Conversion calculators

[Guest JPIngold]

Has anyone found a Roth conversion calculator they trust??? Most of them seem to leave out at least one important assumption.

Thanks.

James

[Belgarath]

That I would trust? There certainly hasn't been one that I've seen that I would trust for all situations, as situations are rarely the same. Added to that, as you mention, they either leave out one or more assumptions that (to me) seem important, or the assumptions they do have aren't necessarily assumptions with which I agree. Doubtless some are better than others, but I haven't made any study or comparison of the ones I've seen.

I caveat this by saying I'm no investment expert or financial planner.

[mbozek]

Has anyone found a Roth conversion calculator they trust??? Most of them seem to leave out at least one important assumption.

Thanks.

James

What important assumptions are being left out?

[Guest JPIngold]

Has anyone found a Roth conversion calculator they trust??? Most of them seem to leave out at least one important assumption.

Thanks.

James

What important assumptions are being left out?

Depends on the calculator you look at, but things like withdrawal assumptions at retirement (e.g. take just RMD's; annual w/d's over life expectancy, etc.); some ignore investment returns on the "side fund"; most ignore the present value of the tax paid on the traditional IRA.

[John G]

Conversion calculators were all the rage when Roths were first created. Many were terrible.

Part of the problem is framing the question. For example, few address the issue of state income tax treatment - both now and in retirement years. For example, if you convert in most states right now, you face state income taxes. However, if you wait until you move to FL, WY, TX or one of the other no income tax states, you don't pay a state tax. So the question of where are your currently living and where might you live down the road can be significant.

The second issue with all calculators is that few are set up to run multiple scenarios about assumptions. I have advised folks about conversions and frankly the assumptions about future tax rates and future income levels are very important. A calculator doesn't tell you what rate to pick, and most calculators don't automatically give you a sequence of answers based upon higher and lower incomes, or high and lower tax rates.

Lets be a little honest about human limitations on predictions. Most of us have trouble seeing five years out...much less 10, 20 or 30 years out. Take a minute and think about this. What significant events happened to you or your household in the past 5 years, and the past 10 years. Sickness, divorce, car accidents, promotions/layoffs, relocations, etc. Example, my wife went back for her PhD 7 years ago and is now a professor - I never expected that, I thought we would be traveling in China and New Zealand.

Long post....my point is that even with the finest, most accurate calculator, the "answer" may be way off. Don't fall for the false precision of a lot of numbers.

There are a few folks who converted to a Roth...and now are eating up their reserves because their job disappeared. Taxes paid years ago are long gone....and if you have no current income, well let's just say your tax rate scenario has changed.

All this from a guy who is a great believer of Roths and understands Roth conversions can be a great tool. Calculators have a certain seduction to them. Even the best calculator doesn't tell you if your scenario is reasonable.

[david rigby]

Lets be a little honest about human limitations on predictions. Most of us have trouble seeing five years out...much less 10, 20 or 30 years out.

Predictions are difficult, especially about the future.

[K2retire]

Lets be a little honest about human limitations on predictions. Most of us have trouble seeing five years out...much less 10, 20 or 30 years out.

Predictions are difficult, especially about the future.

As difficult as it is to predict things you can control (or at least influence) it is even more difficult to predict what Congress might do to the tax rates in the future.

[Guest JPIngold]

Lets be a little honest about human limitations on predictions. Most of us have trouble seeing five years out...much less 10, 20 or 30 years out.

Predictions are difficult, especially about the future.

As difficult as it is to predict things you can control (or at least influence) it is even more difficult to predict what Congress might do to the tax rates in the future.

How true, how true. One thing I have had a hard time explaining to clients is the issue of future income taxes. The media and everyone, for that matter, is telling the masses that tax rates will increase. Well, while I agree with that statement, people need to understand that while some tax rates may increase, that does NOT equate to the statement: "I will be in a higher tax bracket when I retire". While they may increase tax rates (and most likely only on those making more than what a typical retiree would make), if a retiree is able to manipulate his or her taxable income (meaning invest in tax-free investments or only take out enough retirement income to meet living expenses, etc. and is not receiving high levels of pension benefits or rental income), then I am pretty confident that you CAN (and probably will) be in a lower tax bracket in retirement than you are in now during your earning years. That is such a critical factor in the decision and one that I believe many advisors (and generic calculators) are overlooking. You shouldn't just assume you will be in a higher bracket because "tax rates will probably go up".

[John G]

A good test is to run any scenario with your marginal tax rate going up or down 5 percentage points. For example, this might give you a sense for how adding or dropping a state income tax effects your conclusions.

Back to the issue of predictions. Rewind your own personal "history tape", say five years ago. How much that has happened in your life since then did you honestly predict? The last 2 years of the stock market. The BP disaster?....now thing about stuff closer to your family. Members losing jobs? Forced early retirement? Kids moving back home to save money? Your health?

There is something akin to a "half life" when it comes to predicting significant events. It seems to me that you are very lucky if you get 1/2 of the big things right over a five year period. Extend the half life concept to 10 years and you probably missed 75% of the big events.