Modeling Large Roth Conversions

I would like to use ESPlanner to see whether making large Roth conversions that would put us in a higher tax bracket would result in an overall higher Standard of Living. My wife and I are both 63, and have been retired for 4 years. We have been making modest Roth conversions that allow us to remain in the 12% tax bracket.

I am wondering whether to boost our Roth conversions from now through age 70 to put us just below the 24% tax bracket ($168,400 in taxable income for 2019). That would be at a minimum $17,000 per person per year in conversions.

What I really want to see is the trade-off between 1) portfolio risk due to increased drawdowns to pay taxes, and 2) increased Standard of Living due to paying taxes at lower rates before RMDs and SS boost income to at least the 22% and perhaps the 24% federal tax brackets (or higher depending on whether/when the current tax law expires).

My questions:

1) In order to accurately model the conversions, I must reduce Discretionary Spending (and thus taxable income) in ESP to a level that approximates actual spending. Right now, in economics mode with Monte Carlo selected and modest Roth conversions, suggested Discretionary Spending is about $32K more per year than our actual spending. How do I reduce DS to approximate actual spending?

2) Would I set Special Withdrawals at the smooth withdrawal amount plus the proposed Roth conversion amount for each spouse? Is there any way to direct ESP to fund the conversion taxes at least partially through liquidation of regular assets, so as to pay taxes at capital gains rates?

3) Any other settings/inputs that I should tweak to achieve the desired results?

Thanks for your help.


Don't mean to rush anyone, but I am hoping to get this information in time to use it for year-end tax planning.

dan royer's picture

Sorry for the delay. I didn't see this question or overlooked the notice about it that received.

One way to manipulate DS in ESPlanner is to use the living standard adjustment, the second tab in Assumptions. You can't adjust down the first year, but you could adjust down a series of years starting in 2020. This will push the wealth to future years. You could also create a bequest or future special expense to lower all years of DS. Perhaps that's the best way.

Yes, in ESPlanner (unlike MaxiFi) you have to manually calculate up these Roth conversions so you would want to add the extra in your special withdraws on top of the smooth withdraws for each spouse. In MaxiFi, you just indicate the amount(s) to convert and it adds it to the existing smooth withdraw. The only way to fund a Roth through regular assets is to make an ordinary contribution or to contribute more to the Roth than you withdraw from the 401K or IRA. Regular assets is the only other source for this funding. But of course all that you withdraw from the IRA or 401K will get fully taxed as a withdraw.

ESPlanner is not showing the tax brackets themselves, but it is showing the taxes each year, the AGI, and you can perhaps infer what tax bracket you are in. I don't have an analysis in front of me, but I have noticed that the effectiveness of this Roth conversion is conditioned by whether you assume the TCJA tax law becomes permanent or reverts back to the old law in 2025. So you might want to run it both ways. The bottom line is determined by the impact this all has on your DS pattern.

I hope this helps.


PS why are you not using MaxiFi? The comparison of models feature is better there than in ESPlanner. In ESPlanner, you have to look at reports side by side. In MaxiFi, you are able to see the lifetime present value difference and pull up comparison reports.

Thanks, Dan, no problem.

My question about regular assets was not about funding a Roth conversion from regular assets (which of course is not a Roth conversion at all), but ensuring that taxes generated from a trad IRA to Roth IRA conversion are paid from liquidating regular assets in a separate transaction, rather than "off the top" of the trad IRA liquidation. Doing it this way is difficult to calculate manually, because of the accounting for basis of the regular assets, plus the fact that you have to calculate an amount that will not only pay the taxes on the Roth conversion amount, but on the regular asset liquidation to pay the Roth conversion taxes as well.

Re: MaxiFi, I will probably give that a shot next year, but not confident that there is enough time left this year to input the data and master the learning curve to get the answer I want with sufficient confidence.

dan royer's picture

Yes, the taxes are imposed by the program on the special withdraws. The withdraw is made and the tax is imposed. The taxes are paid that year from available income and or withdraws from regular assets. The accounting all happens at once, but I would not call it from off the top of the trad IRA. You shouldn't need to calculate any taxes--the program will do that for you. I hope that makes sense. It's an easier UI in maxifi.


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