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Roth Conversion Methods
Old 12-13-2019, 06:37 AM   #1
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Roth Conversion Methods

I have recently been following a couple very usefull and interesting threads on doing Roth conversions.
Thanks to those that have contributed and done research and math to quantify options. So after some more
math to figure my own situation I have a plan for doing conversions. Almost 80% of my savings are in IRAs
and of that total, only 28% is in a Roth account. My goal is to reverse that to have about 80% in a Roth
account.

So now my thinking and planning is on optimal method of moving assets from TIRA to the Roth account.
Options I have considered are
1) selling assets to cover conversion amount and then transfering that to Roth and purchasing assets.
2) Moving assets (a fund, stock or CD) from TIRA to Roth and keep AA intact.

I like option 2, although there can be less percision as I move the asset and dollar value to be reported
on 1099 is the price fix after next closing price. Don't think this is much of an issue as I plan to move
one or perhaps 2 assets to complete the conversion.

What assets should I move ? I'm leaning to moving the assets with worst performance but not sure what
time frame to look at. Perhaps over past year ? My thinking is that if I move an asset at a low in the
price cycle I would then owe less taxes to move that asset.

I also know there are thoughts on where to hold what type of asset. Holding bonds or income producing
assets in TIRA and assets that will grow in price in a Roth should produce most gains in the tax free
Roth and lower paying in TIRA to have less tax liability in an account that I'll have to pay taxes on
at some point.

BTW, I plan to pay taxes in quarterly submissions from non-tax advantaged accounts to get the most in the
Roth account.

Thanks in advance for your thoughts on this.
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Old 12-13-2019, 07:06 AM   #2
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Quote:
Originally Posted by RetireBy90 View Post
I have recently been following a couple very usefull and interesting threads on doing Roth conversions.
Thanks to those that have contributed and done research and math to quantify options. So after some more
math to figure my own situation I have a plan for doing conversions. Almost 80% of my savings are in IRAs
and of that total, only 28% is in a Roth account. My goal is to reverse that to have about 80% in a Roth
account.

So now my thinking and planning is on optimal method of moving assets from TIRA to the Roth account.
Options I have considered are
1) selling assets to cover conversion amount and then transfering that to Roth and purchasing assets.
2) Moving assets (a fund, stock or CD) from TIRA to Roth and keep AA intact.

I like option 2, although there can be less percision as I move the asset and dollar value to be reported
on 1099 is the price fix after next closing price.
Don't think this is much of an issue as I plan to move
one or perhaps 2 assets to complete the conversion.

What assets should I move ? I'm leaning to moving the assets with worst performance but not sure what
time frame to look at. Perhaps over past year ? My thinking is that if I move an asset at a low in the
price cycle I would then owe less taxes to move that asset.

I also know there are thoughts on where to hold what type of asset. Holding bonds or income producing
assets in TIRA and assets that will grow in price in a Roth should produce most gains in the tax free
Roth and lower paying in TIRA to have less tax liability in an account that I'll have to pay taxes on
at some point.


BTW, I plan to pay taxes in quarterly submissions from non-tax advantaged accounts to get the most in the
Roth account.

Thanks in advance for your thoughts on this.
Comment on the lines bolded by me.
Don't you have the choice of converting dollars instead of a price of the trade?
Typically folks do indeed place their equities in a Roth and the bonds in a TIRA for tax efficiency purposes and to achieve the largest growth over time.
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Old 12-13-2019, 07:59 AM   #3
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Originally Posted by Dtail View Post
Comment on the lines bolded by me.
Don't you have the choice of converting dollars instead of a price of the trade?
Typically folks do indeed place their equities in a Roth and the bonds in a TIRA for tax efficiency purposes and to achieve the largest growth over time.

Dtail, yes I have the option to move the asset or a specific dollar amount. Not much difference with option 1 and 2 as I don't really have to sell the asset and then move and buy it back. I can say move $xx of fund xyz. Then if I remember correctly my last conversation with Fido the amount of shares converted would be based on the next closing price.
I tend to think with my fingers when trying to get a topic in my brain.


Thanks for the response.
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Old 12-13-2019, 09:11 AM   #4
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You are probably overthinking this.

I do Option 1 but the net effect is Option 2.... I sell in my tIRA and buy in my Roth the same security, so my AA is unchanged by the Roth conversion. And since I prefer to have my Roth be stock for tax efficiency I sell stock in the tIRA and buy the same stock in the Roth.

I prefer to do tax-deferred account withdrawals with 100% withholding rather than make estimated tax payments... while that money doesn't end up in my Roth, it does reduce tax-deferred balances which is the prime objective. As icing on the cake, when it comes to underpayment penalties the IRS considers withholding as paid ratably throughout the year even if it is done in December.
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Old 12-13-2019, 09:21 AM   #5
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Originally Posted by pb4uski View Post
You are probably overthinking this.

I do Option 1 but the net effect is Option 2.... I sell in my tIRA and buy in my Roth the same security, so my AA is unchanged by the Roth conversion. And since I prefer to have my Roth be stock for tax efficiency I sell stock in the tIRA and buy the same stock in the Roth.

I prefer to do tax-deferred account withdrawals with 100% withholding rather than make estimated tax payments... while that money doesn't end up in my Roth, it does reduce tax-deferred balances which is the prime objective. As icing on the cake, when it comes to underpayment penalties the IRS considers withholding as paid ratably throughout the year even if it is done in December.

Thanks, I do tend to overthink things like this. My goal is to reduce future taxable income being juiced by RMDs by prepaying today. So for example, if I move $50K and pay the tax from taxable account then I have $50K that will produce income without incurring any future tax liability yet is accessible to me at any time I want without restrictions. I plan to leave about 15% in my TIRA and will do QCD to cover the RMD.
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Old 12-13-2019, 09:41 AM   #6
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Originally Posted by RetireBy90 View Post
What assets should I move?
I guess I'm simple, I have the same funds in my Roth IRA as I do in my Traditional IRA. I would just figure out how many dollars I want to move, then initiate a Roth conversion to transfer those funds from one account to the other.

For instance, I currently have a 50/50 mix in both accounts. If I wanted to convert $30K I would convert $15K of my stocks and $15K of my bonds. This would maintain my 50/50 mix in both accounts. I can always rebalance later if I discover my asset allocation is skewed too much one way or the other.

I do my Roth conversions around the start of the year and pay the estimated taxes online (EFTPS) for the full amount from my regular savings account (i.e. If I convert $20K I pay $2400 estimated tax in my 12% tax bracket).
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Old 12-13-2019, 09:58 AM   #7
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What assets should I move ?

So far my conversions have been just equities. But, for this year I am leaning towards converting some bond funds for flexibility later when we start to draw from our retirement which is next year. I guess I am just anxious because this drawdown phase is uncharted waters for us. We'll be keeping our AA to 60/40. I may need to start a discussion here on the role of bond funds in Roth.
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Old 12-13-2019, 02:23 PM   #8
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What assets should I move ?

So far my conversions have been just equities. But, for this year I am leaning towards converting some bond funds for flexibility later when we start to draw from our retirement which is next year. I guess I am just anxious because this drawdown phase is uncharted waters for us. We'll be keeping our AA to 60/40. I may need to start a discussion here on the role of bond funds in Roth.

From what I've learned from those on this board, bonds should be in TIRA if possible as the expected income (and thus tax liability) would be less than expected income from equities. Thus less expected tax liability with stocks in Roth. Having said that if I complete my plan by 2025 about 80% of my retirement assets will be in the Roth, so it will contain some bonds also. I hope :-)
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Old 12-13-2019, 03:34 PM   #9
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I converted all of our stock funds first over a number of years, purchasing the same stock funds in the Roth IRA, and paid the taxes using the taxable account. Now, all we have left in the traditional IRAs are bond and MM funds. I will be converting the bond funds first and will probably exchange them for stock funds in the Roth IRA for a slowly increasing stock AA.
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