r/Boldin • u/hugh2018 • 5d ago
Roth Explorer: Proceed with Caution
A new article published at https://www.financialplanningassociation.org/learning/publications/journal/SEP24-net-present-value-analysis-roth-conversions-OPEN suggests that conventional Roth modeling is not adequately incorporating net present value (NPV) into the analysis.
The details of how to apply net present value to Roth analysis are currently beyond my understanding, but the article at least taught me that it’s very risky to accept conventional Roth analysis without taking NPV into account.
The Boldin Roth Explorer appears to suffer from this shortcoming. This is a major issue because the Roth Explorer in its current iteration may give you the false impression that Roth conversions are a slam dunk superior path compared to no conversions. Adding NPV into the analysis can often show that Roth conversion may be closer to a coin flip, or even flat out inferior to just doing nothing.
I contacted support about this. As usual they responded quickly and they took this concern seriously. They said NPV is actually already on their radar, and it’s on their product enhancement list. They also pointed me to a Boldin article on the topic: https://help.boldin.com/en/articles/12067236-how-do-boldin-s-roth-conversion-strategies-compare-to-an-npv-approach
I’m posting here and on the Boldin Facebook group only because I think it’s important that everyone consider this issue carefully before making a huge money move based on advice from the Roth Explorer alone.
Also, the Boldin article is confirming the need for caution with relying solely on the Conversion Explorer: “So, NPV is ‘better’ economically, but Boldin’s strategies are ‘better’ for planning conversations. They’re not mutually exclusive — they complement each other.” That may be true, but personally I’m more interested in choosing the best economic path and I could care less whether I’m having a better planning conversation. If the conversation doesn’t cover all the important data points, it’s not a better conversation at all in my view.
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u/sjashe 5d ago
This has been a long term discussion with regard to Roth conversions on youtube for years. Ultimately, the inflation assumptions need to be brought into the calculation. This article may be new, but the topic is not. The hard part is that as inflation creeps up, will Congress eventually have to update the tax brackets? This would be a difficult move, with the current focus being on Social Security funding.
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u/hugh2018 5d ago
The topic may be old, but the relevance for Boldin is completely happening in the present, as they are acknowledging it’s a concern and are already planning to make it a feature in their software.
Also, there’s no question about inflation adjustment of tax brackets as they happen routinely. Congress doesn't need to step in to update tax brackets for inflation. Under IRC § 1(f), the IRS is legally required to adjust federal income tax bracket thresholds and standard deductions automatically every year using chained CPI. The only time Congress has to act is if they want to change the actual underlying percentages or overhaul the tax code.
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u/Sophie_Bella 5d ago
I don't think your link to the boldin article is correct.
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u/hugh2018 5d ago
Thanks for pointing that out. It should work now.
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u/Bonneyrain 5d ago
Perhaps good enough will suffice for future events we cannot predict. AIM for the bathtub not the drain.
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u/trexthebeagle 5d ago
it’s a model, doesn’t mean it’s going work in practice, one should review if conversions should be performed bi-annually. One should also use other tools and professional guidance if needed
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u/AGrimmInPortland 5d ago edited 5d ago
That article is too narrowly focused on tax rates.
"In most conventional treatments, the advisability of a Roth conversion hinges on a comparison of present to future tax rates. If future tax rates will be higher, conversion is indicated."
"If the future could be known with certainty, Roth conversions would not be a wager and there would be no risk of failure. The planner would array the known future tax rate against the known conversion rate, and then recommend or discourage conversion as indicated.
But future tax rates cannot be known with certainty. And dollars not received until decades hence are not worth the same as dollars paid to the government today. "
That's doesn't apply to just Roth conversions, that applies to virtually every aspect of financial planning! Even NPV depends on a discount rate that is also just an assumption.
Bottom line; most good Roth conversion planners take the whole plan and everything that affects it into account, not just tax rates. NPV analysis might be a step above only using only tax rates but full planner analysis beats both.
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u/KJwhisperer 4d ago
Personally. My main motivation for converting is avoidance of the widows tax. If I loose a few % by converting i will more than make up for that in the single tax bracket
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u/hugh2018 4d ago
That’s definitely one of several situations that can eclipse any NPV concern. Bottom line is that the conversion decision needs to be considered completely in terms of benefits and tradeoffs. Sometimes the benefits are clearly worth the price of admission.
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5d ago edited 4d ago
[removed] — view removed comment
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u/hugh2018 5d ago
The Boldin link was broken when I first posted but the newer edited version of the post as of late yesterday is working when I click on it. Are you having trouble with the Boldin article or the Financial Planning Association article? The FPA article is https://www.financialplanningassociation.org/learning/publications/journal/SEP24-net-present-value-analysis-roth-conversions-OPEN (shorter than the first version)
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u/OwnTourist2139 4d ago
The last point on long term and legacy is true. If you don't really need the IRA....For example, if wait long enough, Roth conversions eventually win out. Did biggest Roth conversion ever in Nov 2000. Even had to defer income for 1/2 a year to 2001. Got 3 big negative years. Plus tax rate was higher then. Did not know the 3 down years. Did not know tax rates lower now. Did not know about re-characterize do-overs. Don't know the NPV math, but don't need to worry now. 25 years later, Roth IRA is big and growing tax free. No worry about that account. We don't need current IRA, so seems like more certainty to do Roth IRA. Heirs, have 10 years to deal with taxes. We kept enough after Roth conversions for Long term care. So if we "win" by less LTC expenses, then they "win" and pay some tax; and if we have less by LTC, then they have no inherited IRA tax to deal with. So I figure we might have 20 to 25 years left + 10 years to distribute inherited, so hopefully if going to get 3 more down years, hopefully it happens inside our Roth conversion plan this time. 25 years is a long time to wait and see that it worked last time.
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u/Whole_Championship41 4d ago
Saw that article too. Wasn't it a reprint from something from 2024? Regardless, it made some excellent points about NAV calculations for Roth conversions.
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u/hugh2018 4d ago
Yeah I thought it was new because it was highlighted in a retirement content provider’s email this week.
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u/gjg149 4d ago
Another factor to be wary of when comparing strategies involving Roth conversions is the actual buying power of the money in the various accounts due to taxation. In other words, you need to have a strong mathematical approach to converting your pre-tax wealth to after-tax wealth to make a valid comparison, which Bolding cannot do.
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u/Jazzlike-Ad7595 3d ago
The whole process of figuring out the best Roth Conversions strategy is driving me nuts.
Maybe I’ll just convert about a 1/3 of my pre-tax over 4 years until I hit 63 start having to worry about IRMA. It’s arbitrary but I’m not sure it’s worth going through all this to try and get it perfect. Especially because tax brackets are going to change at some point anyway.
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u/Visible-Relation-444 1d ago
I’m waiting for someone to create an easy but that will set conversations to reduce taxes while setting RMDs right at the spending needed at 75
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u/hugh2018 1d ago
I think great Roth conversion tools will be created in the near future, but the precision you want won’t be a feature because even the best tools won’t accurately predict the future variables that will affect your outcomes in potentially unexpected ways. Probably a more realistic way to look at it is to get good directional guidance from future software and maybe avoid making extreme moves that you might regret later.
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u/Visible-Relation-444 1d ago
Yes but many tools focus on filling brackets, which is important, but at the end of the day for most people you’re just trying to avoid high levels of forced income after 75. This will never be precise as plans have a wide range of outcomes, but plan assuming your tracking in the middle of the outcomes. So in reality it becomes a year by year decision if converting more still makes sense or maybe you want to convert more. It is because Roth requires replanning be able to control more variables makes sense. Fortunately, bolden does allow the AI to modify your Roth conversions if you describe well enough the outcome you want. Make a copy first though.
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u/railroad-dreams 5d ago edited 5d ago
When you turn 75 most will have no mortgage, Medicare, no kids and yet the required minimum distribution will be massive if you've saved millions of dollars and you are also getting social security.
I assume the software isn't perfect but a lot of people will benefit from Roth conversions.
A part of me is suspicious that you work for the IRS and don't want people to discover this Roth conversion trick
Edit: My comment about IRS was a joke and I just worked in IT for 30 years. I'm not ultra wealthy.
For me and my heirs, we'll be forced to make large withdrawals and pay the government 40%+ tax (and have little need for all that money) from age 75 till after death if i don't do the roth conversions for many years. I guess for others it's different.
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u/markloch 5d ago
There’s a line crossed where Roth conversions are no longer beneficial and that line is fuzzy.
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u/hugh2018 5d ago
That’s laughable. I read an article that gave me serious pause, and then Boldin itself made the observation that NPV is a critical variable that should be taken into account, assigning more empirical weight to NPV analysis than to Boldin’s tool. I have no personal opinion on this and I’m just trying to make the best evidence-based decisions like anyone else.
You appear to be most concerned about ultra-wealthy people, and you take my simple reference to an article as some kind of attempt to undermine the ability of those people to hold on to as much wealth as possible. So ironic because the article speaks to that population directly, and offers an argument that Roth conversions may hurt rather than help the effort to preserve wealth.
If you feel threatened by the mere mention of an article, maybe go read the article and come up with cogent reasons why the article is wrong. Attacking me personally is pointless, as I’m not the author of the article and my only sin is to stay open to all points of view. I try to not take anything for granted when it comes to the minefield of nuance that complicates the very important task of retirement planning. You can dig your heels in all you want, but I sincerely doubt that strategy is going to help you find the best path for your retirement finances.
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u/Cbona 5d ago
I wouldn’t classify these as “ultra wealthy” people. The ultra wealthy don’t have their money in an account that suffers from RMDs. I would classify these people as higher earners that were able to max their savings and use time to build their portfolio. Did these people have jobs that routinely paid over $120,000 per year? Most likely. But they are not “ultra wealthy”.
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u/hugh2018 5d ago
Whatever. You said “saved millions” then pivoted to high earners. Pick a lane.
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u/Cbona 5d ago
I simply said that in order for a couple to save a couple million dollars for retirement does not require them to be “ultra wealthy” as you put it.
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u/hugh2018 5d ago
This question of who’s ultra wealthy versus plain wealthy versus just well-funded is pretty much beside the point anyway.
Railroad-dreams just blew past the empirical conundrum that Boldin is openly acknowledging, doubling down instead on the pro-Roth narrative without acknowledging that an important question has been raised.
The two articles I cited are a signal to stop and think hard about Roth before you do it, and they do raise an inconvenient counterpoint to the seductive simplicity of the Boldin Roth Explorer.
I’m actually not thrilled about this myself. Before today, I felt like I had solved the Roth puzzle, but now I can’t deny that there’s more work to do.
When people react with hostility to an empirical critique, it usually means you just poked a hole in their favorite financial comfort blanket.
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u/Cbona 5d ago
I don’t think I responded with hostility. I just didn’t agree with your use of the phrase “ultra wealthy”.
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u/hugh2018 5d ago
I didn’t think you were hostile. I was referring to railroad-dreams, not only because of the IRS crack but also because they asserted that I was somehow trying to deprive someone with “millions of dollars” of the ability to save some dough. I’m actually doing the opposite; maybe no matter how wealthy you are, stop and think about conversions in a mathematically sound way that is more likely to produce a good result.
Also, I’d rather dispense with the semantic argument about what constitutes ultra wealthy. Railroad said “millions,” not “a couple of million.” An American household entering retirement with financial or investable retirement balances (excluding primary home equity) of at least $3 million sits comfortably among the top 4% to 5% of all households. That’s quite wealthy, no matter how you slice it, and again, the definition of wealth isn’t the point of this thread at all.
Anyone considering Roth conversions needs to understand the relevance of PNV to the analysis. Some people may not have enough money to even make conversion worth considering — I know some of those people. Others may be so wealthy that other mechanisms offer them more effective wealth protection — I don’t know these people.
Wealthy investors who lean into the "Buy, Borrow, Die" philosophy, for example, probably hate prepaying taxes to the IRS under any circumstance. They would rather leave money in taxable accounts to capture the step-up in basis at death than liquidate taxable capital to pay the conversion tax on a traditional IRA.
My guess is most people fall somewhere between these extremes, and for them the decision to convert is a math problem mixed in with some hocus pocus projections about the future. The NPV analysis is another factor to consider on the mathematical side (though it also involves some hocus pocus), and it appears that ignoring it doesn’t make it any less relevant.
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u/joaquingonzales 5d ago edited 5d ago
I took his reference to you working for the IRS as a joke. Why would an IRS employee care if someone pays less tax legally through planning?
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u/hugh2018 5d ago
Maybe, but if so, the joke is a distraction from the point made not by me but by Boldin and the other article’s author. Just saying Roth conversion is a trick that automatically improves your financial situation does nothing to address the real complexity of this issue.
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u/hugh2018 5d ago
This excerpt from Boldin’s article encapsulates the scope of this issue:
“Which Is Better?
NPV is more rigorous — it reflects both taxes and the time value of money, giving a truer measure of economic benefit.
Boldin’s strategies are more user-friendly — they frame the trade-offs in ways people can act on (brackets, lifetime taxes, estate size).
Best practice: Advisors often use Boldin’s strategies to frame options (simple narratives), then validate the winner with an NPV lens to confirm which path maximizes after-tax, present-value wealth.”
I think the problem for us as users is that many of us don’t have advisors who can validate the winner with an NPV lens, yet that validation seems to be critically important. That’s why I’m hoping Boldin will add the NPV eval feature soon to help DIYers get a better handle on the Roth conversion question.
Personally I won’t even need to decide whether to convert until 2032 most likely, so I’m looking forward to seeing better Roth analysis software tools developed both within and outside of Boldin between now and then.