Analyzing roth conversions - impact of different analysis on yes/no decision

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(@nc-cpl)

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Topic starter August 20, 2022 11:06 am

Might be a simple answer to this. I am considering doing some roth conversions. When I use the "Plan Roth Conversions" option and optimize over a 10 year period, I get vastly different results depending on whether I have previously run either an A) "Use Specified Expenses Only" analysis...OR....B) the "Specified Expenses with smoothing" analysis for a scenario. The former results in a MUCH larger amount that is suggested to be converted over the 10 years vs the latter. In fact, it suggests conversions that take my TIRA balance to zero over the 10 year period. Approach "B" suggests converting an almost negligible amount.

So which of the two should I be doing to get to the optimal recommendation on conversions?

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Roth conversion

Stuart Matthews

(@smatthews51)

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August 20, 2022 12:40 pm

Those are two vastly different scenarios because the latter increases your spending to the point that you die broke. The excess spending in scenario B will likely put you in a higher tax bracket as you make withdrawals from your tax-deferred account to support the higher level of spending, and your tax bracket would increase even further if Roth conversions were done. Additionally, the higher level of spending would (at some point) result in withdrawals from the Roth account, thereby reducing the tax-free growth opportunities. In the end, Roth conversions in scenario B probably just don't make any sense.

Stuart

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(@nc-cpl)

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Topic starter August 20, 2022 2:49 pm

@smatthews51 I guess I've been looking at the roth conversion results as separate from the spending strategy analysis run beforehand (I tend to run a spend strategy prior to doing a roth analysis, and didn't consider the impact of one on the other). If the spending strategy influences the conversion results (and decision), than am I correct in concluding that one must see the two as related, and when making a decision to convert or not, you need to factor in and "commit" to the spending strategy in place impacting those results?

Or in my case: I can stick to expenses only, in which case my roth analysis says to convert all of my TIRA (and a portion of my spouse's), ending with a huge Roth balance (and yes our max tax bracket jumps to 24%-28% in those conversion years), OR, subscribe to a smoothed spending strategy, tax bracket remains at 12%, and it has us converting almost zero with the roth balance growing albeit much less.

So, the key question being - is your strategy to spend only whats needed (specified), or, the most you safely can (smoothed), and only after that can you see what the roth analysis reveals (based on that spending strategy)?

AND....if the smoothed spending strategy indicates you are able to spend more than you realistically would, you can also manually reduce that amount, run a fresh roth analysis, and it will reveal different results yet again based on the lower NSDS.

AND...If I adjust my NSDS spending amount to assess its impact on roth conversion decisions, I assume it leaves the dollars I've specified (in Expenses) for charities that are intended to serve as QCD's, unconverted?

Am I on track here?

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