Modeling Roth conversions

[jimr]

Oh, that makes sense. So then additional input entries for tax rates need to be net effective rates then?

Yes. That's correct. All the tax rates used by the planner are effective or average tax rates. The planner doesn't understand the concept of marginal tax rates.

[jwendellp]

Sorry for the confusion and thank you very much for the help!

[jimr]

No problem. I wish I could implement the roth conversion with a different tax rate for each roth conversion entry, but the simulation can't handle that without pretty massive changes.

All of the cashflows of a given type are aggregated together by year as they get passed into the inner simulation routine. That means that inner simulation code doesn't know the amounts of the individual "Roth Conversion" cashflow entries. For each year, It just knows the total tax free amount to convert and the total taxable amount to convert and the income tax rate to use for that year.

[target2019]

Oh, that makes sense. So then additional input entries for tax rates need to be net effective rates then?

Yes. That's correct. All the tax rates used by the planner are effective or average tax rates. The planner doesn't understand the concept of marginal tax rates.

Thanks for adding a new feature for Roth conversions. Using an effective tax rate is sufficient for the planning FRP does.

Last year was the first time I converted IRA money to Roth. I used the WhatIf Worksheet in TurboTax 2019 to help me find an amount that kept us in the 12% bracket. You do have to make close estimates for all of your income and withholding. Since the idea is so dependent on your personal circumstances, you should re-evaluate during the year.

With the new feature I tried -0-, 20000, and 40000 conversion amounts. Then copied FRP details to a workbook and plotted curves for each case. It's really worth a look to do this for yourself.

[Fortitude]

I, too, would like to thank you for adding the Roth conversion feature. It seems to be working just fine. I've been using FRP for years and I retired a couple of years ago at 58 and started doing Roth conversions. I use TurboTax's What-If worksheet to max out at the 12% marginal tax rate just like target2019 mentioned. That, in conjunction with FRP, have proven to be remarkable tools.

One question though. In the detailed view, I can clearly see the effect of the Roth conversion decreasing the tax deferred portfolio balance and increasing the tax free portfolio balance, but I can't seem to see the income tax associated with the conversion. Taxes on Withdrawal is zero which is where I would have expected to see it. When I entered the Roth conversion, I did enter 100% of the conversion is taxable and I do have an input for income taxes for the years of the conversion.

I feel like I'm missing the obvious, but I can't figure out what it is. Any help would be appreciated.

[jimr]

The Roth amount and taxes should be visible in the detailed view with the "show more details" radio selected. Also, in that view, if you right-click on any column header and select show all columns you can see a bunch more columns that show all the taxes, etc.

You can export the table to excel by right-clicking on any cell and selecting copy-to-clipboard.

The taxes-on-withdrawal column only covers the taxes due on the amount needed to fund expenses, but not the Roth conversion taxes.

[Fortitude]

Thanks very much for your help! After all these years using the app, I had no idea right clicking a column heading expanded the column listing. I also didn't realize the data can be exported to Excel. This opens up a whole lot of possibilities when analyzing the data!

Since receiving your response, I ran into problems with the Windows machine that I was running FRP. The file is still in tact and I'm now trying to open it on my Mac after installing the FRP Mac version, but I'm encountering difficulties opening the file. Will the Mac version of FRP open a file that was created in Windows or am I going to have to create a whole new file in the Mac version?

[jimr]

The .frp files should be readable on either machine. Are you getting a specific error? Also, keep in mind that on a mac it's important to go into the manual install folder to run the planner and NOT use the .jnlp file in the root folder. The .jnlp launcher goes to the FRP website and fetches the latest released version of the planner and won't use the new beta version.

[Fortitude]

The .jnlp launcher goes to the FRP website and fetches the latest released version of the planner and won't use the new beta version.

That's where I made my mistake by using the .jnlp launcher. I don't recall the exact wording in the error message, but I'm sure it was in reference to the Roth Conversion entry being in the .frp file.

The problem I'm having now is that the app (frp.jar) isn't recognizing the .frp file as a file for me to be able to open with the app. I'm still working on it, but I'll take any ideas that you might have.

[jimr]

I'm not a mac expert, but I think you can right-click (or equivalent) on frp.jar and select "Java ..." as the program to use to run the file.

Also, you may need to make the .jar file executable before you can run it. The ReadMe.txt file in the root directory has some more directions.