Multi-year Roth conversion in ESPlanner Pro


I understand how to model a single year IRA to Roth-IRA conversion:

  1. Decrease the amount of the IRA on the Retirement Accounts panel
  2. Increase the amount of the Roth IRA on the Retirement Accounts panel
  3. Enter a taxable special receipt for the amount of the conversion

The Special Receipts panel allows me to enter multi-year receipts, but the Retirement Accounts panel only shows the current year. How should I model converting, for example, $100,000 per year for 5 years from a normal IRA to a Roth IRA. The purpose of staging it over multiple years would be to avoid Alternative Minimum taxes.


Why not just figure out the additional taxes that will be incurred for each year's conversion and just enter them as non tax related special expenditures instead of using taxable special receipts which can affect income, net worth, etc. ?'s picture

The process I described is documented in the ESPlanner case studies,

There has to be a taxable special receipt because the government charges income tax on the converted amount, just as it would were you to withdraw it from the IRA. The taxable special receipts can be entered for a multi-year conversion in the special receipts section, but their is only one place to enter the Roth IRA amount on the Retirement Accounts/Asset panel.

Am I misunderstanding your question?

For the original multi-year conversion, there are a couple of wrinkles.

One is how to account for interest/investment gains that would have been achieved if the original IRA had remained intact vs. adding Roth IRA contributions in years 1 to X once you take the assets out of the IRA. This isn't hard, but isn't included in the case study.

Also, it is likely that the conversion shifts consumption (and taxes) somewhat up or down so it may not be as simple as comparing taxes before/after given the non-linearity of ESPlanner. There may be a better way to handle the taxes as others have posted, but I'd try to keep it simple and as close to apples to apples as possible to only include the taxes directly relating to the conversion.

Experimenting you may find it better to convert over a longer/shorter period or higher/lower amounts.


Either you misunderstood me or I misunderstood you. Not sure which :-)

Anyway, I read the part in the case study you referred to that says how to do the conversion in ESPlanner. Based on that my interpretation is that in your step 2 in your original post, that is supposed to be a Roth IRA Contribution which is done in the Contributions tab of the Retirement Accounts panel, not the Assets tab (you did not mention which tab you were referring to). The Contributions tab does allow entries by year.

But when I modeled multi-year Roth conversions earlier this year, I didn't like the idea of using Special Receipts because if I recall correctly those end up in Regular Assets. In my case I have different returns set up for Regular Assets than I do for Retirement Assets (specified in the Implement Portfolios tab in the Monte Carlo panels). I wanted to make sure the returns wouldn't change when the $ are moved from Traditional to Roth accounts. Also, Roth contributions are limited to 6,500 (if over 50) for 2014 (they were unlimited in 2010, but that was an exception year). ESPlanner may not enforce the limit (yet), so you still might be able to do it.

To explain more of what I was getting at in my last post, I agree with your steps 1 and 2 (disregarding that the case study said to use a Roth contribution for step 2 as I interpreted it). But for step 3, to me, you just have to make sure that the taxes charged as a result of the movement of $ from Traditional to Roth are accounted for.

For step 3, since Taxes and Special Expenses are both reductions of income, I was suggesting to do a side calculation of what the taxes would be on each conversion amount in each year and just enter them as non tax related special expenses. To calculate the tax charged on the 100,000 conversion amount for a given year or years, you should be able to:
1. Run reports when there is no retirement withdrawals or conversions for the given year or years (which might be accomplished by setting the Key Ages in the retirement panel to an age after the year of the conversion(s), and ensuring there are no Special Retirement withdrawals for that year in the Special Withdrawals tab of the Retirement Accounts panel). Take note of the Taxes amount from the tax report for that year. Call it X.
2. Run the reports again after setting a Special Withdrawal of 100,000 (the conversion amount) from the Traditional IRA for the given year (in the Special Withdrawals tab). Again, take note of the Taxes amount from the tax report. Call it Y.
3. The tax charged for the 100,000 should be the difference Y-X from steps 2. This would be entered in Special Expenses as a non-tax related Special Expense. It shouldn't be too much different than using a Special Receipt, except that the returns for the 100,000 would be calculated from the returns set up for the Retirement Accounts instead of from the Regular Assets account.

If the returns are configured to be the same for both Regular Assets and Retirement Accounts, than the method suggested in the case study would be less time consuming. But in my case, I have different Monte Carlo portfolios set up for Regular Assets and Retirement Accounts. So I did it as I described.

FYI, I am a customer, not an ESPlanner employee. Maybe others can comment on whether I said makes sense (or they can poke holes in it :-).

Tom's picture

Thanks for pointing out the contributions panel in step 2, I was indeed using the assets panel. I also agree with your refinement for step 3. Being a customer myself, I hope one of the experts chimes in to confirm this approach.

dan royer's picture

Tom writes: But when I modeled multi-year Roth conversions earlier this year, I didn't like the idea of using Special Receipts because if I recall correctly those end up in Regular Assets.

But if you then create a non-tax related special expenditure for the same year that you create the special expense, this would keep them from going into Regular Assets. Doesn't that solve the issue Tom? (And then you don't have to do the side tax calculation).

Happy Thanksgiving!

Dan, the Special Expenditure amount is for the "taxes" charged from moving the money from the Traditional to Roth IRA via the conversion, not the actual amount of the conversion. So just for discussion, if the Conversion amount is 100,000 and the taxes ended up being 10,000 then the special expenditure would be 10,000. The 100,000 is the Roth contribution. The IRAs field (Traditional IRA) is also reduced by the 100,000. So the Special Receipt is not completely offset by the Special Expenditure (and that was not the intent anyway).

By the way, I ran a quick test (on 2.28.0) this AM to confirm what happens to the returns using the technique in the ESPlanner 2010 case study (not the technique I described in my last post). The test was to do 2 consecutive years of Traditional to Roth Conversions at 100,000 per year. I did this on a copy of my current regular profile since I have Traditional and Roth assets already in it. So here is what I did:
1. Reduced the IRAs field by 200,000 in Retirement Account Assets to indicate the money moving out of Traditional IRA.
2. Entered 100,000 of Roth Contributions for 2 consecutive years to indicate the money moving into the Roth IRA (ESPlanner still let me do this even though the Roth Contribution limit is only 6,500).
3. Entered 100,000 of Taxable Special Receipts for same 2 consecutive years to allow ESPlanner to apply the taxes on conversions.
The Retirement Account returns were much lower and the Regular asset returns were higher in the 2 years of conversion when comparing to the reports before testing the conversions. Also, interestingly, the Roth Contribution (which appears in Total Spending report) does offset the Special Receipts (which show up in Total Income report) but the returns for the 200,000 are in Regular Assets, not Retirement Assets. I would guess this is because everything is done at year end. So bottom line, in my test it was confirmed that the returns associated with the Conversion amounts were in Regular Assets, not Retirement Assets.


Gentlemen, I am a new customer and appreciate both the forum, and the question as I too would like to model a series of Traditional IRA to Roth IRA conversions. I would like to do this early in my retirement in the most tax efficient way while I am in the lower tax brackets, before collecting SS, and while living off just my pension and after tax assets. I look forward to all you experts figuring the best method out and providing a clear set of instructions. I will try to learn as we go here. Thanks and Regards, Roger

dan royer's picture

Hi Roger, yes, follow along and I suspect we'll clarify our agreement pretty quickly. It may be time to create a new, simpler case study that shows how this is done.

dan royer's picture

Tom, I would have added a step #4 to have a non-tax related special expense in the same year as the tax-related receipt in order to flush the amount you put in back out of Regular Assets. What remains after that transaction is only the tax consequence. This would save you from calculating the taxes on the side.

But I will review the thread above because I perhaps missed something you were seeing or trying to do. But my point: in the same year, a taxable receipt and a non-tax related expense cancel each other out (per regular assets) except for the tax consequence. Then adjust accordingly the dollar amounts as new balances as moved from IRA to ROTH.

And Happy Thanksgiving to you as well. I'm looking forward to the end of the year because I enjoy entering my new balances in ESPlanner and assessing me end of year returns.

Dan, I think the confusion might be that the way I propose to do it does to not use any special receipts. So there is no need to cancel it out. So, let's say you want to move 250,000 from Traditional to Roth over 5 years (50,000 per year). To me, the steps to model it would be:
1. Decrease Traditional IRA balance by 250,000.
2. Increase Roth IRA balance by 250,000 ( Change the assets, don't use contributions. The returns are unaffected because Traditional and Roth are both Retirement accounts, which is a key point).
3. Do 5 side calculations to figure out the taxes on the 50,000 conversion for each of the 5 years (could do it the way I described in earlier post, or use tax software).
4. Enter 5 non tax related special expenditures, one for each of the 5 conversions over the 5 years for the amounts calculated in step 3. These represent the taxes. They are just in the form of special expenditures instead of in the form of actual taxes.

What I like about this approach is there is never anything put in Regular Assets. The returns are the same just as if you didn't do a conversion. There might be something I am missing, but I until I hear what, I don't see what's wrong with this approach. Thanks for sticking with this. I know this is something a lot of us want to nail down until an enhancement is made in ESPlanner someday to make it easy.

The idea here is to represent the taxes as special expenditures, that's all (once they have been figured out in the side calculation. There is no special receipt involved.

dan royer's picture

Yes, I see what you are saying. And I think that works fine. I'm just saying that you can replace steps #3 and #4 with this alternative: you can have ESPlanner calculate the taxes for you by entering in the same year both a taxable special receipt and a non-tax related expense. This seems simpler to me than calculating on the side. This would not end up with any extra regular assets--but it would give you an extra tax burden for each year you do this.

You are right--in your approach there is not anything put in Regular Assets. But that is true, in effect, for my alternative as well. In my version you do see the income from this exchange in the total income report--this is what causes the taxes to go up appropriately for that year. But you'd also see a special expenditure of the same amount in the Total Spending report for that year. So in the Regular Assets report, you'd see no net gain in the ending balance for that year (aside from whatever consequence this has with regard to taxes of course).

So, sure, I'm not saying there's anything wrong with your approach. That would work fine. I'm just suggesting that letting ESPlanner calculate the taxes for you might be easier. I'm glad for this exchange since, as you say, it's a relevant, important topic.

I've always been a bit suspicious of the simultaneous taxable special receipt and a non-tax related expense before, but think I see the value now. The consumption (and taxes) of the profile will be different after the conversion and this is in addition to the conversion specific taxes. Using ESPlanner to calculate all the taxes takes both into consideration.

For a multi-year approach, it might make sense to break up Tom's step #2 into individual years as contributions. You'd need to add in amounts for real rate of return as the assets would increase each year.

Then the simultaneous taxable special receipt and a non-tax related expense would be accurate each year instead of a larger lump sum approach.

Happy Thanksgiving!

dan royer's picture

And maybe my approach doesn't work as neatly with the multi-year conversion?

Tom, Brian, Greg, Dan, etc.,
I've always modeled Roth conversions by: 1, a special withdrawal from retirement accounts, and 2, a contribution to the Roth retirement account. If you make sure that your order of withdrawal has Roth accounts last, then the special withdrawal will calculate the correct taxes. Just repeat for multi year conversions,
What am I missing?

dan royer's picture

OK, maybe it is that simple. That works as I see it. Maybe we were too focused on getting the balances right in the recording of current year assets? Those of course are in the past relative to the conversion so they don't matter. And like any other ROTH contribution, we can trust that behind the scenes it is increasing the pool of assets in ROTH to withdraw at some later date. Our reports do not show these retirement account balances in explicit separate columns. They are all just "retirement accounts" even though they are in separate pools behind the scenes.

OK, I see a limitation of my approach. I think it works fine as stated if you are over age 59 1/2, but if under, ESPlanner will impose the early withdrawal penalty. So, you'd need a special receipt to adjust for the 10% penalty.

dan royer's picture

I did a few tests and it does not look like ESPlanner imposes any penalty on early withdrawals.

Thanks all. The one thing I hope doesn't get lost is the importance of retaining retirement account returns during the years Roth conversions are done. This is only relevant if Retirement Assets are configured to get higher returns (e.g. more stocks) than Regular Assets in the Monte Carlo Implement Portfolios screen, which is true in my case. In my testing, when I use Dan's Special Receipt/Special Expenditure approach, my Retirement Account returns take a big hit in the years of the Conversions. If you do another case study to illustrate Roth Conversions, please take this into consideration. I would think it is not too uncommon to configure portfolios in Retirement Accounts to be higher than Regular Assets since the Retirement Money is typically less liquid. Thanks.

dan royer's picture

I think where I got thrown off in the beginning is that the case study we referred to was written before we changed the UI in the program to allow people to take withdrawals before age 59. This required that you reset the balance and calculate the tax consequence by using special expenditure/receipts in the same year. Since we can now withdraw from accounts prior to age 59 (and the program doesn't appear to impose the 10% tax penalty) then I think Mike's approach works pretty slick. It's worth testing on a simple case, which I can do and show you just to be clear. Then I'll need to update that case study.

Thanks Mike and Dan. I may be wrong, but I think the original case study was before special withdrawals were allowed (along with before age 59). That led to the old standby special expenditures/receipts hack to approximate the conversion.

This method is much slicker. It's interesting how new functionality can be used in multiple ways/for multiple purposes.


dan royer's picture

Yes, I just updated the case study using this new method. It is easier and more straightforward to model. I also call attention to the fact that when you plan to take SS has a big impact on the advantage of the conversion. I may need to do some more copy editing, but here's the study:

How should I capture the conversion of tax deferred savings to a Roth?
I have read this chain of possible solutions, and I have carefully examined the “Convert Your IRA to a Roth!” case study.

This is my scenario:
I want to convert 50k per year for four years (age 66-69) from tax deferred savings to my Roth.

The case study recommends:
1. Indicate a $300,000 contribution to the ROTH in 2015
2. Indicate a $300,000 withdrawal from individual account in 2015.
3. Run this new profile; compare the living standard path generated with that from the basic profile

I am unable to get past the first recommendation… when I try to “contribute” money on the Retirement accounts dialog at age 66 or later, I receive the following message: “You can’t add contributions past your last age of contribution”

I must be missing something in my translation of the instructions or this particular point was not covered. Either way I would really like to receive some guidance on how to complete this scenario in ESPlanner Pro v.2.33.1
Thanks ahead of time for clear direction on this topic.

Comment Image: 

Go to the "Key ages" tab (seen on your graphic) and set your age of last contribution to include this year (or future years if that is your plan). This will let you include the Roth contribution.


So simple when you know the answer.
Thank you!

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