Roth rollovers - how often and when strategy?

[tominboise]

Roth conversions - how often and when strategy?

I plan on doing Roth conversions this year, up to our income limits to maintain our ACA subsidy for health insurance. My main question is, do you all roll over once, twice or more times per year, as you get a better feel for your income stream? Or do you do it all at the end of the year, when your income is well known. In our case, income is derived from interest on savings, dividends and long term capital gains on equities sold during the year. The balance between the total of those and the subsidy limit is the available amount for Roth rollover.

 

[RunningBum]

First, the terms "rollover" and "conversion" are not interchangeable. You are talking about conversions. Hopefully you or a mod can fix the thread title to avoid confusion.

I don't have much room to the ACA cliff so I just do a conversion in the last week of the year once I know what my MAGI will be. I leave a little buffer for surprises, like if I forgot interest from some bank, but I'm pretty darned careful.

If I had more room, I'd probably convert a safe amount early in the year. Another option would be to do a small amount of market timing, waiting for a drop in the market to convert more shares and count on market recovery to happen in your Roth. 2020 would've been great for that. Other years you might not ever get much of a drop, so it would be better just to convert early in the year.

If you find more certainty about your MAGI as the year progresses, sure, you could convert some again. Just remember that you can no longer recharacterize, so be careful.

 

[MichaelB]

Happy to change the thread title if needed, but Investopedia seems to treat both terms as similar. https://www.investopedia.com/how-to-do-a-rothira-rollover-4770219

Perhaps there is a detail that makes the difference?

 

[RunningBum]

Happy to change the thread title if needed, but Investopedia seems to treat both terms as similar. https://www.investopedia.com/how-to-do-a-rothira-rollover-4770219

Perhaps there is a detail that makes the difference?

Looks like my error. I had always thought a rollover is just transferring money or an account to another account with the same tax status. Like rolling over a 401K to a tIRA. But it does appear that rollover and conversion are (or can be?) the same thing. Thanks for the gentle correction, and yes, leave the thread title as is.

 

[SecondCor521]

I pretty much agree with RunningBum.

Typically I do a pro forma tax return around early December. After making sure of all of my income, I figure out what my target AGI is, and then do my Roth conversions right after the last VFIAX dividend is finalized. For example, I did my conversions on 12/21 and 12/23 for 2020. My 12/21 conversion was for most of what I wanted and the 12/23 conversion was fine-tuning.

In 2020 for the first time, I decided to do a Roth conversion when the market was cratering. I chose to do approximately half of what I thought I would do. I happened to succeed on both counts: I did my conversion on 3/17 which was near the low, and the amount ended up being just about half of the amount that I ultimately ended up converting.

The main drawback is that Roth conversions, as RunningBum notes, are no longer reversible, so the increase in AGI is pretty near impossible to undo. So you may constrain your tax planning choices later.

When looking at my situation at year end, I briefly considered a very low AGI target for 2020 to take advantage of certain tax law changes and a potential change in my kids' college choice that occurred between March and December. However, because of my March conversion and my other income, I had already exceeded the applicable AGI target and could not choose that strategy. I don't think it turned out to be any big deal, as the strategy I chose instead was probably still a good one.

I think it's also important to note that it's good to look at the consequences of missing your AGI target either on the low side or the high side. If you're converting up to the 400% FPL ACA cliff, then the risk is asymmetric and it is probably wise to err somewhat on the low side just in case. In my particular case my AGI target has more of a symmetric risk, so I try to hit the number on the button. I think this year I got within a dollar. What helps me is that my tax situation is relatively stable from year to year (excepting my kids' college stuff) and I carefully track all of my income via documents and spreadsheets. Plus I check and re-check at least four or five times before making any transactions.

 

[tominboise]

Thanks for the thoughts. I did revise the title of the thread as I am doing Roth conversions. Anyway, as I suspected, I will keep track of my income(s) through the year and do a conversion late in Q4, unless the market craters significantly between now and then. My estimates show that I will be able to convert around $20k this year.

 

[VanWinkle]

I was on the ACA for 3 years and did small conversions to stay in the maximum premium and cost subsidies sweet spot. As there was little room, I would wait until after Christmas and do the conversion in the last week of the year when taxes were known.

Now, without the ACA concerns, I do a larger conversion early in the year, and a second conversion to top off the brkt during the last week of the year.

VW

 

[gauss]

#1) I convert about a third to one half during the first "dip" in the market during the year.

#2) I convert the remaining amount of my target dollar amount during December.

Note my target is based on 24% tax bracket maximization, not ACA.

-gauss

 

[tominboise]

#1) I convert about a third to one half during the first "dip" in the market during the year.

#2) I convert the remaining amount of my target dollar amount during December.

Note my target is based on 24% tax bracket maximization, not ACA.

-gauss

This would be my target if I didn't need the ACA subsidy. It's worth about $25k year in my situation.

 

[cat4ever]

This would be my target if I didn't need the ACA subsidy. It's worth about $25k year in my situation.

$25K? What is your situation if you don't mind me asking? I haven't dealt with ACA yet, but didn't realize subsidies would ever get that high.

 

[fh2000]

I converted a Traditional IRA account to Roth account online at Vanguard last August, and it took just a couple of days.

But when I asked to covert some funds from my old 401K to Roth, they needed physical paper work for that process. I mailed one application to their processing center in September, then the mail simply disappeared. I had to wait for 45 days to allow it to expire, then mail a new application via certified mail this time. It still took a while to get to their processing center, then transferred to the proper department.

This year, I will make sure start the Roth conversion from 401K early to allow any delays.

 

[pb4uski]

I usually have done my near the end of they year after a projected tax return is done in late December.

This year I decided to do a big chunk in Jan 2021... about 93% of what I expect to be able to do for the full year.... I wanted to get that money into tax-free status earlier rather than later.

 

[tominboise]

$25K? What is your situation if you don't mind me asking? I haven't dealt with ACA yet, but didn't realize subsidies would ever get that high.

All depends on your situation and probably what state you live in. For a silver plan, family coverage (college daughter still on our insurance), the premium is $2345 per month. The subsidy is $2096/mo so net is $249/mo for the insurance. That is with our income at $45k/year.

 

[cat4ever]

wow, didn't realize the premiums or the subsidies were that high. I'm getting COBRA with dental for $1600/month, and it's a very good mega-corp policy. Plus I can use HSA funds to cover my COBRA premiums. I think I'll be maxing at least to top of 24% bracket and maybe beyond this year with Roth conversions to set me up for ACA in the coming years. For your income do they use current year or the estimated upcoming year AGI for determining subsidy?

 

[davebarnes]

I have Zoom call with my tax prep guy on February 11th.
Will probably do Roth conversions on Feb 12th. I am not a market timer.
I am ignoring the IRMAA limits as we have $1.2M to convert.
Current plan is to do $200K/year. Need to get this over with.

 

[SecondCor521]

wow, didn't realize the premiums or the subsidies were that high. I'm getting COBRA with dental for $1600/month, and it's a very good mega-corp policy. Plus I can use HSA funds to cover my COBRA premiums. I think I'll be maxing at least to top of 24% bracket and maybe beyond this year with Roth conversions to set me up for ACA in the coming years. For your income do they use current year or the estimated upcoming year AGI for determining subsidy?

Not the person you asked, but ACA APTC (aka subsidies) are based on your estimated AGI for the upcoming year. They get reconciled against your actual AGI at tax time on Form 8962, which you file with your 1040.

The typical cadence is estimating your income for year N at open enrollment in Nov/Dec of year N-1, receiving APTC and paying subsidized premiums during year N, and then reconciling it on Form 8962 with your 1040 for year N by April 15th of year N+1.

BTW, you can switch over to an ACA policy if your COBRA runs out mid-year because it's considered a loss of coverage which entitles you to a special enrollment period. So if your COBRA runs out on July 31st, you could get an ACA policy starting August 1st.

 

[SecondCor521]

Need to get this over with.

Why?

 

[pb4uski]

I have Zoom call with my tax prep guy on February 11th.
Will probably do Roth conversions on Feb 12th. I am not a market timer.
I am ignoring the IRMAA limits as we have $1.2M to convert.
Current plan is to do $200K/year. Need to get this over with.

Just want to make sure that you know that any Roth conversion done on Feb 12 is a 2021 tax event as it sounds like you think it will impact your 2020 taxes but it wouldn't.

 

[tominboise]

wow, didn't realize the premiums or the subsidies were that high. I'm getting COBRA with dental for $1600/month, and it's a very good mega-corp policy. Plus I can use HSA funds to cover my COBRA premiums. I think I'll be maxing at least to top of 24% bracket and maybe beyond this year with Roth conversions to set me up for ACA in the coming years. For your income do they use current year or the estimated upcoming year AGI for determining subsidy?

Not the person you asked, but ACA APTC (aka subsidies) are based on your estimated AGI for the upcoming year. They get reconciled against your actual AGI at tax time on Form 8962, which you file with your 1040.

The typical cadence is estimating your income for year N at open enrollment in Nov/Dec of year N-1, receiving APTC and paying subsidized premiums during year N, and then reconciling it on Form 8962 with your 1040 for year N by April 15th of year N+1.

BTW, you can switch over to an ACA policy if your COBRA runs out mid-year because it's considered a loss of coverage which entitles you to a special enrollment period. So if your COBRA runs out on July 31st, you could get an ACA policy starting August 1st.

What he/she said. 2020 was our last year working and so we had to estimate our income for 2021, which wasn't a problem. It is a balance between the subsidy amount, the amount of taxes one wants to pay and where your income streams are.

We did have to submit enough paperwork regarding where that income was coming from. I used a couple of screen shots from Vanguard showing the dividends, etc and made up some numbers regarding stock sales to cover the difference. After this year, they will use the previous year income, so less paperwork required.

I could have also just paid the premium at full price all year and reconciled the difference when I did our taxes for 2021, but I didn't want to lose the earnings on the money all year.

 

[cat4ever]

So if your COBRA runs out on July 31st, you could get an ACA policy starting August 1st.

Yep, that's the plan. In fact those are my exact dates for 2022, you are good That will also be my 58th birthday (July 31). The subsidy for 2022 won't be quite as important since it's only for 5 months, so I may load up on Roths in 2022 as well, then hope to coast at least for some of my remaining 6 1/2 years before medicare on big subsidies.

 

[davebarnes]

Just want to make sure that you know that any Roth conversion done on Feb 12 is a 2021 tax event

I know.

 

[davebarnes]

Why?

Because I hate fretting about something for 6+ years.
And, as I am 9 years older than wife, there is the whole joint/single thing.