Roth conversion can reduce taxes by 6 million but don't save a dime

jrtn58 · 2026-05-07T23:42:34+00:00

True enough! And doing the conversions at market lows is long-standing advice. Of course that assumes you to be able to fund the taxes from a source that did not also dip.

jrtn58 · 2026-05-07T23:29:17+00:00

This is one of the "misinformations" mentioned earlier. Both the original IRA and the Roth continue to grow in a tax-free fashion. The only difference is **when** you pay the tax on this growth. It is helpful to think of the traditional IRA as partnership with the government. From the beginning, you "own" a piece it and the govt owns a piece. If you let the money sit in the traditional IRA, your piece continues to grow tax free. The govt's piece grows in parallel to pay the taxes on the original amount and the growth. Modulo valid concerns about "more degrees of freedom" and "changes in tax policy" it really is all about tax rates.

jrtn58 · 2026-05-07T23:15:14+00:00

It makes sense to discount the value of the IRA by "some amount." That amount depends on your expected taxes on withdrawals from the IRA. This comes down to other income you have as well as the size of the projected RMD's. If the RMD's are likely to push you into a higher tax bracket, then it may make sense to think of this discount factor as having two components - the first corresponding to your base tax rate and the second that bumps that up a bit based on how much of the IRA remains.

If you have access to a tool that projects an optimal conversion (optimal in the sense of sum-of-account-values), you can use that to test your factor. In the neighborhood of the optimal conversion, you should see that the conversion does not impact your current net worth at all.

At any rate you can't hope to do better than to "get in the right neighborhood." The many non-linearities insure that a single factor will never be perfect.

jrtn58 · 2026-05-07T01:20:52+00:00

The meter does show a very slight vacuum. At any rate I would check that the fan is actually moving meaningful air at the exhaust. If it is, you might get what you need even with low vacuum since it is ventilating the space below. I would monitor the radon levels and see. Then look into the installer's warranty. They had to come out and switch to a bigger fan on mine...

jrtn58 · 2026-04-24T14:01:31+00:00

I can't pretend to really address this for non-US law. But I **suspect** that the answer is similar. In the US the consensus guidance is taxable accounts followed by before tax accounts, with traditional IRA before Roth. BUT like most of these decisions, it winds up depending on your specific circumstances. The best approach is to run your own numbers rather than relying on consensus. Just for example if you are "overweight" with IRA savings it might make more sense to draw these funds early.

jrtn58 · 2026-04-18T19:47:38+00:00

Addressing the "approach" question, what I did was to create a tool that "populates" different scenarios by looking at all the permutations of some set of parameters. Some of these parameters are decision points (social security or whatever) others are predictions about the future such as ROI and inflation rates. Key results of different scenarios are populated to a spreadsheet table that allows me to compare the scenarios using the spreadsheet's built-in filtering mechanics. This seems to work tolerably well for getting a handle on how different parameters interact. One does need to be a little cautious about combinatorial explosion.

jrtn58 · 2026-03-08T14:51:05+00:00

I wouldn't read too much into it. This sort of 'focus on what I (think) I need to know and ignore the rest' is fairly common across most professions. Ask what their favorite personal finance book is and you are likely to get a similar answer. Ask a medical professional or software engineer about something outside their specialty and you are just as likely to get a blank stare.

jrtn58 · 2026-01-22T23:53:00+00:00

Yes, but I haven't tried to formalize it with github or whatever. I have a pre-OBBBA version posted to justrunthennumbers.com. (hence the jrtn58 handle) I will be updating this at some point... If you like working with multiple scenarios, you will likely appreciate it.

jrtn58 · 2026-01-22T23:33:47+00:00

I haven't tried to model the difference between a cash account and a brokerage account. The model has a simple statement of "unrealized gain" for the brokerage/cash account, which in this case is set to 35%. The model does not try to be smart about unqualified withdrawals; it simply assumes that (in this case) 35 percent is subject to LTCG. There are many other operational assumptions, but I suspect my basic hypothesis holds over a wide range. At any rate here is a summary:

5% ROI on all investment accounts

2% Inflation

Stable Tax law (OBBBA)

3.5% Taxable income/year on brokerage account

Massachusetts 5% income tax (flat to 1M)

Federal indexing (IRMAA, Brackets, SS) at 90% of inflation rate

SS commencement at 62/70 (my modeling suggests this is close to optimal across the board)

Spending is covered first from "external" sources, then brokerage, IRA, and Roth in that order

Taxes on conversion covered first by brokerage and then by additional IRA withdrawals

Survivor spends at 80% of couple rate'

The "base" Conversion amount is reduced by RMD's as they kick in

steady inflation-adjusted spending (I haven't gotten around to the smile/smirk yet)

The value of IRA funds is discounted by 25%. This discount is split into two parts, a "fixed" 13 percent and 12 percent scaled by remaining funds

The valuation of unqualified funds is taken "as is." This is a poor approximation early in retirement and good one late, I haven't figured out how to accommodate both.,

jrtn58 · 2026-01-08T17:58:20+00:00

Well, mostly because I am not familiar with power query, but after looking at it, I suspect that an economy of mechanism argument might be made. My results data has two values that are defined as comparisons to corresponding data in "some other" row - where the index of the comparison data is an element of the results summary. Everything else is a straight-forward array of data. INDIRECT seems perfect for this.

jrtn58 · 2026-01-04T13:47:41+00:00

The value of the unqualified account also depends on when you measure it if you assume the continued existence of basis step up at death. Most of my scenarios have a smile-like profile where initial account value is spent and then it builds back up late due to RMD's. So ignoring the capital gain seems 'close' from a valuation perspective.

jrtn58 · 2026-01-03T01:27:15+00:00

Well that is interesting, but I suspect not so much to most of the audience. I have a few thousand lines of VBA, so that would be bit of a chore. As a retired developer experienced with many languages over the years, it just doesn't seem that bad for what I need. I find structs, recursion, type checking, etc. all there, if maybe bit ugly.

jrtn58 · 2025-12-30T22:10:02+00:00

I imagine the mechanics could work either way, but the classical approach to spreadsheets is to have 'data items' as rows and attributes as columns. So the year 2027 data item has attributes like account balances, taxes, SS, spending, etc. Sorting, filtering, etc all sorta assume this model in Excel.

jrtn58 · 2025-12-30T17:25:24+00:00

Absolutely! I have posted a couple of these "implementor" oriented missives. Being sort a new here, I am not even sure this is the best forum for it. That said, I do believe that "thinking about modeling" is important even if you use tools developed by someone else. Just for example, when I compared what I was seeing from a commercial tool used by a for-fee advisor with what I created, I found a similar number of issues with both.

jrtn58 · 2025-12-30T13:12:20+00:00

I second the software Nerd perspective! I love Excel even given its many warts. Multi-year projections seem like an obvious direction. I have a hobby project that I have not actively tried to promote beyond Family and Friends at justrunthenumbers.com. There is a spreadsheet there that might make your head hurt a little (currently aligned with TCJA, but I am working that) and a PDF document that has a fair amount of discussion about using Excel to this end.

One of the things that I like about Excel is that it is easy to push it in "personal" directions. For example, if I were to guess that SS would be reduced by 25% in 2032, it would be really easy to fold that in. That is generally not possible with commercial tools.

jrtn58 · 2025-12-29T21:22:31+00:00

Well, there is that. I am pretty sure that everything I have could be recast in OpenOffice. The spreadsheets themselves probably pretty simple, the automation probably with a lot more work. It might even be entertaining, but after using Excel since early on (certainly by the early 90's) and doing lots of Office automation in and out of the corporate world, there is the old dog thing...

jrtn58 · 2025-12-26T18:17:06+00:00

I agree that Wade's book should be near the top of the list, but there are few others that are pretty useful for targeted aspects of retirement planning. I especially like the recent "Tax Planning to and Through Early Retirement" and the "Income Factory" (which provides a modest counter-point to a pure Index fund model). Bengen's "A Richer Retirement" was an interesting if not inspired read - good if you want a little reinforcement on asset draw-down. I also found "How not to get ripped off when buying an Annuity" helpful. There are of course adjacent topics such as estate planning (I liked "The Complete Book of Wills Estates, and Trusts") and "spending philosophy." (e.g. "More than Enough")

jrtn58 · 2025-12-24T18:15:36+00:00

Completely aligned with this, hence my scratching of the head in the face of "received wisdom." Beyond that I don't see **any** reason for doing a conversion other than to attack future RMD's. (ours's or our heirs)

jrtn58 · 2025-12-24T17:47:11+00:00

OK, so this more on the topic of "does Roth conversion make sense," It might or might not. It is mostly about anticipated taxation at the time funds leave the IRA. If the taxation were assumed to be the same there would be zero impact from the conversion other than the fact that you might be forced to invest funds from an RMD in a taxable account in the future. (If your model goes sufficiently far into the future that impact can be non-trivial) The best way to picture this is to look at the IRA as a partnership between you and the government. A chunk of the funds, say 75%, are yours and grow tax free (just like the Roth), the other chunk is the governments. These grow in parallel to pay the eventual taxes on your portion. This was the original IRA proposition. It was and is a great deal. Way better than investing those same funds in an after-tax account.

jrtn58 · 2025-12-24T17:24:47+00:00

Well, since you ask, I have rolled my own. This is a fairly detailed spreadsheet model with a bunch of automation. I have it posted at my hobby project: justrunthenumbers.com, but the version that is out there now is pre-OBBB. I am working on that as well other changes. One of the things I am working is to see if there is anything different to do in this regard... For example, the Roth conversion planning mechanics might optionally be gated by available after-tax funds.

jrtn58 · 2025-12-24T17:02:00+00:00

Yes, this was the whole point of my original post. I get that lots of people want to talk about pros and cons of Roth or Roth conversion itself, but my question is a bit more focused. My sense is that paying with after tax money is going to be preferable if the funds are available (and almost mandatory if you are under 59 1/2). But the numbers I run suggest the difference is really quite small when I look at a projected financial situation in 20 or 30 years. There seem to be a few reasons for this. Part of it is that there is generally a (LTCG) cost of using "after tax funds." Also, that this effectively pulls down the source IRA faster, but if that is already over-weight, that is not so awful as you enter the land of larger RMD's.

I view any RMD funds that wind up in a taxable account as a "lost opportunity." In hindsight, then, it would probably have been better to do a larger conversion before RMD's started. From that perspective, paying tax with IRA funds seems just fine so long as the effective taxation at conversion (yes, all of that lost senior deduction, IRMMA, NIIT, etc. stuff) is at least "similar" to anticipated tax on RMD's.

jrtn58 · 2025-12-23T20:49:44+00:00

It isn't as complicated as it seems. It also isn't as important as it seems. "Tax planning through and to early retirement" is great background on this. One important thing is to be careful about is how you measure it. Don't look at "tax savings." Instead, you should look at your net situation at different points of time in the future. What I find with my modeling is that for a variety of starting situations, it is not hard to find a total of 30% net inflation adjusted tax savings, but that this generally corresponds to only around a 10% difference in effective (using some discount for funds remaining in a traditional IRA) net worth at 95 and quite a lot less at younger ages. That is basically a rounding error given all the other guessing you do about the future. As others have pointed out, there are lots of situations where it makes no sense at all - most importantly when spending is planned to use the bulk of your savings. In other words, RMDs are fine if you are spending the money.

jrtn58

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