Roth Conversion Strategy Changes in 2018?

[jroon]

I appreciate the collective wisdom of the posters on this forum and have benefited greatly over the years as a lurker.

I have done Roth Conversions over the past few years and have always used International Stock and US Stock index funds because I knew if the market tanked during the year I could recharacterize.

Now that this option will no longer be available, should the money I convert go into a different fund like a balanced fund? That way, if the market tanks I won't have as much regret at having done the conversion (assuming stocks and bonds don't equally tank).

Is anyone else changing their conversion strategy?

 

[FlaGator]

Not me.

My Roth balance is low at <10% of total investments. It's invested in high risk/return asset classes - US and Intl Small Value. No way would I put bonds or funds with bonds in my Roth at this point, those are staying in the tIRA. If I can convert enough of the tIRA that I can't achieve my desired AA otherwise, I would consider it. Might load the taxable account with munis instead.

 

[devans0]

No changes. I have not recharacterized yet and won't expect to. If I convert less and pay my Uncle more, so be it. I'm still far ahead.

 

[RunningBum]

Since there is no longer the "undo" recharacterization, a conversion is just like the rest of your Roth investment, so you would probably want to invest it the same way as the rest of the account.


The other obvious change is that I won't convert until the end of the year because I will have very little room under the subsidy, and don't want to go over.

 

[mpeirce]

The other obvious change is that I won't convert until the end of the year because I will have very little room under the subsidy, and don't want to go over.

My plan is to do about half "soon". Then, as the end of year approaches, decide how much to top it off.

 

[pb4uski]

I was never a fan of the horse race game.... I just convert out of Total Stock in my tIRA to Total Stock in my Roth... this will be the last year to recharacterize and hit the top of the 15% tax bracket on the button... in the future I'll just try to dial it in as close as I can without going over into 30%-land.

 

[Sunset]

I'm thinking we will up our conversions, taking advantage of the new lower tax rates, to the top of the 22%.
My reasoning is:
that we have too much in IRA which was socked away at the 25% rate, so we are saving something in the end.
Compared to LTCG, it's just 2% more, since our State taxes 5% and the Fed 15%, I can save some of the LTCG for when/if we move to a 0% State.
I think the tax rate tables will change in a few years, so this opportunity will only last a short time.

 

[Trooper]

I was never a fan of the horse race game.... I just convert out of Total Stock in my tIRA to Total Stock in my Roth... this will be the last year to recharacterize and hit the top of the 15% tax bracket on the button... in the future I'll just try to dial it in as close as I can without going over into 30%-land.

Same here, except I convert in/out of VFIAX. Question about an over conversion in 2018: Won't one make the marginal rate 27% (12%+15%)?

 

[pb4uski]

Yes, I was thinking 2017 tax brackets.... in 2018 it will be 12% and 15%.... 27% in total rather then 30%.

 

[walkinwood]

If converting at a market high is your concern, you could do the conversion monthly or quarterly - dollar cost average.

 

[Miranda]

I'm thinking we will up our conversions, taking advantage of the new lower tax rates, to the top of the 22%.
My reasoning is:
that we have too much in IRA which was socked away at the 25% rate, so we are saving something in the end.
Compared to LTCG, it's just 2% more, since our State taxes 5% and the Fed 15%, I can save some of the LTCG for when/if we move to a 0% State.
I think the tax rate tables will change in a few years, so this opportunity will only last a short time.

DH also thinks tax tables will change in a few years and the window will close on this opportunity.

Basically, for the next couple of years, qualifying for ACA subsidies is not a concern so we plan to take advantage of lower tax rates and convert to top of 24% bracket now in order to reduce future tax burden for ourselves and possibly heirs.

ETA: I think DH plans on staying invested in the same funds when he converts.

 

[jazz4cash]

I appreciate the collective wisdom of the posters on this forum and have benefited greatly over the years as a lurker.

I have done Roth Conversions over the past few years and have always used International Stock and US Stock index funds because I knew if the market tanked during the year I could recharacterize.

Now that this option will no longer be available, should the money I convert go into a different fund like a balanced fund? That way, if the market tanks I won't have as much regret at having done the conversion (assuming stocks and bonds don't equally tank).

Is anyone else changing their conversion strategy?

I don't understand the logic of the part I bolded. I can't think of any reason why fund selection would be altered by loss of the ability to recharacterize, but I'm not very knowledgeable about conversions. Maybe no conversions to term products like CDs, but otherwise I don't follow.

 

[pb4uski]

Same here... I also thought it was odd but didn't bother to comment. The only thing that I could think of is that one could recharacterize, wait 30 days and then do a bigger conversion (as a % of IRA value) since the values of shares have declined and end up with more converted for the same tax cost.

 

[SecondCor521]

I don't understand the logic of the part I bolded. I can't think of any reason why fund selection would be altered by loss of the ability to recharacterize, but I'm not very knowledgeable about conversions. Maybe no conversions to term products like CDs, but otherwise I don't follow.

I'm not jroon, but what one used to be able to do under the old tax law was convert-recharacterize-reconvert. If the value of the investment decreased between the date of conversion and the date of reconversion, then taxes were only owed on the lower amount.

Under the new tax law, one can only recharacterize contributions, not conversions, so the above strategy is obsolete.

ETA: crossposted with pb4uski, but I think the point is that if his conversion tanked, the tax savings on the recharacterization/reconversion would at least soften the blow, so jroon could feel free to take more risk.

 

[jroon]

I'm not jroon, but what one used to be able to do under the old tax law was convert-recharacterize-reconvert. If the value of the investment decreased between the date of conversion and the date of reconversion, then taxes were only owed on the lower amount.

Under the new tax law, one can only recharacterize contributions, not conversions, so the above strategy is obsolete.

ETA: crossposted with pb4uski, but I think the point is that if his conversion tanked, the tax savings on the recharacterization/reconversion would at least soften the blow, so jroon could feel free to take more risk.

Yes, that is exactly the issue. Thanks.

 

[43210]

OP, what is your assessment of the situation if you convert everything to post-tax dollars.

A lot of mis-analyses come from equating pre-tax and post-tax dollars.

Note, for example, that if you Roth-convert by moving stocks from Trad to Roth, then you have effectively bought some more stocks, which you may or may not later "regret", but that's nothing to do with Roth-conversion specifically.

 

[jroon]

Here is an interesting Boglehead thread "Roth Conversions without Ability to Recharacterize for anyone interested:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=236426

 

[adrift]

DH also thinks tax tables will change in a few years and the window will close on this opportunity.

I'm not good at predicting; particularly, about the future and politics. As passed, the law is in place for 8 years. If I remember correctly, that can't be undone through reconciliation. It would need 60 votes in the Senate to undo.

we plan to take advantage of lower tax rates and convert to top of 24% bracket now in order to reduce future tax burden for ourselves and possibly heirs.

The top of the 24% bracket is quite high income (by our standards at least). Filing jointly, with the standard deduction, it's at least $339K of income. With itemizing, HSA contributions, etc.; it could be higher.

Depending on your particular circumstances, you might want to look at Medicare IRMAA Surcharge amounts and which tax year they are based on. For our unique situation, this issue might get us to make a one time shot in 2018 at converting to the top of the 24% bracket.

I need to crunch some numbers and predict the future before deciding on this.

 

[LOL!]

I guess I can say that I will change my Roth conversion strategy.

Instead of converting to small-cap emerging markets value ETFs, I will take less risk and convert to Total US Stock Market index fund or Total International Index fund.

Also, I will not convert all at once at the beginning of 2018, but maybe lesser amounts 2 to 4 times throughout 2018.

 

[Cobra9777]

One change I'm considering is converting into the new 22% bracket. Previously, I never converted beyond the top of the 15% bracket. Based on our projected mix of rates on RMDs, along with modest growth expectations, the potential downside was considerably more significant than the fairly limited upside. However, at that rate of conversion, even with more than 10 years still to go, we can only convert about 35-40% of our tax-deferred balances by 70. So I'd like to do more if it makes sense.

A couple things have changed now. Obviously, the rate is lower from 25% to 22%. But it's notable that under the new law, the rate reverts to 25% just before we start RMDs. Anything can change, but that is current law. Also, under the cumulative effect of chained CPI indexing over the next 10 years, we will convert *less* if we decide to stay inside the 12% bracket. And thus *more* of our RMDs creep into the higher incremental rates compared to prior law.

I realize it's not just about tax rate differentials. Roth balances grow tax free and we've still got a long way to go and hopefully a lot of growth along the way. So that aspect alone is very attractive, even if the tax rate then and now is the same. So I'm starting to warm up to the idea of doing some conversions at 22%.

 

[kramer]

One change I'm considering is converting into the new 22% bracket. Previously, I never converted beyond the top of the 15% bracket. Based on our projected mix of rates on RMDs, along with modest growth expectations, the potential downside was considerably more significant than the fairly limited upside. However, at that rate of conversion, even with more than 10 years still to go, we can only convert about 35-40% of our tax-deferred balances by 70. So I'd like to do more if it makes sense.

A couple things have changed now. Obviously, the rate is lower from 25% to 22%. But it's notable that under the new law, the rate reverts to 25% just before we start RMDs. Anything can change, but that is current law. Also, under the cumulative effect of chained CPI indexing over the next 10 years, we will convert *less* if we decide to stay inside the 12% bracket. And thus *more* of our RMDs creep into the higher incremental rates compared to prior law.

I realize it's not just about tax rate differentials. Roth balances grow tax free and we've still got a long way to go and hopefully a lot of growth along the way. So that aspect alone is very attractive, even if the tax rate then and now is the same. So I'm starting to warm up to the idea of doing some conversions at 22%.

In my personal situation, where taxable account is much larger than tax deferred, I would consider what you are proposing except that then all of my qualified dividends in my taxable account get taxed at 15% instead of 0%. So, my brackets for conversion go: 10%, 12%, 27%, 22%. For my situation, the 27% is just too high, so I am staying within the 12% bracket for the foreseeable future.

 

[LOL!]

One change I'm considering is converting into the new 22% bracket. Previously, I never converted beyond the top of the 15% bracket.

I agree with kramer.

The 15% bracket is still in play because qualified dividend income is still taxed at 0% if one stays below this. And a Roth conversion increases AGI so that QDI becomes taxable. At least in 2017, Roth conversions above the 15% ($75,900, taxable income) made one's marginal rate 30%.

I don't know how this will all interact with the new tax law, but I think it is something to certainly look at carefully.

 

[RunningBum]

But Cobra says that they will only get 35-40% converted at that rate. Which means that once SS and RMDs start, they will hit that 15+15% rate every year. In that case, it makes sense to me to go through the 12+15% rate and to the end of the 22% rate. In fact I'd probably go to the end of the 24% rate too.


Since it wasn't mentioned, I'm assuming the ACA subsidy is not in play, or not enough to worry about. That's what's keeping me from this strategy.

 

[kramer]

But Cobra says that they will only get 35-40% converted at that rate. Which means that once SS and RMDs start, they will hit that 15+15% rate every year.

Actually, the OP did not provide enough information to conclude this.

But that is why I said my personal situation, just to make sure folks were aware of the give/take of Roth conversion decisions.

Also, most people are going to want some money left in IRAs (as opposed to paying high marginal rates for conversions to completely empty out an IRA). Firstly, the RMDs on a low remaining balance will be low. If you will have high medical or high LTC costs, they will be deductible and you can take higher income those years. And if you are going to purchase a deferred annuity, it is generally better to do so within an IRA than outside an IRA.

Edit: Ah, I see, you were referring to the poster Cobra and not the OP.

 

[Philliefan33]

I haven’t crunched the numbers yet, but I suspect that we will start doing some Roth conversions this year.

DH’s pension has put us in the 25% bracket since he retired (not a bad thing) and projected SS + RMDs barely went into the 28% bracket, so I didn’t see any tax advantage in doing conversions.

Now with our tax bracket dropping to 22% for (probably) eight years, I’m thinking we should move some money and pay 22% on it rather than (what I believe) will be higher tax rates in the future.

I’ll play with some spreadsheets later to see what the numbers indicate.