good time to convert to Roth

[GrayHare]

Even for this buy-and-holder, when traditional retirement account values are down is when I like to convert a portion to Roth. Stocks had a downdraft in May, and the Monday premarkets are down, so the upcoming week might be another down one. IMO we're approaching a good time to convert to Roth.

Ideally one would convert exactly at the bottom, but since timing that precisely is not possible, one might consider breaking the year's total planned conversion amount into smaller portions converted at different times, each at what looks to be a relative low point.

Anyone have other strategies for when they do their converting to Roth?

 

[RunningBum]

I used to convert at the start of the year, figuring the longer I had it in tax free rather than tax deferred, the better off I was. We may have a drop now, but will it go as low as it was Jan 1?

Now, with no Roth recharacterization, and being able to only convert a little bit, I wait until the last week of the year, when I know how much room I have to stay under 400% FPL.

 

[VanWinkle]

I used to convert at the start of the year, figuring the longer I had it in tax free rather than tax deferred, the better off I was. We may have a drop now, but will it go as low as it was Jan 1?

Now, with no Roth recharacterization, and being able to only convert a little bit, I wait until the last week of the year, when I know how much room I have to stay under 400% FPL.

Yes, the ACA does change the game a little, I also wait until the last week
or so to make sure I stay in the sweet spot 138% of FPL

 

[free2020]

Even for this buy-and-holder, when traditional retirement account values are down is when I like to convert a portion to Roth. Stocks had a downdraft in May, and the Monday premarkets are down, so the upcoming week might be another down one. IMO we're approaching a good time to convert to Roth.

Ideally one would convert exactly at the bottom, but since timing that precisely is not possible, one might consider breaking the year's total planned conversion amount into smaller portions converted at different times, each at what looks to be a relative low point.

Anyone have other strategies for when they do their converting to Roth?

Agree that the very best time to convert is when there’s panic in the street. I wouldn’t sweat over catching the exact bottom. 2009-10 was perfect. I would focus more on creating the cash capacity to pay the additional tax burden. In general that’s about 7 years of preparation time for the typical market pull back of 10+%. We have not had one lately so being prepared would be prudent.

 

[joylesshusband]

I did the bulk of my annual conversion on JAN 8th, as my gut told me the market would hardly go much lower than that during the rest of the year.
My gut is no market expert, but I tend to trust it on occasion.

I now have a very small portion of my annual conversion left to be done in late DEC, after I get a real good picture of the actual amount of dividends.

My taxable income target is within $10 under the 0% CG fed. tax.

 

[pb4uski]

I usually don't do any conversions until December until I have a pretty good read on my tax situation. Realistically I could probably do it earlier as our income is pretty predictable but once it is done I can undo it anymore. I'm somewhat afraid that some situation might occur where I need to raise cash that would result in capital gains and I would be sorry if I had previously done some Roth conversions.

 

[wolf]

Sorta of related comment. Congress trying to do get rid of the "stretched" IRA (inherited).

Might have an impact on your plans? or maybe not.

 

[RunningBum]

Sorta of related comment. Congress trying to do get rid of the "stretched" IRA (inherited).

Might have an impact on your plans? or maybe not.

There's another recent thread on that. http://www.early-retirement.org/forums/f28/rmd-going-to-72-a-97142.html Covers the stretch IRA issue too. This thread is more about "give you are going to convert some, when is a good time".

 

[SecondCor521]

I usually don't do any conversions until December until I have a pretty good read on my tax situation. Realistically I could probably do it earlier as our income is pretty predictable but once it is done I can undo it anymore. I'm somewhat afraid that some situation might occur where I need to raise cash that would result in capital gains and I would be sorry if I had previously done some Roth conversions.

Basically the same here.

The only other thing I do nowadays is I'll do two Roth conversions in December. For me, I'm converting mutual fund shares and there is always a little ambiguity as to what the closing price will be and thus the exact amount of taxable income. By doing two Roth conversions, I can get the majority of the conversion done in the first transaction without much concern about going over my target. The second conversion, being a smaller number of shares, can then get me closer with also a similarly low risk of going over my target.

Probably needlessly fiddly, but it keeps me entertained.

 

[pb4uski]

I'm pretty sure that I can convert a $ amount... they just back I into the number of shares based on the closing price.

 

[SecondCor521]

I'm pretty sure that I can convert a $ amount... they just back I into the number of shares based on the closing price.

My situation is that my traditional IRA is at Vanguard and is invested in two mutual funds. I just double checked, and they will only let me enter a Roth conversion for X number of shares. They have a footnote on the page:

"This total is estimated based on the previous NAV or closing price. The actual conversion amount is based on today's NAV or closing price."

Obviously, if you have a different custodian then YMMV. Doing the dollar amount and them backing into the number of shares would be the modern and civilized way of doing it. But I'm with Vanguard; I'm just thankful I don't have to fill in a paper form and get a medallion guarantee.

 

[GrayHare]

Today's ~2% bump up says Monday (yesterday) was the day to convert, but there will be other opportunities during the next 7 months.

 

[karen1972]

With the correction in December, I converted most of what I had planned in Jan. Currently, to me we got a stretched out head and shoulders going on.. which I wouldn't be investing in and be waiting for end of year unless something shakes out that would instigate a breakout. To me its a complete coin toss given politics seems to be driving a number of market decisions and thus very hard to predict.

 

[FIREchief]

My situation is that my traditional IRA is at Vanguard and is invested in two mutual funds. I just double checked, and they will only let me enter a Roth conversion for X number of shares. They have a footnote on the page:

"This total is estimated based on the previous NAV or closing price. The actual conversion amount is based on today's NAV or closing price."

Obviously, if you have a different custodian then YMMV. Doing the dollar amount and them backing into the number of shares would be the modern and civilized way of doing it. But I'm with Vanguard; I'm just thankful I don't have to fill in a paper form and get a medallion guarantee.

Yeah, as @pb4uski suggested, some custodians can handle a dollar amount. At Fidelity, IIRC you can either request a dollar amount at any time during the day or wait until after close and submit a share amount up until something like 9PM Eastern time to capture that day's NAV.

 

[FIREchief]

I'm somewhat afraid that some situation might occur where I need to raise cash that would result in capital gains and I would be sorry if I had previously done some Roth conversions.

Are you trying to stay below the 0% capital gains limit or something like an ACA or IRMAA threshold?

 

[pb4uski]

Yes... 0% capital gains limit.

 

[RunningBum]

Today's ~2% bump up says Monday (yesterday) was the day to convert, but there will be other opportunities during the next 7 months.

So the question is, if it goes up 10% over the next few months, and then drops 5% one day, are you going to declare victory even though you actually had a 5% run up?

 

[GrayHare]

In my book any tax free gain is a victory.

 

[FIREchief]

Yes... 0% capital gains limit.

That makes sense. I used to retain a zero balance HELOC to cover such situations (i.e. I could take out a home equity loan to get me to the end of the tax year and then take the capital gains and pay off the loan the following January).

 

[FIREchief]

I execute my entire (or close to it) Roth conversion target the first business day of each year. Over time, this has (and likely will continue to) come out ahead of trying to "wait and see" (i.e. market timing). If the market was flat (or reducing) over most multi-year periods, then something like quarterly conversions would make sense. Of course, if the market wasn't growing over time, why would we have money in it in the first place?

 

[RunningBum]

In my book any tax free gain is a victory.

Well, you're paying a tax on the conversion, that's a given.

And in the scenario I described, looking for a short term drop while sitting out (or not converting) during a run up, you're paying more tax, or converting fewer shares. Maybe you'll see a lower price before the end of the year and save a little bit (or convert a few more shares). But maybe it won't come back down to this level, then what do you do?

This is why I don't try to time the market.