Roth Conversion Strategy Changes in 2018?

[SecondCor521]

Correct.

jroon is considering a market timing strategy by converting a large number of shares when they are "cheap" and anticipating they will rebound.

Color me confused.

jroon is converting this month per your quote above. I don't think many people would argue that shares are "cheap" now.

 

[jroon]

I will be paying taxes on the amount I convert and will not be able to recharacterize. I realize no one knows what the market will do this year (or any year. I am trying to avoid a situation where, for example, I convert 32K in Stocks (US and/or International) and at the end of the year it is only worth 20K for example. I still owe the taxes on the 32K.

So, is there a way to avoid this situation now that we can't recharacterize, or am I looking at this the wrong way? Sorry if this question was not clear in my earlier post (or if it still is not clear).

 

[43210]

..., or am I looking at this the wrong way?

Possibly. Do you think it would be a problem if (hypothetically) there were a flat tax? If yes, then you are thinking about it in the wrong way.

 

[user5027]

Color me confused.

jroon is converting this month per your quote above. I don't think many people would argue that shares are "cheap" now.

I'll try to help you.

jroon is thinking about converting this month, but also mentions maybe converting another 50k or so if the market tanks and the shares are cheaper.

Does that help?

 

[user5027]

I will be paying taxes on the amount I convert and will not be able to recharacterize. I realize no one knows what the market will do this year (or any year. I am trying to avoid a situation where, for example, I convert 32K in Stocks (US and/or International) and at the end of the year it is only worth 20K for example. I still owe the taxes on the 32K.

So, is there a way to avoid this situation now that we can't recharacterize, or am I looking at this the wrong way? Sorry if this question was not clear in my earlier post (or if it still is not clear).

The only way to avoid that is to convert as late in the year as possible, but then you will not enjoy almost a years worth of potential tax free gains and dividends on the amount converted.

I liked your idea about taking a bigger bite of the conversion apple if the market tanks.

 

[SecondCor521]

I'll try to help you.

jroon is thinking about converting this month, but also mentions maybe converting another 50k or so if the market tanks and the shares are cheaper.

Does that help?

Yeah. I thought you were referring to his first conversion, not his second one. Thanks.

 

[Sunset]

My dream is to be home for two weeks when the market falls 99% in 1 day , so I can convert everything to ROTH, and then the market rebounds to its normal 100% level.

Otherwise, we will move some from IRA and towards the end of the year move the rest, unless there is a drop in which case we will move shares (without selling) as there is no need to have the sell & buy cost if I'm just going to get the same thing.

 

[jazz4cash]

The only way to avoid that is to convert as late in the year as possible, but then you will not enjoy almost a years worth of potential tax free gains and dividends on the amount converted.



I liked your idea about taking a bigger bite of the conversion apple if the market tanks.

How about selling the stock to lock in the gain. Convert at any time you wish. I think the main concern is paying taxes on a loss.

 

[user5027]

How about selling the stock to lock in the gain. Convert at any time you wish.

I'm not following you here. I'm in ETFs. When I convert, XX shares of VTI, equal to the $$ I want converted, move from my tIRA to my Roth. No sale involved.

Once you sell when do you get back in? Isn't that always the problem, being right twice?

 

[RunningBum]

I will be paying taxes on the amount I convert and will not be able to recharacterize. I realize no one knows what the market will do this year (or any year. I am trying to avoid a situation where, for example, I convert 32K in Stocks (US and/or International) and at the end of the year it is only worth 20K for example. I still owe the taxes on the 32K.

So, is there a way to avoid this situation now that we can't recharacterize, or am I looking at this the wrong way? Sorry if this question was not clear in my earlier post (or if it still is not clear).

I don't see how to avoid it. You are correct that you'd like to convert at a low, so that you pay lower taxes and get the recovery gains tax free forever. But there's no way to predict where that low is. History says that most the market will go up, so that favors converting early. Or you could do a little market timing and wait for a dip. The market seems to be high now, but we could have another 15-20% gain this year before a fall next year.

 

[mpeirce]

Is anyone else changing their conversion strategy?

In 2017 I used the horse race approach for the first and last time.

This year I expect to convert about half of what I think would be best this month. Then, near year end, I’ll covert the rest allowing me to fine tune the amount for tax purposes.

Why half now? Playing the averages since up years are more common than down years.

But what if the market is down? Oh well, no regrets, in 10+ years any up/down variability will look like noise.

 

[zinger1457]

This year I expect to convert about half of what I think would be best this month. Then, near year end, I’ll covert the rest allowing me to fine tune the amount for tax purposes.

That's my plan also, for 2017 my MAGI (after ROTH conversion) looks to be about ~$180 short of the ACA subsidy cliff. I thought I left enough of a buffer but capital gains and dividends for 2017 turned out to be a lot more than I estimated. With the recharacterization option gone I definitely don't want to risk being so close to the edge for 2018.

 

[SecondCor521]

I would do similarly but I am lazy, so my plan is probably to wait until after Christmas every year and then convert up to my target. I currently know all of my income by about 12/20 each year. That way I lose out on the tax savings of converting earlier in an (on average) up year, but I also don't have to worry about exceeding my target AGI in case a cliff is involved.

 

[kramer]

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.

I just wanted to say thanks for the discussion on this thread ... I tried to read it with an open mind and now you just about have me committed to convert to the top of the 24% bracket this year Anyway, I have a weird situation with the foreign tax credit which will actually pay for the extra taxes that I will pay on my qualified dividends when they get pushed into the 15% bracket. (in a typical year, my tax rate is low so I am not allowed to use up all of the foreign tax credit I get from mutual funds holding foreign stocks, but the unused amount can be carried forward for 10 years, so I can use some of that carry forward amount in a year when my taxes are high like when I IRA to Roth convert).

Even though it is not necessarily a win for me if taxes do not go back up after 2025, I have other considerations. My situation is pretty perfect right now, living abroad in my early 50's so no State taxes and I don't have to keep income low for ACA purposes or Medicare premiums. But if I ever moved back to the US, these things will matter and so my hands would be tied at that time. So it's possibly better to convert to reduce this risk and uncertainty. In addition, if one is going to convert, it seems to be advantageous to do it sooner rather than later (right?) ...

 

[Perryinva]

Am I correct in assuming that if pensions and current SS income place one at a MFJ taxable income of $72k, that with the new standard deduction of $24k, the remain $48k precludes any after tax qualified dividends from being tax free?

 

[pb4uski]

You're confusing terms. The $72k limit is for taxable income but is after the $24k of standard deductions.

So if you had $72k of pensions and SS, after the $24k standard deduction your taxable income would be $48k... so the first $24k of preferenced income would be 0% and anything above that would be 15%.

OTOH, if what you meant was that your taxable income after considering pensions, SS and standard deduction was $72k, then any preferenced income would be at 15%.

 

[Perryinva]

Thank you, yes, I mixed up amounts as to what is qualified, and what is taxed, based on the preferenced income amounts. I would only have a brief period of a few years where preferenced dividend income would be low enough to take advantage of the 0% rate, which will factor in to determining what is smarter : take advantage of $24k of preferenced dividend income OR roll over tIRA to Roth. I would not have $24k in qualifying divs, but any would be at the expense of less rolled over. It still seems that the amount at 0% trumps the rollover. But if it wasn’t even a consideration then why bother investigating it.

 

[jroon]

Quick update. I spoke to my Vanguard Flagship representative today and did my first 2018 Roth Conversion. He mentioned some of his clients are modifying their conversion strategies due to the 2018 Tax Law changes. He agreed it made sense to convert into a more conservative fund due to the loss of the recharacterization option. Others are opting to wait until later in the year to do their conversions.

I converted from the Total Stock Market Index fund in my traditional IRA into the Total Bond Market Index fund which also accomplished rebalancing.

 

[Perryinva]

Really? A bond fund in a Roth? Curious selection unless you plan to use the Roth sooner rather than later.