions or live off the tax deferred account in hopes of lessening the RMD blow to come.

Questions:
1) All things being equal, does i-ORP try to predict what the min/max amounts will be for future tax brackets based on historical creep or due to inflation? Does it also do the same with the standard deduction?
2) What do you typically use for a glidepath asset allocation for the "Plan End" entries? Do you keep it what it was at retirement for each account type or do you glide towards 100% fixed income?
3) Many here have 100% fixed income in tax deferred and 100% equities in Roth. If you are making large conversions into Roth, how do you maintain your overall asset allocation? Where do you make your adjustments?
I recommend entering the same stock/bond allocation in all accounts. Otherwise the program will put the money into the account with the highest stock allocation and therefore the highest return as quickly as possible. Holding bonds preferentially in tax deferred can lower the ideal amount of Roth Conversions, but I-orp can't handle that math - RPM and Pralana Gold are a couple of programs that I know of that can.

RPM is free at this site's Wiki and is a modifiable spreadsheet, so you can customize it if that is your thing. Pralana is a paid program (also an Excel spreadsheet, but protected, no formula writing). Pralana has a more complete tax package, more flexibility in accounts types, withdrawal strategies, historical & Monte Carlo results included, etc.
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

Exchme wrote: Fri Jan 21, 2022 7:00 pm
LMK5 wrote: Fri Jan 21, 2022 5:55 pm Excellent thread. Hope I'm not too late to the game. I've been running i-ORP and, whether I specify unlimited Roth conversions or no conversions, the spendable income is about the same. In each case, the tool is clearly recommending that I make very large withdrawals from the tax deferred account for about 5 years (I'm 60 and newly retired) resulting in tax bills into the 6 figures for the first 3. I'm way too skittish to write those checks. Interestingly, i-ORP leaves money only in the taxable account (I specify 1M as an end value) at end of plan. It has me spending money from the Roth IRA and depleting it even in the unlimited conversion scenario where all those taxes were paid up front to convert into it.

I'm seeking some middle ground. I'd like to either do some Roth conversions or live off the tax deferred account in hopes of lessening the RMD blow to come.

Questions:
1) All things being equal, does i-ORP try to predict what the min/max amounts will be for future tax brackets based on historical creep or due to inflation? Does it also do the same with the standard deduction?
2) What do you typically use for a glidepath asset allocation for the "Plan End" entries? Do you keep it what it was at retirement for each account type or do you glide towards 100% fixed income?
3) Many here have 100% fixed income in tax deferred and 100% equities in Roth. If you are making large conversions into Roth, how do you maintain your overall asset allocation? Where do you make your adjustments?
I recommend entering the same stock/bond allocation in all accounts. Otherwise the program will put the money into the account with the highest stock allocation and therefore the highest return as quickly as possible. Holding bonds preferentially in tax deferred can lower the ideal amount of Roth Conversions, but I-orp can't handle that math - RPM and Pralana Gold are a couple of programs that I know of that can.

RPM is free at this site's Wiki and is a modifiable spreadsheet, so you can customize it if that is your thing. Pralana is a paid program (also an Excel spreadsheet, but protected, no formula writing). Pralana has a more complete tax package, more flexibility in accounts types, withdrawal strategies, historical & Monte Carlo results included, etc.
Interestingly, I inadvertently ran it with the tax deferred account indicating an 80/20 beginning AA instead of the actual 20/80 AA and I got a very different output as one would expect. This time it did not advise large withdrawals from the tax deferred account and the tax bill was very reasonable. Like you mentioned, the program seems to want to get as much money as possible out of the bond-heavy accounts and into the equity-heavy account as soon as possible. My guess is that i-ORP doesn't factor in the increase in risk to the overall portfolio!

When I put all accounts at 50/50 AA, my output is very much the same as when I use the actual AA for each account type--high withdrawals from tax deferred and high initial tax bills.

BTW, I will also venture into RPM. I've been avoiding it up till now :( .
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Re: How I use I-ORP, and who shouldn't

Post by Silk McCue »

LMK5 wrote: Fri Jan 21, 2022 7:41 pm

Interestingly, I inadvertently ran it with the tax deferred account indicating an 80/20 beginning AA instead of the actual 20/80 AA and I got a very different output as one would expect. This time it did not advise large withdrawals from the tax deferred account and the tax bill was very reasonable. Like you mentioned, the program seems to want to get as much money as possible out of the bond-heavy accounts and into the equity-heavy account as soon as possible. My guess is that i-ORP doesn't factor in the increase in risk to the overall portfolio!

When I put all accounts at 50/50 AA, my output is very much the same as when I use the actual AA for each account type--high withdrawals from tax deferred and high initial tax bills.

BTW, I will also venture into RPM. I've been avoiding it up till now :( .
Your rate of return for equities along with the percentage of equities is driving the result. It’s just math. I-ORP can’t factor in risk. You can reduce the rate of return if you want to. In retirement you would want to run I-ORP each year.

Cheers
LMK5
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

What would be an appropriate "Plan End" AA entry for each account type? Same as beginning? 100% bonds? Something else?
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neurosphere
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Re: How I use I-ORP, and who shouldn't

Post by neurosphere »

Silk McCue wrote: Fri Jan 21, 2022 7:51 pm
LMK5 wrote: Fri Jan 21, 2022 7:41 pm

Interestingly, I inadvertently ran it with the tax deferred account indicating an 80/20 beginning AA instead of the actual 20/80 AA and I got a very different output as one would expect. This time it did not advise large withdrawals from the tax deferred account and the tax bill was very reasonable. Like you mentioned, the program seems to want to get as much money as possible out of the bond-heavy accounts and into the equity-heavy account as soon as possible. My guess is that i-ORP doesn't factor in the increase in risk to the overall portfolio!

When I put all accounts at 50/50 AA, my output is very much the same as when I use the actual AA for each account type--high withdrawals from tax deferred and high initial tax bills.

BTW, I will also venture into RPM. I've been avoiding it up till now :( .
Your rate of return for equities along with the percentage of equities is driving the result. It’s just math. I-ORP can’t factor in risk. You can reduce the rate of return if you want to. In retirement you would want to run I-ORP each year.

Cheers
One can put in glide paths for each of the accounts. One method I've used is to set the intial Roth allocation to be stock heavy compared to pretax, but then to have then glide to a similar final amount. For example, based on intial balances I'll set Roth at 80/20 and pretax at 40/60 such that the blend equals the allocation I want at the start. But then I'll set the final allocation at 10/90 each (for example). This is one workaround of sorts to putting all stock in Roth forevery which then of course will make i-orp suggest converting everything and now your portfolio is 100% Roth and 100% stocks. :)

In reality, I view i-orp (and any such tool) more like education of the concepts and the ranges of outputs based on tweaks of assumptions. Then, I make a reasonable math+personality suited plan. But "math alone" suggests that if 1) you assume that stocks will outperform bonds over your time frame and 2) you have a long planning horizon --> agressive and early conversions is the natural output. But if you want to plan for the situation where bonds perfrom about the same as stocks from retirement to your death, then sure, you aren't going to covert anything but then you just won't bother owning stocks in the first place. :D

I have two "types" of risk tolerance when thinking about what to do in/upon retirement: 1) stocks vs bonds and 2) pay tax now vs pay tax later. It's nearly impossible to add in a sequence of returns risk (via monte carlo or otherwise) as a third factor within a tool. Ok, wait, I guess it's possible. But how useful is an output like "this Roth conversion strategy has an 85% success rate compared to no conversion" when there are an infinite other Roth conversion strategies to compare to?

I'm realizing I just typed a lot of words but didn't really say anything new nor advance the discussion other than to say I view all these tools as educational, and then I do what kinda sorta feels right to me. :wink:
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

neurosphere wrote: Fri Jan 21, 2022 8:31 pm
Silk McCue wrote: Fri Jan 21, 2022 7:51 pm
LMK5 wrote: Fri Jan 21, 2022 7:41 pm

Interestingly, I inadvertently ran it with the tax deferred account indicating an 80/20 beginning AA instead of the actual 20/80 AA and I got a very different output as one would expect. This time it did not advise large withdrawals from the tax deferred account and the tax bill was very reasonable. Like you mentioned, the program seems to want to get as much money as possible out of the bond-heavy accounts and into the equity-heavy account as soon as possible. My guess is that i-ORP doesn't factor in the increase in risk to the overall portfolio!

When I put all accounts at 50/50 AA, my output is very much the same as when I use the actual AA for each account type--high withdrawals from tax deferred and high initial tax bills.

BTW, I will also venture into RPM. I've been avoiding it up till now :( .
Your rate of return for equities along with the percentage of equities is driving the result. It’s just math. I-ORP can’t factor in risk. You can reduce the rate of return if you want to. In retirement you would want to run I-ORP each year.

Cheers
One can put in glide paths for each of the accounts. One method I've used is to set the intial Roth allocation to be stock heavy compared to pretax, but then to have then glide to a similar final amount. For example, based on intial balances I'll set Roth at 80/20 and pretax at 40/60 such that the blend equals the allocation I want at the start. But then I'll set the final allocation at 10/90 each (for example). This is one workaround of sorts to putting all stock in Roth forevery which then of course will make i-orp suggest converting everything and now your portfolio is 100% Roth and 100% stocks. :)

In reality, I view i-orp (and any such tool) more like education of the concepts and the ranges of outputs based on tweaks of assumptions. Then, I make a reasonable math+personality suited plan. But "math alone" suggests that if 1) you assume that stocks will outperform bonds over your time frame and 2) you have a long planning horizon --> agressive and early conversions is the natural output. But if you want to plan for the situation where bonds perfrom about the same as stocks from retirement to your death, then sure, you aren't going to covert anything but then you just won't bother owning stocks in the first place. :D

I have two "types" of risk tolerance when thinking about what to do in/upon retirement: 1) stocks vs bonds and 2) pay tax now vs pay tax later. It's nearly impossible to add in a sequence of returns risk (via monte carlo or otherwise) as a third factor within a tool. Ok, wait, I guess it's possible. But how useful is an output like "this Roth conversion strategy has an 85% success rate compared to no conversion" when there are an infinite other Roth conversion strategies to compare to?

I'm realizing I just typed a lot of words but didn't really say anything new nor advance the discussion other than to say I view all these tools as educational, and then I do what kinda sorta feels right to me. :wink:
I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?

But I do agree that in the end you need to be comfortable with whatever plan you execute.
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