MaxiFi’s Roth Conversion Optimizer™
Our new Roth Conversion Optimizer uses advanced algorithms to calculate exactly how much to convert each year to minimize your lifetime taxes and, thus, spend more in retirement.
Roth Conversions, Calculated Correctly, Can Dramatically Lower Lifetime Taxes
Roth conversions let you transfer assets from regular IRAs, 401(k)s, and 403(b)s to their Roth counterparts. These conversions are taxable. But Roth assets grow tax free and aren’t taxed on withdrawal. Plus, Roth withdrawals do not trigger Social Security benefit taxation or Medicare Part B IRMAA taxation. Roth conversions also limit tax uncertainty, reduce future RMDs, and facilitate tax-advantaged bequests of Roth balances. MaxiFi’s Roth Conversion Optimizer calculates how much to convert annually based on precise projections of federal and state income taxes, taxes on Social Security benefits, Medicare IRMAA taxes, and Required Minimum Distributions (RMDs).
Roth Conversions – Many Moving Parts
Converting more this year means higher current, but lower future taxes. Current conversions also impact gains from future conversions. Thus, an optimal conversion strategy requires simultaneously deciding how much to convert this year and in all future years. Moreover, conversions can change taxes abruptly by putting you in higher or lower federal-income, state-income, and IRMAA tax brackets as well as alter the taxation of Social Security benefits. In short, federal income taxes are only part of the picture and converting only when federal income tax brackets are low is rarely optimal. Remarkably, making large-scale conversions early on, even at the cost of paying federal income taxes at the highest rate, may produce major future tax savings by dramatically lowering future brackets.
Roth Conversions – Key Factors
With optimal Roth conversions, one size fits none. Your age, spouse’s age (if married), longevity, wages, retirement dates, Social Security collection strategy, and levels of regular and retirement assets all matter. So do future tax changes, your Roth withdrawal strategy, and the state income taxes you’ll face in retirement. Finally, paying higher immediate taxes can cause cash-flow problems limiting the conversions you can sustain.
Internal Consistency
Reducing lifetime taxes via Roth conversions permits higher lifetime spending with the timing of increased spending depending on cash-flow constraints. But a household’s spending path affects its current and future asset accumulation which then affects taxable asset income and taxes. Thus, Roth conversions impact taxes, which impact spending, which impact taxes, and on and on. Mathematically, optimal Roth conversion is a highly non-linear, simultaneous equations problem requiring MaxiFi’s advanced algorithms to get right.
Roth Conversions – Go Big or Go Home?
Each household’s optimal conversion strategy is unique and for some, Roth conversions may not help. But applying MaxiFi’s Roth Conversion Optimizer to a range of alternative test cases produces surprising findings. For many households, early conversion of all or virtually all regular IRAs, Roth-convertible 401(k)s and 403(b)s, as well as other tax-deferred assets is the winning strategy. Yes, doing so means far higher tax brackets early on. Yet, the tax reductions from much lower future taxes can produce, on balance, lower lifetime taxes. Converting on a large scale can make these tax reductions substantial.
See our Roth Conversion Optimizer case study to learn more.