Please note that this option is not available in MaxiFi Standard.
If you choose this option, we will analyze converting different amounts in different years from your non-Roth accounts to your Roth accounts to find the plan with the highest Lifetime Discretionary Spending.
Determining when to convert assets to Roth accounts and how much to convert in each year is an extremely complex problem. There is no simple method for finding the optimal Roth conversion strategy due to the numerous factors involved, such as the following:
- Roth-conversion-induced changes in current and future taxes
- Required future minimum distributions from non-Roth retirement accounts
- The extent and degree of Social Security benefit taxation
- The time-path of Medicare Part B IRMAA premiums
- Cash-flow constraints
- Your willingness to accept a lower living standard in the short term in order to enjoy a higher living standard in the long term
- Your regular assets, Roth and non-Roth retirement accounts, Social Security, and other income streams
- Your assumed nominal return on regular assets and retirement accounts
- Your assumed future inflation rate
- Your household’s demographic composition
MaxiFi considers all these factors and more while searching extensively for the optimal conversion strategy. It assumes the use of regular assets to pay conversion-induced taxes. MaxiFi performs Roth conversion optimization after other options you’ve selected. MaxiFi's Roth-conversion optimization assumes Roth accounts will be withdrawn first or last depending on the base settings in the plan. However, if the Roth First/Last optimization was chosen in the setup of the maximization report, then the best option discovered by that optimization process will be used. Your base setting will not be changed unless you choose to apply the maximized solution.
Because of the multiple factors at play, some optimal conversion plans may appear counterintuitive. The plan may also include Roth conversions that produce cash flow constraints, with lower living standards at the beginning of your plan and higher living standards towards the end. This reflects the fact that Roth withdrawals are not taxable -- your taxes can decline significantly when you begin Roth withdrawals. To avoid such constraints, and thereby better smooth your living standard, you can specify special withdrawals from your Roth accounts starting at earlier ages. You can also re-run maximization with the "Spending Reduction Limit" set to a low limit or set to completely ignore plans with discretionary spending lower than your base plan.
Important Note: IRS rules govern how long you must wait to withdraw from a Roth account on a tax-free basis and how long Roth contributions need to remain in the account prior to their accrued income being withdrawn tax free. MaxiFi does not account for these rules. You must consider them separately before implementing any conversion plan. This article provides some information about these rules, but you may want to consult with a tax or financial advisor.
Beta Notice: We have tested and found our Roth-conversion optimizer to be highly robust, but if you notice any problems or find any significantly better solutions, please use the Help button to contact us.