Interpreting the Results of the Roth Projection

If not yet enabled, enable and access the Roth Projection Tool.

If not yet built, build the Roth Projection.

 

Jump to:

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• Tax Bracket Visualizer
  • Entering Roth Conversions
• Projected Taxes
• IRMAA Surcharges
• Portfolio Value
  • Portfolio Value Difference
• Portfolio Value by Asset Type
• Required Minimum Distributions
• Assumptions
• Exporting Results

 

To replicate the case study in the videos and the entries in the screenshots below, you can use the following "The Joy of Rothing" cheat sheet linked here.

 

 

 

Tax Bracket Visualizer

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The first graph allows you to visualize the level of ordinary income (e.g., wages, taxable Social Security, taxable interest, IRA distributions - including Roth conversions, etc.) overlaid by the various marginal tax brackets on that ordinary income. Note that we intentionally only show ordinary income (not total income, Adjusted Gross Income or taxable income), as that is the type of income that is subjected to marginal tax brackets.

You can use this graph to see the valleys and peaks of income projected throughout a client's lifetime, to better spot opportunities where low income may make Roth conversions more attractive. 

Clicking on any of the bracket percentage labels (10%, 12%, 22%, etc.) for either the 'Base Case' or 'Roth Conversion' income labels allows you to show/hide any bracket for either case to better focus on specific elements of the analysis. In the example above, we've hidden the 32%, 35%, and 37% brackets because they are out of the scope for this client's income.

In this graph, we see a very common picture for individuals between retirement and when Required Minimum Distributions (RMDs) are set to begin. This common valley of income is one of the known sweet spots that are ripe for Roth conversions.

Hovering over the graph, as shown below, lets you zoom in on particular ages or years to see the amount of ordinary income in the 'Base Case' and 'Roth Conversion' scenarios, along with the ordinary income levels where corresponding tax brackets begin.  



This example starts with a very low amount of ordinary income of just $4,956. If we want to max out the 12% bracket as part of our Roth conversion strategy, we can see that there is plenty of room to go until the 12% bracket stops and the 22% bracket starts at $100,850 of ordinary income. Accordingly, if maxing out the 12% bracket is our goal, we may wish to convert upwards of $90-95K (adjusted for inflation) starting at age 64 until when RMDs are set to start at age 75.

 

 

Entering Roth Conversions

As a first approximation, let's enter those conversions to begin at age 64 and go until Bob's RMDs start at age 75. Notice that those amounts start at age 64, the year after Bob retires, and continue until age 74, the year before Bob's RMDs start.

With Bob's Roth conversions, we've started to fill up the 12% bracket, as seen below. However, we had Bob's conversions going through age 74, the year before RMDs began at his age 75, but it looks like they ended at age 71 below. Why is that? The notification at the top of the analysis gives us a clue. Even though we had these conversions continuing until age 74, we've fully converted Bob's tax-deferred assets by his age 71. 




That leaves us room to add some conversions for Jane now, between Bob's age 71 (Jane's age 69) and when RMDs begin for each at age 75. With that in mind, let's add some Roth conversions for Jane starting at her age 69, through her age 74.

The result? We see below that we've maxed out the 12% bracket, but starting at Bob's age 70, he starts to receive Social Security income, and we're peeking over the 12% bracket into the 22% bracket. We peek even higher into the 22% bracket once Bob's RMDs start at age 75. However, we're off to a good start.




There will be some element of plug and play to fine-tune your client's Roth conversion strategy, as we see above. After some editing of the amounts, this Roth conversion strategy for Bob and Jane has been optimized to max out the 12% bracket over time.

From those, we arrive at an appropriate strategy for them, as seen in the final Tax Bracket Visualizer below. Notice now that we've not only converted all of Bob's tax-deferred assets, but now Jane's as well, due to the notification outlined below that indicates not all entered Roth conversions were completed due to those tax-deferred assets being depleted.

 

 

Projected Taxes

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The Projected Taxes graph shows lifetime tax projections of both the base scenario (with none of the Roth conversions entered earlier) and the Roth conversion scenario, which are outlined in blue above. The projection difference indicates the lifetime tax savings anticipated by executing the Roth conversions as entered earlier when you built your projection. In the example above, we see that by utilizing Roth conversions over several years, this client is projected to save $922,572 in taxes.

If you'd like, you can show a net present value of the nominal amount of tax savings shown above by clicking the toggle in the Control Panel shown below. In this case, we've discounted those tax savings by 6%, an amount equal to our portfolio return. If you are unsure about which discount rate to use, check out the (?) icon circled below for two resources that delve into the appropriate discount rate to use.

Even when discounting the tax savings, there is a respectable amount of tax savings as a result of undertaking this Roth conversion strategy, as seen below.

Medicare - Income Related Monthly Adjustment Amount (IRMAA Surcharges)

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While not technically a tax, Income Related Monthly Adjustment Amount (IRMAA) surcharges on Medicare Part B and D Premiums can be a consideration for Roth conversion planning as well. Within the Roth Projection tool, you can map out future IRMAA surcharges. To enable this additional graph, toggle on this option in the Control Panel.

Above, you will see that there is a savings of $28,204 in IRMAA surcharges down the road as a result of reducing the income that is pushed out from future RMDs (Required Minimum Distributions) from those tax-deferred retirement accounts when this Roth conversion strategy is implemented. Similar to the Projected Taxes graph, you can also discount the IRMAA Surcharge into a net present value as well by using that same toggle. 

Portfolio Value

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This graph will show the cumulative effect of the Roth conversions on the combined portfolio balance by the end of the plan, which corresponds to the user-entered life expectancy for the longest-lived member of the household.

In the example above, the projected total portfolio balance is $11,258,279 if the Roth conversions are undertaken, compared to $10,215,984 if they were not, indicating total portfolio assets would be estimated to be $1,042,295 higher. The base case and Roth conversion lines on the graph are sometimes so close that it may be difficult to see the difference, which is why we include a "Portfolio Value Difference" as part of the Roth Projection Tool analysis.

 

Portfolio Value by Asset Type

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You can also view the various account balances across the taxable assets, tax-deferred assets for each client, and the combined Roth assets. The balances on these pots of money are shown under the base case scenario and the scenario where Roth conversions are utilized. Hovering over the graph area will show the balances over time of each asset type, as you move along the x-axis.

Required Minimum Distributions (RMDs)

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If toggled on in the Control Panel, the next graph on the report will be an illustration of the projected Required Minimum Distribution (RMD) amounts coming from tax-deferred accounts for both the Base Case and Roth Conversion scenarios. This can be particularly helpful in illustrating the impact of Roth conversions on potentially reducing RMDs in later years, especially for clients who will not need their full RMD to meet spending needs. In the example below, this series of Roth conversions will lower the RMDs these clients would otherwise have to take.

 

Assumptions

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The end of the Roth Projection will include a summary of the assumptions used in the analysis and any disclaimer language added by your firm.

 

Exporting Results

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At the bottom of the Control Panel, you can click the "Export" button shown below to view a spreadsheet of the math behind the projections.