How to Model Roth Conversion Strategies in the Boldin Retirement Planner

The decision to save into a Roth account or to convert money from a traditional IRA or 401(k) into Roth savings is not straightforward. There are a large number of criteria to consider and ultimately, your decisions about Roth strategies will come down to what is right for you and your goals, the assumptions you make about your future, and your current and future income and investments.

There are rules of thumb for making decisions about Roth strategies, but here we want to show how you can use the Roth Conversion Explorer (a tool inside of the Boldin Retirement Planner) to make more informed and personalized decisions.

Get a Multi Year Roth Conversion Strategy with the Roth Conversion Explorer

The Boldin Retirement Planner is a system that puts the power of financial planning into your own hands. It has a very unique tool, the Roth Conversion Explorer, that is designed to help you identify the amount and timing of Roth conversions over future years.

The Explorer is hugely powerful, running a “greedy-type” algorithm to determine Roth conversion strategies that meet the goals and parameters that you define in the tool and in your overall financial plan.

Here are 7 tips to help you get the most out of this tool:

Tip 1: Make sure that the data in your plan is accurate

Make sure the scenario you are using (you can run the Explorer on any of your scenarios) is accurate and up to date. If the data in your plan is not accurate, you will not get good results. Pay particular attention to:

• Your retirement date and how your income amounts and sources might change over time
• Your assumptions for inflation, rates of return on investments, and your longevity
• Tax rates. Be sure to understand which future tax rates you are using. You can set this in My Plan > Assumptions > Taxes
• The withdrawals strategy you have active in your plan may impact how much you are withdrawing from savings in the future which will impact your income and therefore conversions

Tip 2: Understand how to set up the Explorer

First, know that the Roth Conversion Explorer is going to ignore any Roth conversion strategies you have currently modeled in your Boldin Plan.

Then, make choices for what you want to model.

What is your conversion goal? Do you want the tool to figure out how to:

• Maximize your estate at longevity
• Maximize your estate while staying within a certain tax bracket
• Minimize lifetime tax liability (get suggested conversions to insure that you pay less in taxes)
• Convert up to an IRMAA bracket. IRMAA stands for Income Related Medicare Adjustment Amount. It is an extra Medicare fee that is charged to high earners. If you exceed an IRMAA threshold by as little as a penny, you pay extra for Medicare and the charges can add up.

How do you want to fund the taxes you will owe for the conversion? You have the option to tell the tool if it is okay to pay for the tax liability of the suggested Roth conversions with converted funds or not.

• If you say yes, this may trigger additional taxes and is not always the best option. However the tool will be less constrained and may offer a greater estate at longevity.
• If you say no, you are selecting what is likely to be the more tax advantageous option and the tool with stop suggesting conversions if you do not have enough money in your taxable savings, checking, or investment accounts in a given year.
  • Also, by saying no, you’ll also be asked if you want to protect a minimum amount in taxable savings. You may want to do this if you want to conserve an emergency fund of after-tax monies.

Tip 3 – Play with your parameters on the results screen:

We strongly suggest that you play with the Explorer using the parameters to the left of your results. Use the different criteria being presented and see how they impact your suggested conversions.

You may get very different results as you click around. But, mostly importantly, you may learn a lot through this exploration.

NOTE: Be sure to assess optimistic, average, and pessimistic forecasts on conversions: You can’t predict the future, but it is important to understand various future possibilities and to assess how your conversion strategies might be impacted by rates or return and inflation. The Roth Conversion Explorer provides toggles for optimistic, pessimistic and average forecasts.

You will also probably want to adjust your scenario’s tax bracket, longevity age and other criteria listed above in Tip 1 and rerun the Explorer to see the impact of those criteria on your results.

Tip 4: Assess your results

The Explorer presents really rich results that are worth digging into. You can see:

• A summary of the conversions being suggested where you can see the number of conversions and the lifetime impact on your estate and on your taxes.

You will also get the following charts and data tables.

Toggle between your current plan and the plan with suggested conversions to see:

• Annual conversions – their values and the years they are projected to occur
• Projected Roth, pre-tax, and traditional savings account balances over time

Additionally, you can explore a comparison of:

• Your projected annual effective tax rate along with a summary of your lifetime effective tax rate with and without the suggested conversions
• The projected amount you will owe in taxes each year as well as a lifetime summary
• The IRMAA fees you will be subject to with and without the conversions
• Your Required Minimum Distributions (RMDs) with and without the conversions

Tip 5 – Beware of what the Roth Conversion Explorer does not do (yet)

This version of the tool does not help you assess everything that may be a factor for your Roth conversion strategies. The higher income that Roth conversions will trigger may trigger higher costs.

A few examples of costs that may rise with higher income include:

ACA: If you are getting insurance through the Affordable Care Act, then higher income may mean that you will lose valuable healthcare subsidies. The Planner does not currently model ACA subsidies so these are not considered by the Explorer.

College Costs: Beware if you are hoping to fund college costs. The higher income from the conversions may mean that you are eligible for less aid.

You may not want to do conversions in years where you are subject to these costs.

Tip 6 – Applying your results to your plan

Depending on your circumstances, the Roth Conversion Explorer may recommend anywhere from zero to 10 or more conversions.

The tool does not currently enable you to apply the suggested conversions directly to one of your scenarios. (It is something we are working on.) And, we realize that entering a large number of conversions one by one is onerous.

However, it may be important to model the Roth conversions you are contemplating and stress test your plan (e.g. by switching to pessimistic assumptions).

• You can use the Suggested Conversions tables within the explorer to help transpose suggested conversions into your plan.

7. Remember that things will change

It is important to remember that the suggested Roth conversion strategies are based on the details that are in your plan today and that your personal circumstances, economic conditions, and even tax laws (Boldin actively updates tax rules in the Planner) will likely change in the future.

As such, you will want to use this tool over time and be ready to evolve your plans over time.

Other Roth Scenarios to Run in the Boldin Retirement Planner

Future Roth conversions and figuring out what to convert and when is a hot topic and a great way to reduce what you’ll pay in taxes over your lifetime. However, there are additional Roth questions to answer. Here are a few additional things to try if you are interested in Roth strategies:

Should you save into a Roth account or traditional savings?

If you are still accumulating assets, you may be asking yourself whether you should be saving into a Roth account, traditional savings, or both.

While there is never going to be one right answer, there may be an answer that is more right for you.

In the Boldin Retirement Planner you can run “what if” scenarios to help you decide how to save. You can apply future contributions to Roth in one scenario and to traditional savings in another scenario and do a full scenario comparison to assess future wealth, returns, tax liability and more.

Model one off Roth Conversions

In the Planner, you can try out any individual Roth conversions in any future year and again, assess the financial ramifications across a variety of plan metrics.

How much should you convert this year (2023)?

The Boldin Retirement Planner is a forward looking projection tool. It won’t tell you about conversions for the current year.

If you want to know how much you should convert to a Roth in 2023, you may want to try out the 2023 Roth Conversion Calculator to help you see all the various tax implications of Roth conversions this year, including IRMAA.

—> Go to Boldin to use rich Roth functionality that is part of the comprehensive Planner

–> Find the 2023 Roth calculator here: https://www.boldin.com/roth-conversion-calculator/