I bought a subscription to New Retirement because of its much touted Roth conversion tool. I thought I'd share my tribulations as I work with it, both to get advice and feedback, but also to get others a chance to get a feel for what the tool does and decide if it might be useful to them.
Spoiler/Preview/TLDR: NR calls their tool "Roth conversion Explorer" and it is aptly named. It doesn't offer any advice or optimizations, you plug in inputs, it gives you outputs that may or may not be meaningful, and it's up to you to make sense out of it.
A good example is that it will tell you what the end of plan balance will be with or without conversions. But it doesn't really point out that one balance will be taxable to your heirs, and the other will not. I understand it can't know what your heirs tax rates will be, but it doesn't give you an option to enter some guesses to at least compare apples and pears.
I'll post some example graphs with/without conversions results in future posts.
Here is the first idiosyncrasy I ran into:
NR asks you to enter min/max returns (it calls them pessimistic/optimistic) for each of your accounts. That already creates an interesting problem: today I'm using Asset Location for tax efficiency: my brokerage and Roth IRA are all equities, and my tIRA mostly fixed income. It means that my brokerage rate of growth today is much higher than my tIRA.
As the brokerage account gets consumed during retirement, the tool then assume that my return on investment is worse and worse and converges to the tIRA return only (we're not doing Roth conversions yet). I intend to keep a more or less constant AA though retirement, so the assumption the tool makes that my tIRA return will remain low over 40 years in incorrect and it will generally underestimate the growth of my portfolio.
To make matters worse, I do have a small Roth IRA today with only equities, so I told NR I have higher returns in Roth IRA. That means that when I start modeling Roth conversions, the tool will use high growth rates for a larger and larger portion of my portfolio, artificially increasing the benefit of conversions to my final balance.
I'm not sure it's quite the right thing to do, but for now I changed all accounts to have the same min/max/ FWIW I used 6.77 optimistic REAL return and 2.79% pessimistic REAL return. When I first started using NR, it did all of its calculations in nominal dollars. since those mean nothing to me (what will $1000 buy me in 30 years?), I entered all inflation rates as 0% and all growth rates in REAL growths, to effectively force the tool to use real dollars (aka Toady's dollars). since then then added a "Today's dollar" toggle but I'm till doing things the way I was.
Making the change to a homogeneous return on all accounts actually takes my base plan from 97% success to 93% success in the Pessimistic case. I'm not entirely sure why, most graphs look "about the same", and that small of a percentage change is likely irrelevant.
The Roth Conversion explorer has a lot of options:
For now the option that makes the most sense, maybe because I understand it the most, is filling up to a certain bracket.
Spoiler/Preview/TLDR: NR calls their tool "Roth conversion Explorer" and it is aptly named. It doesn't offer any advice or optimizations, you plug in inputs, it gives you outputs that may or may not be meaningful, and it's up to you to make sense out of it.
A good example is that it will tell you what the end of plan balance will be with or without conversions. But it doesn't really point out that one balance will be taxable to your heirs, and the other will not. I understand it can't know what your heirs tax rates will be, but it doesn't give you an option to enter some guesses to at least compare apples and pears.
I'll post some example graphs with/without conversions results in future posts.
Here is the first idiosyncrasy I ran into:
NR asks you to enter min/max returns (it calls them pessimistic/optimistic) for each of your accounts. That already creates an interesting problem: today I'm using Asset Location for tax efficiency: my brokerage and Roth IRA are all equities, and my tIRA mostly fixed income. It means that my brokerage rate of growth today is much higher than my tIRA.
As the brokerage account gets consumed during retirement, the tool then assume that my return on investment is worse and worse and converges to the tIRA return only (we're not doing Roth conversions yet). I intend to keep a more or less constant AA though retirement, so the assumption the tool makes that my tIRA return will remain low over 40 years in incorrect and it will generally underestimate the growth of my portfolio.
To make matters worse, I do have a small Roth IRA today with only equities, so I told NR I have higher returns in Roth IRA. That means that when I start modeling Roth conversions, the tool will use high growth rates for a larger and larger portion of my portfolio, artificially increasing the benefit of conversions to my final balance.
I'm not sure it's quite the right thing to do, but for now I changed all accounts to have the same min/max/ FWIW I used 6.77 optimistic REAL return and 2.79% pessimistic REAL return. When I first started using NR, it did all of its calculations in nominal dollars. since those mean nothing to me (what will $1000 buy me in 30 years?), I entered all inflation rates as 0% and all growth rates in REAL growths, to effectively force the tool to use real dollars (aka Toady's dollars). since then then added a "Today's dollar" toggle but I'm till doing things the way I was.
Making the change to a homogeneous return on all accounts actually takes my base plan from 97% success to 93% success in the Pessimistic case. I'm not entirely sure why, most graphs look "about the same", and that small of a percentage change is likely irrelevant.
The Roth Conversion explorer has a lot of options:
- Highest estate value. I'm not going to worry about this one, my intent is to die with zero. but at age 100. Since I will likely not make it to age 100, my heirs will get what they get when I kick the bucket. But I do care about making sure whatever they're lucky to get doesn't saddle them with unexpected taxes.
- Tax Bracket Limit. You can fill up to each tax bracket 10%, 12%, 22% etc... I have the option to assume tax brackets will revert in 2026, so filling up to 12% really means 15% after 2026.
- Lowest Lifetime tax liability. I love sticking it to the man, but this feels like the tax tail wagging the dog, so I will likely ignore.
- IRMAA Backet limit. Since conversions can push you into paying IRMAA, this lets you chose if you want to stay at $0, or are OK to pay up to each next tier. Maybe I'm not worried enough about IRMA but this again feels like the tax tail wagging the dog. The nice thing is that other conversions method will still show you their impact on IRMAA, so you can still keep an eye on it.
For now the option that makes the most sense, maybe because I understand it the most, is filling up to a certain bracket.
Statistics: Posted by Raspberry-503 — Fri Aug 09, 2024 6:49 pm — Replies 5 — Views 572