How Does the Roth Explainer Work?

Use the Roth Explainer to dial in to whether a Roth conversion is the right move for your client.

You can also view our tutorial video below, in which our VP for Subscriber Success and Engagement Ben Birken walks through using the Roth Explainer and interpreting the results.

 

 

Table of Contents:

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Enabling and Accessing the Roth Explainer
- Don't see the Roth Explainer?

Roth Explainer Wizard
- Screen 1 of 3 - Conversion Amounts and Account Balances
- Screen 2 of 3 - Assumptions for Return, Life Expectancy, Social Security
- Screen 3 of 3 - Assumptions for Spending, Inflation, and Miscellaneous

Interpreting the Roth Explainer Results
- Projected Taxes
- IRMAA Surcharges (NEW!)
- Portfolio Value
- Portfolio Value Difference
- Required Minimum Distributions

- Control Panel / Edit Assumptions

- Export Results

- Origin / Methodology of the Roth Explainer

Enabling and Accessing the Roth Explainer

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The Roth Explainer is available to those subscribed to a Premium Plan or higher. Users with Firm Admin privileges will first need to enable the tool by navigating to Settings > Security Settings, and toggle on the "Allow One Page Roth" permission setting seen below underneath the Firm Preferences section.

To access the Roth Explainer, start in the Scenario Analysis screen, and navigate to the Roth Conversion Worksheet by clicking on the pencil icon next to the Roth Conversion line within the 1040 Income section as highlighted below.

Once an entry is made for one of either Taxpayer 1 or Taxpayer 2, Holistiplan will summarize the incremental cost of the conversion, the effective rate, and the marginal rate on ordinary income after the conversion. The incremental tax cost refers to the incremental Federal income tax cost from that conversion, not including any state income tax impacts or changes to Medicare Premiums as a result of IRMAA (Income Related Monthly Adjustment Amount) surcharges.

Also once a Roth Conversion amount is successfully entered, the purple Roth Explainer button will pop up to launch the Roth Explainer tool. In this example below, David Lee Roth is going to make a $50,000 Roth conversion. 

I enabled the Roth Explainer, but it's still not showing up. Why not?

1. The Roth Conversion (Override - All taxpayers combined) field is being used, instead of the fields specific to Taxpayer 1 and/or Taxpayer 2. In the example below, you would clear the $25,000 entry outlined in red, which will open up the fields outlined in green to enter in the amount of the Roth conversion per taxpayer.
   
   
   
   
   
2. Taxpayer 1 and/or Taxpayer 2 have not been assigned in the Age/Filing Status/Dependents tab of Scenario Analysis. In the example below, we have not assigned Cradle Will Roth as Taxpayer 2. If you have not added the second taxpayer (Cradle for example in this case) you will need to navigate back to the client household and add them as a client.
   
   
   
   
   

Once you access the Roth Explainer, you will then be prompted to "Start" the three step data entry wizard as seen below.

Screen 1 of 3:

In the first step, you'll see the Roth conversion(s) for Client 1 and/or Client 2. Note, the message that these amounts are sourced from the scenario, and are not editable within the Roth Explainer, but instead within the scenario to which the Roth Explainer is linked.

The following information below is entered here as well:

• Taxable Assets - Enter the combined balance of all non-retirement accounts, including both cash and investments)
• Cost Basis of All Taxable Assets - Enter the cost basis of the taxable asset balance. This information is used to determine the tax impact of any taxable account distributions.
• Tax Deferred Assets - Enter the total balance for any tax-deferred assets that are subject to RMDs (Required Minimum Distributions) for Client 1 and Client 2.
• Combined Household Roth Assets - Enter the combined balance for any Roth accounts for Client 1 and Client 2.

You will notice that there are warnings in red text below. The balance entered for Taxable Assets must exceed the Roth conversion cost, and the Roth conversion amount must be less than the total balance of Tax Deferred Assets.

Screen 2 of 3:

Next, assumptions will be made on the portfolio rate of return, tax efficiency of the portfolio, life expectancy, Social Security benefits start year and amount of each client.

• Rate of Return - Return assumption for the portfolio as a whole. Return by account type or for specific accounts is unsupported.
• Portion of returns that are capital gains (optional) - This assumption approximates the tax efficiency of the investments within the taxable assets account. The higher the portion of returns that are capital gains, the more tax efficient and less tax drag distributions from the taxable account will have. Keep in mind, the taxable assets balance may include not only investment positions, but cash positions as well.
• Life Expectancy - We default to age 100 arbitrarily. Enter the life expectancy of each client.
• Social Security Start Year - When will Social Security retirement start for each client?
• Social Security Expected Amount - Enter the annual amount, in today's dollars, of the expected benefit amount expected once the client(s) begin receiving Social Security retirement benefits.

Screen 3 of 3:

Last, we'll make assumptions about annual spending, inflation, and whether adjustments are made for the imbedded tax liability of tax-deferred accounts and whether the tax rates assume the sunset of the Tax Cuts and Jobs Act (TCJA) in 2026.

• Spending Assumption - Enter the annual spending assumption for your client's true lifestyle spend need for the first year of the projection. While the client may not need to spend any portfolio assets in the first year, entering a number is necessary to properly inflate spending throughout the projection when spending will potentially come from portfolio sources.

• Inflation Assumption - Enter the assumed inflation assumption for tax brackets and the standard deduction amount. Inflation assumptions for spending and income items are added for each of those items individually, and not in this field.
• Tax Adjustment Assumption for Tax-Deferred Accounts (optional) - This setting effectively reduces the tax-deferred balances by the amount of the percentage indicated to reflect the embedded tax liability for those accounts. For example, if the total balance for all tax-deferred accounts were $1,000,000, and the tax adjustment assumption was set to 24%, the adjustment to the tax-deferred account balances would reduce them by 24% ($240,000), and effectively use a new balance of $760,000 in the projections to account for the after-tax funds available from those accounts. This setting can be toggled on/off now or at any time in the future within the projection within the Control Panel.
• Checkboxes:
  • Adjust Tax-Deferred Assets - Checking this box incorporates the Tax Adjustment Assumption above to reduce the starting balance of the total tax-deferred assets by the percentage entered in that field.
  • Assume 2026 Tax Rate Sunset - Checking tis box assumes the tax rates under the Tax Cuts and Jobs Act (TCJA) sunset in 2026 according to that legislation.

Interpreting the Roth Explainer Results

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Once the Roth Explainer wizard has been completed, your Roth Explainer Results will look like the example below. The Control Panel will be on the left side of your screen, where you can make edits to assumptions and other changes. The right side of your screen will show a preview of the Roth Projection output, complete with your firm logo and any disclaimer language.

You will also see buttons at the top right of the preview panel to view the Roth Projection in Presentation Mode (without the Control Panel) and to Print the Roth Projection.

Projected Taxes:

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 where outlined in blue above. The projection difference indicates the lifetime tax savings anticipated by executing one singular Roth Conversion entered in Scenario Analysis. In the example above, we see that by utilizing Roth conversions over several years, this client is projected to save $106,195 in taxes.

IRMAA Surcharges (NEW!):

While not technically a tax, IRMAA (Income Related Monthly Adjustment Amount) 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 although there is a slight bump in IRMAA surcharges in 2028 as a result of the Roth conversions, there is a savings of $69,816 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. This is accomplished by reducing the RMDs with lower tax-deferred account balances as a result of the Roth conversions.

 

Portfolio Value:

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

In the example above, the projected total portfolio balance is $9,801,403 if the Roth conversion were to be done, compared to $9,692,180 if not done, indicating total portfolio assets would be estimated to be $109,223 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 a "Portfolio Value Difference" is graph shown below is included as part of the Roth Explainer analysis.

 

Required Minimum Distributions:

Next, if toggled on in the Control Panel, is a graph showing what the effects of the Roth conversions will have on the projected RMDs for any tax-deferred asset balance(s) for your client(s). This can be particularly helpful to illustrate for clients who will not need their full RMD to meet spending needs, and can otherwise shift those balances to a Roth IRA which has no RMD requirements for the account owner. In the example below, these series of Roth conversions will lower the RMDs these clients would otherwise have to make.

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.

 

Control Panel / Edit Assumptions:

The control panel allows you to edit the same assumptions and settings you saw in the wizard where you built your Roth Projection. There are some other settings you can adjust here as well.

• Toggles: Toggles exist to show or hide the Projected Taxes, IRMAA Surcharges, Portfolio Value, Portfolio Value Difference, and RMDs graphs, as well as to only show the last 5 years of portfolio balance estimates. You can also choose to input data by the calendar year or client age, depending on what makes most sense for you.
• Clients: Adjust the filing status, clients representing Taxpayer 1 and Taxpayer 2, the year, and to show if either taxpayer is eligible for the additional standard deduction for blindness.
• Assets: Make any edits to the balance for taxable assets, cost basis of those taxable assets, tax-deferred asset balance(s), and combined Roth assets balance(s).
• General Assumptions:
  • Tax Adjustment Assumption: This setting effectively reduces the tax-deferred balances by the amount of the percentage indicated to reflect the embedded tax liability for those accounts. For example, if the total balance for all tax-deferred accounts were $1,000,000, and the tax adjustment assumption was set to 24%, the adjustment to the tax-deferred account balances would reduce them by 24% ($240,000), and effectively use a new balance of $760,000 in the projections to account for the after-tax funds available from those accounts.
  • Rate of Return: This assumed return is applied to all account types as a blended rate within the investment portfolio - taxable, tax-deferred, and Roth.
  • Returns that are Cap Gains: This assumption approximates the tax efficiency of the investments within the taxable assets account. The higher the portion of returns that are capital gains, the more tax efficient and less tax drag distributions from the taxable account will have. Keep in mind, the taxable assets balance may include not only investment positions, but cash positions as well.
  • Inflation Assumption: This setting adjusts the inflation assumption for tax brackets and the standard deduction amount. Inflation assumptions for spending and income items are added for each of those items individually, and not in this field.
  • Checkboxes:
    • Adjust Tax-Deferred Assets: Checking this box incorporates the Tax Adjustment Assumption above to reduce the starting balance of the total tax-deferred assets by the percentage entered in that field.
    • Assume 2026 Tax Rate Sunset: Checking tis box assumes the tax rates under the Tax Cuts and Jobs Act (TCJA) sunset in 2026 according to that legislation.
  • Expenses: Use this field to edit the spending assumption for your client's true lifestyle spend need for the first year of the projection. While the client may not need to spend any portfolio assets in the first year, entering a number is necessary to properly inflate spending throughout the projection when spending will potentially come from portfolio sources.

• Medicare Assumptions (NEW!):
  • To include the impact of any IRMAA (Income Related Monthly Adjustment Amount) surcharges, check the box for Medicare Part B and/or Medicare Part D for Client 1 and Client 2 (if filing jointly).
  • Enter the age Client 1 is planning on enrolling in Medicare (usually age 65).
  • Enter the Medicare Part D Annual Premium (unlike Part B, Part D Medicare Premiums vary by zip code, so there is no uniform amount)

 

 

Add an income item by selecting Add Row then providing the Year, Value, and Inflation percentage. In the example below, if Client 1 will begin receiving $30,000 in Social Security income in 2039, you would enter $30,000 as the value for that year.

• Client Assumptions:
  • Life Expectancy: Use this field to update the life expectancy of your client(s). The projection's end date corresponds to the user-entered life expectancy for the longest lived member in the household.
  • Income Sources: Income sources are the first source used to meet spending needs, so make sure any income from the sources below are entered.
    • Wages
    • Social Security
    • Pensions
    • Annuities
    For any of the Income Sources listed above, click the "Add Row" button outlined in green below to add a starting year row (outlined in green) and an ending year row (outlined in red) to both start and stop that stream of income.
    
    
    
    In the example above, we have modeled two more years of wage income by indicating a starting year of 2025, with an annual wage of $150,000, inflated at 2.0% annually, before ending in 2026. When changes are made, you will be prompted to "Apply" those changes to the resulting graph showing the conversion amounts over time.
    
    

Beyond any income added above, the portfolio balances will be used from account balances in the following order to meet spending needs:


Taxable Accounts > Tax Deferred Accounts > Roth Accounts

As you make changes to those assumptions, the analysis will update in the background, and where needed, you will be prompted to reload the graphs as seen below.

Finally, near the bottom of the Control Panel, you can click the "Export" button shown circled below to view a spreadsheet of the math behind the projections. That spreadsheet contains two tabs - one "Projection" tab which shows math under the hood for the base case, and a "Roth Projection" tab which shows the math behind the projections that incorporate the series of Roth conversions that are being modeled.




Check out the video below for a walk through of the math under the hood in the worksheet available using the "Export" button shown above. Each column title includes comments on what that particular column is calculating or what values in that column represent.

 

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If you would like to take at the stories of the origin of the Roth Explainer, check out the video below in which our co-founder Roger Pine breaks it all down in a behind the scenes look.