Roth Conversions - McQuarrie study

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indexlover
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Roth Conversions - McQuarrie study

Post by indexlover »

Hello BHs,

Have you seen this article ? https://www.marketwatch.com/story/to-ro ... 1623431970

and the study, “When and for Whom Are Roth Conversions Most Beneficial?,” by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE

I would love to hear the collective thoughts from this august BH group.

Thanks in advance.
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Prokofiev
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Re: Roth Conversions - McQuarrie study

Post by Prokofiev »

Although the article is basically right for the majority of people, many/most Bogle Heads will be in the group that
can gain from Roth conversions. Many early retirees will have years with little income. I retired at 47 and will take SS
at 70, giving me 23 years of conversions at a 0,10,12 or 14/15% tax bracket. My post-72 income will be huge and force me
into much higher brackets. At least some Roth conversion is a no-brainer for me.

The article is also correct that for high-worth individuals, the amount saved by conversions is a relatively small % of
total worth and not likely to move the needle on retiree wealth. True. But if I can save $100k in taxes, I'll take it - even if
it only represents 1-5% of my total portfolio.
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Re: Roth Conversions - McQuarrie study

Post by retiredjg »

It seems to me this article (did not read the 42 page study) is talking mostly about Roth conversions while working. I think it is already well accepted that Roth conversions while working are not a great idea.
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Re: Roth Conversions - McQuarrie study

Post by tibbitts »

retiredjg wrote: Thu Jun 17, 2021 2:46 pm It seems to me this article (did not read the 42 page study) is talking mostly about Roth conversions while working. I think it is already well accepted that Roth conversions while working are not a great idea.
It's important to consider, though, that income from RMDs may be well above income while working, especially for Bogleheads who've deferred as much income as possible.
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FiveK
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Re: Roth Conversions - McQuarrie study

Post by FiveK »

The paper makes some assumptions (some reasonable, some questionable), further assumes that those assumptions apply to practically everyone, and draws conclusions presented as universally applicable. Unless an individual fits those assumptions, the conclusions may not be correct for that individual.

The paper continues to compare current marginal vs. future effective rates instead of the correct comparison between current and future marginal rates.

The one part that does make sense: the traditional vs. Roth choice won't make a huge difference on retirement spending ability, given any mainstream situation. Make a simple guesstimate, implement, and get on with life.
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Re: Roth Conversions - McQuarrie study

Post by ckangas »

There are so many things which depend on personal circumstance.

Granted, there does seem to be a bit of bias from some of the financial media. You have people like Dave Ramsey which tell people to go full Roth regardless of circumstances. But most reputable advice recommends looking at your own circumstances and figuring things out from there.

I'm not sure if the article adds much to the conversation.
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Re: Roth Conversions - McQuarrie study

Post by iceport »

ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.
That's so true!

Conveying that message would probably be the best way to counter misleading or overly simplified personal finance articles.

I must admit, I find Roth conversions a very confusing strategy. I'm doing them, but without a crystal ball, I don't know how much it will benefit me. But tax-deferred contributions were made in a 25% tax bracket, so I figure if I can convert in the 22% bracket, I'm saving at least 3% in federal taxes off the top.

During all my years making tax-deferred contributions, I never expected such a tax break!

(And that should be a big lesson here: We just don't know what our future tax rates will be until we get there.)
"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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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

retiredjg wrote: Thu Jun 17, 2021 2:46 pm It seems to me this article (did not read the 42 page study) is talking mostly about Roth conversions while working. I think it is already well accepted that Roth conversions while working are not a great idea.
It assumes retirement at 65. And looks at conversions at that point.
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Re: Roth Conversions - McQuarrie study

Post by LilyFleur »

iceport wrote: Thu Jun 17, 2021 3:34 pm
ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.
That's so true!

Conveying that message would probably be the best way to counter misleading or overly simplified personal finance articles.

I must admit, I find Roth conversions a very confusing strategy. I'm doing them, but without a crystal ball, I don't know how much it will benefit me. But tax-deferred contributions were made in a 25% tax bracket, so I figure if I can convert in the 22% bracket, I'm saving at least 3% in federal taxes off the top.

During all my years making tax-deferred contributions, I never expected such a tax break!

(And that should be a big lesson here: We just don't know what our future tax rates will be until we get there.)
We don't know future tax rates, and we also don't know how much our tax-deferred accounts will grow--or not--between now and when we would have to take RMDs.

If you use the Schwab calculator, even a 2% change in returns from now until age 72 can make a big difference in RMDs, depending on the size of the portfolio and your investing horizon.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

tibbitts wrote: Thu Jun 17, 2021 3:01 pm
retiredjg wrote: Thu Jun 17, 2021 2:46 pm It seems to me this article (did not read the 42 page study) is talking mostly about Roth conversions while working. I think it is already well accepted that Roth conversions while working are not a great idea.
It's important to consider, though, that income from RMDs may be well above income while working, especially for Bogleheads who've deferred as much income as possible.
He looks at RMDs combined with Social Security. He does not look at pension income.

“Table 2 applies the first year RMD divisor to calculate the minimum TDA balance required to enter each tax or Medicare bracket in 2027. What will it take for Rob and Sue to fall into the 24% tax bracket when their RMDs begin? Four million dollars in their TDA. Anything less will put them in the
22% bracket—two brackets down from their tax bracket while working, of 32%. Alternatively, simply to re- main in the 32% bracket they occu- pied while working will require an age 72 TDA balance over $9 million dollars.
Is it plausible that an affluent cou- ple like Rob and Sue could accumulate $4 million in their TDAs? Table 3 cal- culates investment outcomes if they each made the maximum annual con- tribution for thirty years and con- cludes: yes, if everything goes exactly right, a couple with peak income of $400,000 could accumulate just barely enough to nose into the 24% bracket when their RMDs begin.”
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

LilyFleur wrote: Thu Jun 17, 2021 3:43 pm
iceport wrote: Thu Jun 17, 2021 3:34 pm
ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.
That's so true!

Conveying that message would probably be the best way to counter misleading or overly simplified personal finance articles.

I must admit, I find Roth conversions a very confusing strategy. I'm doing them, but without a crystal ball, I don't know how much it will benefit me. But tax-deferred contributions were made in a 25% tax bracket, so I figure if I can convert in the 22% bracket, I'm saving at least 3% in federal taxes off the top.

During all my years making tax-deferred contributions, I never expected such a tax break!

(And that should be a big lesson here: We just don't know what our future tax rates will be until we get there.)
We don't know future tax rates, and we also don't know how much our tax-deferred accounts will grow--or not--between now and when we would have to take RMDs.

If you use the Schwab calculator, even a 2% change in returns from now until age 72 can make a big difference in RMDs, depending on the size of the portfolio and your investing horizon.
“Remarkably, neither a tax hike nor a tax cut appears to make much differ- ence to Roth conversion outcomes for affluent professionals. Pre-tax breakeven does not occur until the late 80s or after, whether tax rates rise by 4% or fall by 4%.”
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Re: Roth Conversions - McQuarrie study

Post by celia »

indexlover wrote: Thu Jun 17, 2021 1:59 pm Hello BHs,

Have you seen this article ? https://www.marketwatch.com/story/to-ro ... 1623431970

and the study, “When and for Whom Are Roth Conversions Most Beneficial?,” by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE
I would have loved to read it, but it now looks disabled. If anyone downloaded the .pdf file, can you search for "surviving spouse" or just "spouse" and see if it says anything about the survivor having to file as Single instead of MFJ. Also see if it mentions "IRMAA". Thanks.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Roth Conversions - McQuarrie study

Post by iceport »

celia wrote: Thu Jun 17, 2021 3:55 pm
indexlover wrote: Thu Jun 17, 2021 1:59 pm Hello BHs,

Have you seen this article ? https://www.marketwatch.com/story/to-ro ... 1623431970

and the study, “When and for Whom Are Roth Conversions Most Beneficial?,” by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE
I would have loved to read it, but it now looks disabled. If anyone downloaded the .pdf file, can you search for "surviving spouse" or just "spouse" and see if it says anything about the survivor having to file as Single instead of MFJ. Also see if it mentions "IRMAA". Thanks.
Just three references to "spouse," with nothing about survivors, but the document is littered with "IRMAA" throughout.

The download still works just fine for me... cookie problem?
Last edited by iceport on Thu Jun 17, 2021 4:03 pm, edited 2 times in total.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

I’d really encourage everyone to read the study itself. The author addresses many of the objections being raised here.

One finding is that if you withdraw the money from the Roth before a certain break even period, you didn’t get any benefit. The break even point is 13 to 15 years best case.
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Re: Roth Conversions - McQuarrie stud

Post by lazynovice »

celia wrote: Thu Jun 17, 2021 3:55 pm
indexlover wrote: Thu Jun 17, 2021 1:59 pm Hello BHs,

Have you seen this article ? https://www.marketwatch.com/story/to-ro ... 1623431970

and the study, “When and for Whom Are Roth Conversions Most Beneficial?,” by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE
I would have loved to read it, but it now looks disabled. If anyone downloaded the .pdf file, can you search for "surviving spouse" or just "spouse" and see if it says anything about the survivor having to file as Single instead of MFJ. Also see if it mentions "IRMAA". Thanks.
Does not mention moving to single brackets but he finds tax rate changes very immaterial- see my answer above.

He takes IRMAA into account.

You can read it for free if you sign up with an email address.
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LilyFleur
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Re: Roth Conversions - McQuarrie study

Post by LilyFleur »

lazynovice wrote: Thu Jun 17, 2021 4:00 pm I’d really encourage everyone to read the study itself. The author addresses many of the objections being raised here.

One finding is that if you withdraw the money from the Roth before a certain break even period, you didn’t get any benefit. The break even point is 13 to 15 years best case.
I think Roth is a good legacy vehicle because of that.
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Re: Roth Conversions - McQuarrie study

Post by DSBH »

celia wrote: Thu Jun 17, 2021 3:55 pm I would have loved to read it, but it now looks disabled. If anyone downloaded the .pdf file, can you search for "surviving spouse" or just "spouse" and see if it says anything about the survivor having to file as Single instead of MFJ. Also see if it mentions "IRMAA". Thanks.
Within the Marketwatch article there is a URL in the fourth paragraph to take you to the paper itself.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

LilyFleur wrote: Thu Jun 17, 2021 4:06 pm
lazynovice wrote: Thu Jun 17, 2021 4:00 pm I’d really encourage everyone to read the study itself. The author addresses many of the objections being raised here.

One finding is that if you withdraw the money from the Roth before a certain break even period, you didn’t get any benefit. The break even point is 13 to 15 years best case.
I think Roth is a good legacy vehicle because of that.
Yes. He says something to the effect of a Roth that is never touched beats everything.
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Re: Roth Conversions - McQuarrie study

Post by loghound »

LilyFleur wrote: Thu Jun 17, 2021 3:43 pm
If you use the Schwab calculator, even a 2% change in returns from now until age 72 can make a big difference in RMDs, depending on the size of the portfolio and your investing horizon.
What Schwab calculator are you referring to?
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Re: Roth Conversions - McQuarrie stud

Post by LilyFleur »

lazynovice wrote: Thu Jun 17, 2021 4:02 pm
celia wrote: Thu Jun 17, 2021 3:55 pm
indexlover wrote: Thu Jun 17, 2021 1:59 pm Hello BHs,

Have you seen this article ? https://www.marketwatch.com/story/to-ro ... 1623431970

and the study, “When and for Whom Are Roth Conversions Most Beneficial?,” by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE
I would have loved to read it, but it now looks disabled. If anyone downloaded the .pdf file, can you search for "surviving spouse" or just "spouse" and see if it says anything about the survivor having to file as Single instead of MFJ. Also see if it mentions "IRMAA". Thanks.
Does not mention moving to single brackets but he finds tax rate changes very immaterial- see my answer above.

He takes IRMAA into account.

You can read it for free if you sign up with an email address.
Considering how many adults in the United States are single, I find it interesting how often financial articles and forums only address MFJ.

What if Rob has a heart attack and dies? What if Rob finds a wife with less mileage on her, and divorces Sue? What is Sue going to do? Or Rob, if those things happen to him?

Even in the thread present in our forum right now about how you made it to $3 million, it isn't specified whether that is $1.5 million for singles, or $3 million whether you're married or not. It's a lot harder to get to $3 million as a single. The single tax brackets are a challenge.
Last edited by LilyFleur on Thu Jun 17, 2021 4:18 pm, edited 1 time in total.
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Re: Roth Conversions - McQuarrie study

Post by LilyFleur »

loghound wrote: Thu Jun 17, 2021 4:09 pm
LilyFleur wrote: Thu Jun 17, 2021 3:43 pm
If you use the Schwab calculator, even a 2% change in returns from now until age 72 can make a big difference in RMDs, depending on the size of the portfolio and your investing horizon.
What Schwab calculator are you referring to?
Be sure to go scroll down to the section where you specify your returns, and play with the slider.

https://www.schwab.com/ira/understand-i ... lators/rmd
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

lazynovice wrote: Thu Jun 17, 2021 3:52 pm
tibbitts wrote: Thu Jun 17, 2021 3:01 pm
retiredjg wrote: Thu Jun 17, 2021 2:46 pm It seems to me this article (did not read the 42 page study) is talking mostly about Roth conversions while working. I think it is already well accepted that Roth conversions while working are not a great idea.
It's important to consider, though, that income from RMDs may be well above income while working, especially for Bogleheads who've deferred as much income as possible.
He looks at RMDs combined with Social Security.

“Table 2 applies the first year RMD divisor to calculate the minimum TDA balance required to enter each tax or Medicare bracket in 2027. What will it take for Rob and Sue to fall into the 24% tax bracket when their RMDs begin? Four million dollars in their TDA. Anything less will put them in the
22% bracket—two brackets down from their tax bracket while working, of 32%. Alternatively, simply to re- main in the 32% bracket they occu- pied while working will require an age 72 TDA balance over $9 million dollars.
Is it plausible that an affluent cou- ple like Rob and Sue could accumulate $4 million in their TDAs? Table 3 cal- culates investment outcomes if they each made the maximum annual con- tribution for thirty years and con- cludes: yes, if everything goes exactly right, a couple with peak income of $400,000 could accumulate just barely enough to nose into the 24% bracket when their RMDs begin.”
Edited. I was wrong. He does address pension income-

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

iceport wrote: Thu Jun 17, 2021 3:34 pm
ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.
That's so true!

Conveying that message would probably be the best way to counter misleading or overly simplified personal finance articles.

I must admit, I find Roth conversions a very confusing strategy. I'm doing them, but without a crystal ball, I don't know how much it will benefit me. But tax-deferred contributions were made in a 25% tax bracket, so I figure if I can convert in the 22% bracket, I'm saving at least 3% in federal taxes off the top.

During all my years making tax-deferred contributions, I never expected such a tax break!

(And that should be a big lesson here: We just don't know what our future tax rates will be until we get there.)
Sure you are saving 3%, but could you still be overpaying?
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Re: Roth Conversions - McQuarrie study

Post by LilyFleur »

lazynovice wrote: Thu Jun 17, 2021 4:14 pm
lazynovice wrote: Thu Jun 17, 2021 3:52 pm
tibbitts wrote: Thu Jun 17, 2021 3:01 pm
retiredjg wrote: Thu Jun 17, 2021 2:46 pm It seems to me this article (did not read the 42 page study) is talking mostly about Roth conversions while working. I think it is already well accepted that Roth conversions while working are not a great idea.
It's important to consider, though, that income from RMDs may be well above income while working, especially for Bogleheads who've deferred as much income as possible.
He looks at RMDs combined with Social Security.

“Table 2 applies the first year RMD divisor to calculate the minimum TDA balance required to enter each tax or Medicare bracket in 2027. What will it take for Rob and Sue to fall into the 24% tax bracket when their RMDs begin? Four million dollars in their TDA. Anything less will put them in the
22% bracket—two brackets down from their tax bracket while working, of 32%. Alternatively, simply to re- main in the 32% bracket they occu- pied while working will require an age 72 TDA balance over $9 million dollars.
Is it plausible that an affluent cou- ple like Rob and Sue could accumulate $4 million in their TDAs? Table 3 cal- culates investment outcomes if they each made the maximum annual con- tribution for thirty years and con- cludes: yes, if everything goes exactly right, a couple with peak income of $400,000 could accumulate just barely enough to nose into the 24% bracket when their RMDs begin.”
Edited. I was wrong. He does address pension income-

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
Pensions are game changers--both with early retirement and ACA subsidies--and with IRMAA cliffs.

A pension + being in the single tax bracket = being very careful about Roth conversions.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

FiveK wrote: Thu Jun 17, 2021 3:15 pm The paper makes some assumptions (some reasonable, some questionable), further assumes that those assumptions apply to practically everyone, and draws conclusions presented as universally applicable. Unless an individual fits those assumptions, the conclusions may not be correct for that individual.

The paper continues to compare current marginal vs. future effective rates instead of the correct comparison between current and future marginal rates.

The one part that does make sense: the traditional vs. Roth choice won't make a huge difference on retirement spending ability, given any mainstream situation. Make a simple guesstimate, implement, and get on with life.
There is an entire appendix on average versus marginal tax rates. Did you read that and disagree?
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indexlover
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Re: Roth Conversions - McQuarrie study

Post by indexlover »

iceport wrote: Thu Jun 17, 2021 4:00 pm
celia wrote: Thu Jun 17, 2021 3:55 pm
indexlover wrote: Thu Jun 17, 2021 1:59 pm Hello BHs,

Have you seen this article ? https://www.marketwatch.com/story/to-ro ... 1623431970

and the study, “When and for Whom Are Roth Conversions Most Beneficial?,” by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE
I would have loved to read it, but it now looks disabled. If anyone downloaded the .pdf file, can you search for "surviving spouse" or just "spouse" and see if it says anything about the survivor having to file as Single instead of MFJ. Also see if it mentions "IRMAA". Thanks.
Just three references to "spouse," with nothing about survivors, but the document is littered with "IRMAA" throughout.

The download still works just fine for me... cookie problem?
Celia - can you try going from here: http://www.edwardfmcquarrie.com/?p=573
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Re: Roth Conversions - McQuarrie study

Post by iceport »

lazynovice wrote: Thu Jun 17, 2021 4:16 pm
iceport wrote: Thu Jun 17, 2021 3:34 pm
ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.
That's so true!

Conveying that message would probably be the best way to counter misleading or overly simplified personal finance articles.

I must admit, I find Roth conversions a very confusing strategy. I'm doing them, but without a crystal ball, I don't know how much it will benefit me. But tax-deferred contributions were made in a 25% tax bracket, so I figure if I can convert in the 22% bracket, I'm saving at least 3% in federal taxes off the top.

During all my years making tax-deferred contributions, I never expected such a tax break!

(And that should be a big lesson here: We just don't know what our future tax rates will be until we get there.)
Sure you are saving 3%, but could you still be overpaying?
I don't know. Doesn't that require knowing my future tax rate(s)?

A modest pension will keep me firmly within what is currently the 22% tax bracket. No really low income years.
"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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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

LilyFleur wrote: Thu Jun 17, 2021 4:17 pm
lazynovice wrote: Thu Jun 17, 2021 4:14 pm
lazynovice wrote: Thu Jun 17, 2021 3:52 pm
tibbitts wrote: Thu Jun 17, 2021 3:01 pm
retiredjg wrote: Thu Jun 17, 2021 2:46 pm It seems to me this article (did not read the 42 page study) is talking mostly about Roth conversions while working. I think it is already well accepted that Roth conversions while working are not a great idea.
It's important to consider, though, that income from RMDs may be well above income while working, especially for Bogleheads who've deferred as much income as possible.
He looks at RMDs combined with Social Security.

“Table 2 applies the first year RMD divisor to calculate the minimum TDA balance required to enter each tax or Medicare bracket in 2027. What will it take for Rob and Sue to fall into the 24% tax bracket when their RMDs begin? Four million dollars in their TDA. Anything less will put them in the
22% bracket—two brackets down from their tax bracket while working, of 32%. Alternatively, simply to re- main in the 32% bracket they occu- pied while working will require an age 72 TDA balance over $9 million dollars.
Is it plausible that an affluent cou- ple like Rob and Sue could accumulate $4 million in their TDAs? Table 3 cal- culates investment outcomes if they each made the maximum annual con- tribution for thirty years and con- cludes: yes, if everything goes exactly right, a couple with peak income of $400,000 could accumulate just barely enough to nose into the 24% bracket when their RMDs begin.”
Edited. I was wrong. He does address pension income-

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
Pensions are game changers--both with early retirement and ACA subsidies--and with IRMAA cliffs.

A pension + being in the single tax bracket = being very careful about Roth conversions.
Based on his conclusions for MFJ, I’d imagine he’d discourage them even more for singles. And inclusion of ACA subsidies would be a further disincentive.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

iceport wrote: Thu Jun 17, 2021 4:24 pm
lazynovice wrote: Thu Jun 17, 2021 4:16 pm
iceport wrote: Thu Jun 17, 2021 3:34 pm
ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.
That's so true!

Conveying that message would probably be the best way to counter misleading or overly simplified personal finance articles.

I must admit, I find Roth conversions a very confusing strategy. I'm doing them, but without a crystal ball, I don't know how much it will benefit me. But tax-deferred contributions were made in a 25% tax bracket, so I figure if I can convert in the 22% bracket, I'm saving at least 3% in federal taxes off the top.

During all my years making tax-deferred contributions, I never expected such a tax break!

(And that should be a big lesson here: We just don't know what our future tax rates will be until we get there.)
Sure you are saving 3%, but could you still be overpaying?
I don't know. Doesn't that require knowing my future tax rate(s)?

A modest pension will keep me firmly within what is currently the 22% tax bracket. No really low income years.
Unless the pension is COLA adjusted, the tax brackets will inflate while the pension stands still. And if you are using post tax dollars to pay current taxes what is the opportunity cost of what you could be making there with an opportunity in a step up in basis at death. I don’t know the answer.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.

Granted, there does seem to be a bit of bias from some of the financial media. You have people like Dave Ramsey which tell people to go full Roth regardless of circumstances. But most reputable advice recommends looking at your own circumstances and figuring things out from there.

I'm not sure if the article adds much to the conversation.
You should read the study not the article.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

Very thorough study. Except for addressing the surviving spouse moving to single rates scenario- which can be addressed with survivor’s benefits and term life insurance. I guess he also misses the legacy impact of heirs in high tax brackets.

Unless you have pension income, I don’t see a lot of reason to convert beyond the current 12% bracket- future 15%. I’ve thought that for awhile. This article is making me question anything above the 0%.
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Re: Roth Conversions - McQuarrie study

Post by FiveK »

lazynovice wrote: Thu Jun 17, 2021 4:18 pm
FiveK wrote: Thu Jun 17, 2021 3:15 pm The paper makes some assumptions (some reasonable, some questionable), further assumes that those assumptions apply to practically everyone, and draws conclusions presented as universally applicable. Unless an individual fits those assumptions, the conclusions may not be correct for that individual.

The paper continues to compare current marginal vs. future effective rates instead of the correct comparison between current and future marginal rates.

The one part that does make sense: the traditional vs. Roth choice won't make a huge difference on retirement spending ability, given any mainstream situation. Make a simple guesstimate, implement, and get on with life.
There is an entire appendix on average versus marginal tax rates. Did you read that and disagree?
Yes.

Are you familiar with the issue and why this choice
hinges primarily on a comparison between your known marginal tax rate now vs. an estimated marginal tax rate at withdrawal?
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

FiveK wrote: Thu Jun 17, 2021 4:53 pm
lazynovice wrote: Thu Jun 17, 2021 4:18 pm
FiveK wrote: Thu Jun 17, 2021 3:15 pm The paper makes some assumptions (some reasonable, some questionable), further assumes that those assumptions apply to practically everyone, and draws conclusions presented as universally applicable. Unless an individual fits those assumptions, the conclusions may not be correct for that individual.

The paper continues to compare current marginal vs. future effective rates instead of the correct comparison between current and future marginal rates.

The one part that does make sense: the traditional vs. Roth choice won't make a huge difference on retirement spending ability, given any mainstream situation. Make a simple guesstimate, implement, and get on with life.
There is an entire appendix on average versus marginal tax rates. Did you read that and disagree?
Yes.

Are you familiar with the issue and why this choice
hinges primarily on a comparison between your known marginal tax rate now vs. an estimated marginal tax rate at withdrawal?
Yes. It addresses traditional versus Roth during accumulation years. Not the point of the study. In the case of conversions you could compare marginal rate during conversions versus your marginal rate at RMDs. I don’t think it changes his answer though. He isn’t comparing rates. He’s comparing the ending value of a portfolio in real dollars. To get there you have to use actual taxes paid on the conversions. Do you disagree?
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Re: Roth Conversions - McQuarrie study

Post by curmudgeon »

The news article was pretty typical lightweight financial press blather.

I took the time to read the paper and it's appendices. I actually agree with the general point that for *many* people, Roth conversions will have very limited effect. But I wasn't too impressed with the paper otherwise. It started with a rather off-the-wall "base case", and continued on to other more or less realistic extensions. A huge, gaping hole was that it made zero acknowledgment of the fact that there will almost certainly be a period of years where a surviving spouse will be being taxed with much smaller single tax brackets.

The author does acknowledge the possibility of people with the ability to live off of taxable savings while doing Roth conversions (someone who sold a business), but writes it off as an edge case. He neglects the reality that his "high income" couple is likely to have saved beyond just their 401Ks, may downsize, have an inheritance, etc. He also seriously neglects the "early retiree" case; age 65 is not early retiring unless you are a college professor.
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Re: Roth Conversions - McQuarrie study

Post by FiveK »

lazynovice wrote: Thu Jun 17, 2021 5:24 pm Yes. It addresses traditional versus Roth during accumulation years. Not the point of the study.
The marginal vs. marginal comparison is appropriate regardless of whether one is addressing contributions or conversions.
In the case of conversions you could compare marginal rate during conversions versus your marginal rate at RMDs.
Correct, the point is to compare a choice for "this year" (in the extreme, "this dollar for this year") vs. sometime in the future.
I don’t think it changes his answer though. He isn’t comparing rates. He’s comparing the ending value of a portfolio in real dollars. To get there you have to use actual taxes paid on the conversions. Do you disagree?
I disagree that he isn't comparing rates. On p. 31 he writes
These are the marginal brackets in which affluent professionals may fall during their peak earnings years; but as Table β.1 shows, the average rate paid on retire-ment income at these exact same in-come levels must be considerably less than the marginal rate levied while working.
This is leading to the first of two Common misconceptions - see that for more.

At some places in the article it is semantics instead of correct/incorrect. Semantics arise when defining "(change in tax)/(change in income)". That ratio goes by various names, including effective, average, effective marginal, marginal effective, incremental, cumulative, marginal, and perhaps others.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

curmudgeon wrote: Thu Jun 17, 2021 5:38 pm The news article was pretty typical lightweight financial press blather.

I took the time to read the paper and it's appendices. I actually agree with the general point that for *many* people, Roth conversions will have very limited effect. But I wasn't too impressed with the paper otherwise. It started with a rather off-the-wall "base case", and continued on to other more or less realistic extensions. A huge, gaping hole was that it made zero acknowledgment of the fact that there will almost certainly be a period of years where a surviving spouse will be being taxed with much smaller single tax brackets.

The author does acknowledge the possibility of people with the ability to live off of taxable savings while doing Roth conversions (someone who sold a business), but writes it off as an edge case. He neglects the reality that his "high income" couple is likely to have saved beyond just their 401Ks, may downsize, have an inheritance, etc. He also seriously neglects the "early retiree" case; age 65 is not early retiring unless you are a college professor.
To address the early retiree question, just convert the payback age by subtracting 65 from it and adding to the Roth conversion age. So a payback age of 80 for a 65 year old is a payback age of 70 for a 55 year old or 65 for a 50 year old. The conclusion still holds.

Agree on the single brackets not being addressed.
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Re: Roth Conversions - McQuarrie study

Post by MathWizard »

Due to family history, I expect my wife to outlive me by
15 years, and she would've pushed into the 22/25% federal bracket
by RMDs and by the extra amount of SS benefits which will be taxed, unless we do Roth conversions for almost a decade
after I retire.

I'll grant you it is not huge,but does represent a few thousand a year throughout a potentially 35 year retirement.
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Re: Roth Conversions - McQuarrie study

Post by cbeck »

lazynovice wrote: Thu Jun 17, 2021 4:00 pm I’d really encourage everyone to read the study itself. The author addresses many of the objections being raised here.

One finding is that if you withdraw the money from the Roth before a certain break even period, you didn’t get any benefit. The break even point is 13 to 15 years best case.
Which points out a problem that I have noticed in discussions of Roth. The value of the Roth depends on the expected lifespan of the Roth, not the owner. I expect my Roth to be feeding my younger wife forty years from now.

Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money. Also, the estate planning benefit of assets exempt from RMDs for the surviving spouse is usually overlooked.

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
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Re: Roth Conversions - McQuarrie study

Post by GerryL »

A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

cbeck wrote: Thu Jun 17, 2021 7:11 pm ….
Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money….

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
I think the first point is because you aren’t replacing? You are paying the taxes you owe. Your Roth is bigger but your after tax account is smaller by the same amount. And you lose the opportunity cost of the after tax investment. He discusses that as one of the things people miss.

He says right in the paper that conversions at 0% are a no-brainer.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

GerryL wrote: Thu Jun 17, 2021 7:30 pm A question I don't often see addressed in discussions of Roth conversions: What do you plan to happen with any money that is in your estate when you die?

Leave it to spouse and/other heirs?
Leave it to charity?
A combination of heirs and charity?

If your money will go to charity, Roth conversions don't really make much sense.
If you plan to leave some or all of your money to non-spouse heirs, you need to consider whether you want to pay taxes for them.
Yes and pay them with after tax funds which they would get a step up in basis on at your death. And are you willing to pay capital gains taxes on the after tax you sell to pay the current taxes. And if you are holding large amounts of cash in taxable to pay the taxes, what are you losing on that?
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Re: Roth Conversions - McQuarrie study

Post by ROIGuy »

I don't think he addressed the fact that when you add in a couple's SS income (taxed at 85%) and some people will also have pensions plus their RMD can really push them into a higher tax bracket; not just their yearly RMD.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

Mr.BB wrote: Thu Jun 17, 2021 8:04 pm I don't think he addressed the fact that when you add in a couple's SS income (taxed at 85%) and some people will also have pensions plus their RMD can really push them into a higher tax bracket; not just their yearly RMD.
I thought so at first but on page 5:

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
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Re: Roth Conversions - McQuarrie study

Post by ROIGuy »

lazynovice wrote: Thu Jun 17, 2021 8:09 pm
Mr.BB wrote: Thu Jun 17, 2021 8:04 pm I don't think he addressed the fact that when you add in a couple's SS income (taxed at 85%) and some people will also have pensions plus their RMD can really push them into a higher tax bracket; not just their yearly RMD.
I thought so at first but on page 5:

Pension income. If the client is a public sector employee or other individual who expects a pension as well as social security, TDA balances would be lower than in the table. Each $10,000 in pension payments would reduce the required TDA balance to enter a bracket by $273,000. Returning to Rob and Sue, if one of them had a pension of $50,000, then instead of needing $4.175 million to enter the 24% tax bracket, only about $2.8 million would be required.
Thanks...I was just reading the abstract, just dnloaded the paper.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

FiveK wrote: Thu Jun 17, 2021 6:42 pm
lazynovice wrote: Thu Jun 17, 2021 5:24 pm Yes. It addresses traditional versus Roth during accumulation years. Not the point of the study.
The marginal vs. marginal comparison is appropriate regardless of whether one is addressing contributions or conversions.
In the case of conversions you could compare marginal rate during conversions versus your marginal rate at RMDs.
Correct, the point is to compare a choice for "this year" (in the extreme, "this dollar for this year") vs. sometime in the future.
I don’t think it changes his answer though. He isn’t comparing rates. He’s comparing the ending value of a portfolio in real dollars. To get there you have to use actual taxes paid on the conversions. Do you disagree?
I disagree that he isn't comparing rates. On p. 31 he writes
These are the marginal brackets in which affluent professionals may fall during their peak earnings years; but as Table β.1 shows, the average rate paid on retire-ment income at these exact same in-come levels must be considerably less than the marginal rate levied while working.
This is leading to the first of two Common misconceptions - see that for more.

At some places in the article it is semantics instead of correct/incorrect. Semantics arise when defining "(change in tax)/(change in income)". That ratio goes by various names, including effective, average, effective marginal, marginal effective, incremental, cumulative, marginal, and perhaps others.
Not sure what to tell you. Every chart in the study talks about the variation in real dollars in the portfolio at the end of the period. He’s comparing what you would pay in one scenario versus another, taking into account time value of money.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

indexlover wrote: Thu Jun 17, 2021 1:59 pm Hello BHs,

Have you seen this article ? https://www.marketwatch.com/story/to-ro ... 1623431970

and the study, “When and for Whom Are Roth Conversions Most Beneficial?,” by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

https://poseidon01.ssrn.com/delivery.ph ... INDEX=TRUE

I would love to hear the collective thoughts from this august BH group.

Thanks in advance.
Thanks for sharing.

Seems like he could have done a better job taking into account pensions. He does it but in a footnote. There are still enough people with pensions that he needs to address those cases more explicitly.

He assumes spouses of the same age and income levels which is becoming more common but has not been the last 30 years. It seems older spouses have a higher risk of leaving a spouse in the single brackets for longer periods of times. He does not touch on that at all.

He also doesn’t address people who are single through all time periods.

But overall pretty thorough
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Re: Roth Conversions - McQuarrie study

Post by dharrythomas »

So we spend our time worrying about something that doesn’t make much difference if you plan to use your retirement account for your retirement. :shock:

Most of us also spend way more time than is justified determining our exact asset allocation, when the difference between 60 and 65% equity or 30 and 35% international probably won’t move the needle on either return or risk.

I also spend way to much time (over the course of a year) deciding what color shirt to wear in the morning.
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Re: Roth Conversions - McQuarrie study

Post by cbeck »

lazynovice wrote: Thu Jun 17, 2021 7:59 pm
cbeck wrote: Thu Jun 17, 2021 7:11 pm ….
Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money….

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
I think the first point is because you aren’t replacing? You are paying the taxes you owe. Your Roth is bigger but your after tax account is smaller by the same amount. And you lose the opportunity cost of the after tax investment. He discusses that as one of the things people miss.

He says right in the paper that conversions at 0% are a no-brainer.
So, I have $1000 in my after-tax account on which I will be obliged to pay tax on the income and gains it generates out to the horizon. Since I am in the X% tax bracket, X% of my TIRA is the identical amount of $1000 which actually belongs to Uncle Sam including the entirety of the income and gains it generates in the future assuming for the moment that my tax bracket never changes. After the conversion Uncle Sam's chunk of what had been my TIRA has disappeared with no remaining tax obligation and now the income and gains of the $1000 from my after-tax account are entirely exempt from any taxes forever there in my Roth. What opportunity cost have I lost?
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Re: Roth Conversions - McQuarrie study

Post by FiveK »

lazynovice wrote: Thu Jun 17, 2021 8:17 pm Not sure what to tell you. Every chart in the study talks about the variation in real dollars in the portfolio at the end of the period. He’s comparing what you would pay in one scenario versus another, taking into account time value of money.
No problem. There are both good and not-so-good points in the paper. It would probably take too long to go through them point by point.

For some people, traditional contributions will work better; for others, Roth contributions will.
For some people, conversions will work better; for others, not converting will.

If there is anything in the article that you think contradicts what is in the traditional vs. Roth wiki, let's discuss.
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

Disappointed he didn't include a scenario where one of the spouses dies a decade or so before the other and tax rates shift from MFJ to single.
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