r2i forum

Hi

Is there anyone used a financial planning software for recommendations for optimal Roth IRA conversion (how much, when etc.), taking into account all tax considerations and future retirement planning?
Ex: Most of my retirement money is sitting in 401K and I am looking for the best way to convert it to Roth, taking into considerations on the current tax situation and also future?

Based on my discussions with the financial planners, I don't seem to get any solid advice on this?
Any pointers or help is appreciated.

Thanks
i2d2

i2d2;678924Hi

Is there anyone used a financial planning software for recommendations for optimal Roth IRA conversion (how much, when etc.), taking into account all tax considerations and future retirement planning?
Ex: Most of my retirement money is sitting in 401K and I am looking for the best way to convert it to Roth, taking into considerations on the current tax situation and also future?

Based on my discussions with the financial planners, I don't seem to get any solid advice on this?
Any pointers or help is appreciated.

Thanks
i2d2

The best time to convert Ira to Roth is in those years when your marginal tax bracket is lower. If people are working, then this is not really possible.

since you have 401k, does your employer allow conversion of 401k to Roth 401k?

i2d2;678924Hi

Is there anyone used a financial planning software for recommendations for optimal Roth IRA conversion (how much, when etc.), taking into account all tax considerations and future retirement planning?
Ex: Most of my retirement money is sitting in 401K and I am looking for the best way to convert it to Roth, taking into considerations on the current tax situation and also future?

Based on my discussions with the financial planners, I don't seem to get any solid advice on this?
Any pointers or help is appreciated.

Thanks
i2d2

No one can tell you what future tax rates are likely to be. You can project your future income, of course and assume current tax rates. Then the calculation is fairly straightforward.

Personally, I might nibble a little part of the 401k off (if allowed by your employer) into a Roth 401k as long as it doesn't bump you into a higher bracket. I know there is some benefit to waiting until your income drops to start converting, but with RMDs and all-- if you have a fairly large balance, I would do some conversions from time to time.

And also consider a backdoor Roth IRA (same math).

Desi

Thank you very much for the prompt response...
My employer allows me to contribute non-deductible 401k, and then converting them to unlimited number of Roth401ks, so I started using that route for some contributions now, not a whole lot, but started that any way........
But I don't know, if they allow me to convert from taxable 401k to Roth401k, i need to verify....

As I start planning for my retirement, I think I should start thinking about this and start working on a strategy (timing, amount) converting my bulk (about 500K) taxable 401k to Roth401K, and I am looking for some kind of advice...
I understand conceptually the best time to convert is marginal tax bracket is low, however I also think (don't know for sure), better to bite the bullet and pay taxes now, so I don't need to pay taxes in future....If everything works out, as I plan, I may continue to be on higher tax brackets in future, based on my current asset base......

Thanks again for your assistance..

Desi;678928The best time to convert Ira to Roth is in those years when your marginal tax bracket is lower. If people are working, then this is not really possible.

since you have 401k, does your employer allow conversion of 401k to Roth 401k?

Thank you greyfri...

I am exactly thinking the same thing, but I am looking for the optimal calculations.....which I am not able to get started, to get a decent understand..... All free calculators out there are too complex or comprehend, and I don't believe the financial planners have any clue either.... Most of the guys I spoke to appear to be fresh college graduates, obtained their CFP and can't comprehend either, that was my experience....but I don't know, if the Robo advisers like betterment or personalcapital or wealthfront are any better, I don't know..

Thanks again for the backdoor tip, which I have started utilizing for the past 2/3 years...

greyfri;678930No one can tell you what future tax rates are likely to be. You can project your future income, of course and assume current tax rates. Then the calculation is fairly straightforward.

Personally, I might nibble a little part of the 401k off (if allowed by your employer) into a Roth 401k as long as it doesn't bump you into a higher bracket. I know there is some benefit to waiting until your income drops to start converting, but with RMDs and all-- if you have a fairly large balance, I would do some conversions from time to time.

And also consider a backdoor Roth IRA (same math).

Google Mega Backdoor Roth IRA. There is a lot of discussion of this on the Internet. Look at this site in particular

https://www.bogleheads.org/

I remember now that you did ask about finding a financial planner earlier.

The basic calculation isn't that difficult:

Say you pay p% right now in taxes, q% when you retire (and take RMDs or convert).

Assume annual growth rate = g %

If you convert $100 now, you are left with 100-p. After n years, you have (100-p)*(1+g/100)^n, no taxes.

If you don't convert, the $100 becomes 100 *(1+g/100)^n after n years. if you withdraw it all, and your tax bracket is q, you are left with

(1-q/100)*100 *(1+g/100)^n = (100-q) * (1+g/100)^n

So you're comparing (100-q) * (1+g/100)^n with (100-p)*(1+g/100)^n

Basically, it all boils down to p vs q (current vs future projected tax bracket).

I am assuming you are not contributing to your 401k, more than the minimum needed to get max employer match?

Some people who know, that due to inheritance, their tax bracket will be higher, do not even bother to contribute to employer 401k since some employer need you to contribute 10% to get 5% from employer and on top of that there maybe 5 year vesting period.

I am not sure converting to Roth, right now, makes sense if your current tax bracket is already high, if I am understanding it correctly, the converted money will be added to your income, right?

i2d2;678942Desi

Thank you very much for the prompt response...
My employer allows me to contribute non-deductible 401k, and then converting them to unlimited number of Roth401ks, so I started using that route for some contributions now, not a whole lot, but started that any way........
But I don't know, if they allow me to convert from taxable 401k to Roth401k, i need to verify....

As I start planning for my retirement, I think I should start thinking about this and start working on a strategy (timing, amount) converting my bulk (about 500K) taxable 401k to Roth401K, and I am looking for some kind of advice...
I understand conceptually the best time to convert is marginal tax bracket is low, however I also think (don't know for sure), better to bite the bullet and pay taxes now, so I don't need to pay taxes in future....If everything works out, as I plan, I may continue to be on higher tax brackets in future, based on my current asset base......

Thanks again for your assistance..

I started contributing to non-deductible 401k and converting the amount to Roth IRA, about 2-3 years ago....This is over and above the max 401k allowed...No inheritance involved here...
It is just my own contributions and planning for the tax, post retirement......


Based on my thinking, I may continue to be in a higher tax brakcet, even during retirement......and even if I am not, it may be better for planning purposes before RMD kick starts... I am hoping that some magic software can run some calculations and provide some recommendations....

techynt;678947I am assuming you are not contributing to your 401k, more than the minimum needed to get max employer match?

Some people who know, that due to inheritance, their tax bracket will be higher, do not even bother to contribute to employer 401k since some employer need you to contribute 10% to get 5% from employer and on top of that there maybe 5 year vesting period.

I am not sure converting to Roth, right now, makes sense if your current tax bracket is already high, if I am understanding it correctly, the converted money will be added to your income, right?

i2d2;678948
Based on my thinking, I may continue to be in a higher tax brakcet, even during retirement......and even if I am not, it may be better for planning purposes before RMD kick starts... I am hoping that some magic software can run some calculations and provide some recommendations....

You keep saying magic software, but how about clarifying what you want this magic SW to do ?

1) What EXACTLY do you plan to input ?
2) What EXACTLY do you want as output ?

Really, I don't think any magical software is needed. See my post above. It's using simplified assumptions (and there are some things I haven't taken into account regarding the taxes you pay on a Roth Conversion), but in general the only parameters that are important are your current tax bracket and your projected tax bracket when you convert/take RMD etc. If you think your future rate is going to be higher, then by all means convert now, in smaller chunks so you don't get pushed into a higher bracket because of the conversion.

Perhaps, it is just only the formula you have mentioned.... but I am not sure..

I am hoping the software would take the following as inputs:
Inputs: my exact tax situation in the current year, after taking into account everything......such as my current income (salary, capital gains, dividends, rentals etc.), taxes (after itemized deductions, rental expenses etc, losses etc.), my current 401k amount, my projected future RMDs (based on some assumptions on the historical gains---this is the only unknown and assumption and nothing else)

Outputs: Recommend X amount to convert, update the taxes I need to pay

Do this every year......and keep updating my financial plan accordingly.

Is there some such thing..???
Thanks

i2d2

greyfri;678951You keep saying magic software, but how about clarifying what you want this magic SW to do ?

1) What EXACTLY do you plan to input ?
2) What EXACTLY do you want as output ?

Really, I don't think any magical software is needed. See my post above. It's using simplified assumptions (and there are some things I haven't taken into account regarding the taxes you pay on a Roth Conversion), but in general the only parameters that are important are your current tax bracket and your projected tax bracket when you convert/take RMD etc. If you think your future rate is going to be higher, then by all means convert now, in smaller chunks so you don't get pushed into a higher bracket because of the conversion.