Roth Conv taxes

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Bigtoeknee
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Joined: Sun Oct 02, 2022 6:32 pm

Roth Conv taxes

Post by Bigtoeknee »

Hi, When using the planner to add in Roth Conversions does it account for the taxes coming from an outside account or does it factor it in and take additional funds from the tax deferred account to pay for them.

Thanks Tony
jimr
Posts: 857
Joined: Thu Feb 28, 2008 6:48 pm

Re: Roth Conv taxes

Post by jimr »

The simulation logic adds the taxes due on any roth conversion done in a given year to the amount of expenses that need to be funded for that year. Then the normal expense funding/withdrawal order logic is used fund the expenses.
Bigtoeknee
Posts: 3
Joined: Sun Oct 02, 2022 6:32 pm

Re: Roth Conv taxes

Post by Bigtoeknee »

Thanks Jim
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jwendellp
Posts: 21
Joined: Thu Feb 25, 2021 12:01 pm

Re: Roth Conv taxes

Post by jwendellp »

Jim, I'm back to being confused about the proper inputs for Roth Conversions, and am hoping you can clarify the best way to handle the inputs.

My confusion is based on:

1) Your post here in this thread stating that FRP accounts for the tax on Roth conversions,

2) But, I seem to recall that somewhere else in the forum you said use a "Roth Conversion" cash flow type for each conversion (which will automatically move from the Tax Deferred Portfolio to the Tax Free portfolio) and a corresponding "Other Expenses" entry to account for the taxes for each specific conversion.

3) Further, in the online documentation (https://www.flexibleretirementplanner.c ... al-inputs/) the screen shot at the top of the page shows a withdrawal from Tax Deferred Portfolio and a corresponding 'net' proceeds deposit to Tax Free Portfolio -- instead of using the Roth Conversion cash flow type. This seems to be different than the text on that page stating, "The ‘ROTH Conversion’ cashflow type causes the amount specified to be withdrawn from the tax deferred portfolio and added to the tax free portfolio. Taxes on the conversion are calculated using the income tax rate and are added to the expenses needed for each year a ROTH conversion is done. If in any year, the tax deferred balance is less than the amount of the ROTH conversion, tax deferred funds are withdrawn until the tax deferred balance reaches zero".

I'm hoping you can clarify the best way to handle the inputs and perhaps update the doc and screen shot(s) to match :-)
jimr
Posts: 857
Joined: Thu Feb 28, 2008 6:48 pm

Re: Roth Conv taxes

Post by jimr »

Yeah, that screenshot shows a way to manually simulate a Roth conversion by using three separate transactions. I'm guessing the comment about using an other expenses cash flow for taxes was also referring to the manual method as well.

It still works fine to do it that way, but now that there's a specific Roth Conversion cash flow type, it's simpler to just use that instead of doing it manually.
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jwendellp
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Joined: Thu Feb 25, 2021 12:01 pm

Re: Roth Conv taxes

Post by jwendellp »

Ok, thanks. So, I all is needed is to use a Roth Conversion cash flow type and it will auto-magically take care of taxes based on the other income tax rate entries?
jimr
Posts: 857
Joined: Thu Feb 28, 2008 6:48 pm

Re: Roth Conv taxes

Post by jimr »

Yes. That'll do it.
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jwendellp
Posts: 21
Joined: Thu Feb 25, 2021 12:01 pm

Re: Roth Conv taxes

Post by jwendellp »

Fantastic! Thanks, Jim!
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