Poll: Annual Roth Conversion Timing?

[LOL!]

We don't know our total income until late in December because my wife is working and her bonus could be 5 to 10% of her salary ... well except for this year when it was 15% of salary. I had done a partial conversion a couple weeks ago anticipating the need for a "top up", but instead the higher bonus blew a hole right into some tax credits and other things we use to pay less taxes.

Since undoing a conversion is no longer allowed, we had to donate more than her bonus to charity this year to avoid paying the stupid tax.

 

[SecondCor521]

I like to wait until December so I can do income tax planning. I could do my tax planning earlier in the year, but as I'm still figuring out FIRE financial planning, I tend to learn things throughout the year that can affect what I do. So I wait.

I also dial it in with multiple conversions. This year I did my first conversion on 12/10 which looks like it will end up being about 85% of my target. I'm waiting for my Vanguard dividend payment to actually come through and for confirmation on one of my income sources, then I'll do another conversion of the additional 15% or so this week.

I am without the ability to recharacterize and also without much flexibility to lower my income after 12/31 (no earned income so no tIRA contribution, and no FSA, so no FSA contribution). So I convert up to whatever level I feel I am 100% certain not to exceed my target. This year that's about $405 below my actual target.

 

[supersonic]

I didnt vote in the poll. We just did our first one a week ago. Converted up to near the 0% cap gains limit. End of the year is the right answer for us as we then know what the capital gains distributions look like for some taxable mutual funds we have. Also delays the large quarterly estimated tax payment to the last quarter.

I guess I dont understand what the advantage would be to doing it earlier? Unless you are using the money in that year?

 

[sengsational]

After the tax software is released in late November and before December 31st.



To me, it makes it so easy...I "do my taxes" right then in early December, doing a sensitivity analysis on Roth conversion amount. Then I pick my number, open the web site and type in the number. Boom, done. And in January/February, I type in the exact numbers for things I flagged as estimated and eFile, which takes about 10 minutes. The hardest thing about executing on this plan is that they ask you "what letter is in box 7". If you hadn't done something before, you can only guess, but I've been doing it long enough to know.

 

[SecondCor521]

I guess I dont understand what the advantage would be to doing it earlier? Unless you are using the money in that year?

I think the thought is the market goes up over time, so is likely to be lower earlier in the year and higher later in the year. Since you pay taxes on the converted value, you can convert the same number of shares at a lower tax cost earlier. 200 shares at $100 each is $20K of taxable income. Those same 200 shares at $120 each later in the year is $24K of taxable income.

 

[Animorph]

I think the thought is the market goes up over time, so is likely to be lower earlier in the year and higher later in the year. Since you pay taxes on the converted value, you can convert the same number of shares at a lower tax cost earlier. 200 shares at $100 each is $20K of taxable income. Those same 200 shares at $120 each later in the year is $24K of taxable income.

That's why I do it.

It's also pretty safe to Roth convert say 80% of your target in January and then fill in the final 20% in December when you have a better tax estimate. Best of both worlds, but still no guarantee you're converting at the lowest market levels.

 

[harley]

I used to do them fairly early in the year, but between the loss of the recharacterization capability and my personal lack of financial organization I'm going to be doing them (starting this year - 2019) at the very last second in order to have my best chance of not screwing it up. I've had to do recharactizations twice before and am aware of how much can unexpectedly change in a short period of time.

 

[Telly]

Always the end of the year. In fact, just did it this morning (Monday). For a few funds don't have the actuals in time, but have ranges, I have done well in guessing where it will end up. Plus, I stay about $500 below what the exact maximum conversion $ amount would be, looking at it tax-wise.

Usually do it after Christmas, but with the way the holidays fall this year in relation to weekends, I didn't want to squeeze it in right before New Years. Worried about something going wrong, getting lost, etc. and the conversion not taking place. Not waiting to the last trading day gives time to verify that it happened, and to re-issue if it didn't.

Oh, a thanks to pb4uski for talking about Roth conversions years ago here. I had fallen off the conversion wagon, his posts made me go back and look at the tax torpedo at age 70+ (claiming SS + RMDs) again, which lit a fire under me to get back on the wagon. Making sure that every year counts!

Still think that we will take a torpedo amidships, but hopefully we can put the fire out... wait a minute, I want to keep the FIRE on!

 

[Midpack]

It's also pretty safe to Roth convert say 80% of your target in January and then fill in the final 20% in December when you have a better tax estimate. Best of both worlds, but still no guarantee you're converting at the lowest market levels.

I just did my first large conversion this month, but from next year on that’s what seems to make the most sense to me. Most of the distribution working tax free in a Roth early and a trim adjustment in Dec to top off target tax bracket. It’s all online easy-peasy so it’s no trouble to do two versus one per year.

 

[RunningBum]

That's why I do it.

It's also pretty safe to Roth convert say 80% of your target in January and then fill in the final 20% in December when you have a better tax estimate. Best of both worlds, but still no guarantee you're converting at the lowest market levels.

I don't do it by %, but rather by $$ margin of safety. My plan is to convert to within about $10K early, then top it off as close as I dare (about $2K short). But, if I'm going for an ACA subsidy I'm usually already within $10K (using year end estimates for divs and interest) so I can't do any early. 80% of my typical small conversion wouldn't be very safe.

 

[Trooper]

I just did my first large conversion this month, but from next year on that’s what seems to make the most sense to me. Most of the distribution working tax free in a Roth early and a trim adjustment in Dec to top off target tax bracket. It’s all online easy-peasy so it’s no trouble to do two versus one per year.

This year will be my fourth conversion and to date have always done this:

all at once in Dec or back loaded somehow (when you know all your income, dividends, CG, etc.) to know exactly how much to convert to top off a tax bracket.

However starting next year I may do what Midpack indicates above.

 

[cranberryjoe]

I voted "Early" but what I actually have been doing each year is one large conversion in January, then a small one in December after CGs and dividends to top off my tax bracket. Looks like that's how many people have been doing it.

 

[harley]

I used to do them fairly early in the year, but between the loss of the recharacterization capability and my personal lack of financial organization I'm going to be doing them (starting this year - 2019) at the very last second in order to have my best chance of not screwing it up. I've had to do recharactizations twice before and am aware of how much can unexpectedly change in a short period of time.

Good thing I waited. I finished my TT estimates last night, and I have zero room for a conversion this year. Our side business had a great hear, and we weren't planning to sell our house this year but we did. So we're already topping out the 22% bracket. If I'd have done the conversion early I'd be hosed, especially since I start Medicare in Dec of 2020. I know IRMAA is based on income, but I'm not sure if they take one time things like a home sale into account. I might have to appeal if they do. But no conversion for me this year. Hopefully I can start again next year.

 

[Splash]

Biggest pre-tax balance is in my 401k plan which only allows 2 conversions per year. Also, trying to get close to ACA MAGI cliff without going over.

Converting 50% early in year and another 40% in mid-December within my 401k plan. Then making final conversion amount from DH IRA on last possible date.

 

[Steeler75]

There is a non-economic event in November that I will watching closely as well.[/QUOTE]

+1

Just completed first year conversion yesterday. If it wasn’t an election year in 2020, i’d consider early conversion with top off in December, but not this year. I’ll take my chances and wait to covert after we see which direction the country wants to go forward in.

Also +1 to converting bonds from tIRA into Roth this year, freeing up dry powder for any unforeseen downturn in equities.

 

[rubytuesday]

I'm confused. I thought Roth conversion was allowed only once in a calendar year, no? I made my first one this fall in the beginning of October, because stocks regularly tend to dip in October. The market indeed took a tiny dive the day before I made conversion, which suited me perfectly (ie, my new Roth account made about 9% profit in 2.5 months after the conversion, tax-free forever). I want to convert everything as soon as possible (which will take 2 more years), so am converting in the 24% tax bracket. But since I pretty immediately after conversion earned 9% tax-free, I think at least this year converting in the 24% tax bracket ended up being better than paying lower % tax over more years.

 

[devans0]

In general, I want conversions early. If the beginning of the year looks like a trend down such as in a recession, I may wait.

 

[VanWinkle]

I'm confused. I thought Roth conversion was allowed only once in a calendar year, no? I made my first one this fall in the beginning of October, because stocks regularly tend to dip in October. The market indeed took a tiny dive the day before I made conversion, which suited me perfectly (ie, my new Roth account made about 9% profit in 2.5 months after the conversion, tax-free forever). I want to convert everything as soon as possible (which will take 2 more years), so am converting in the 24% tax bracket. But since I pretty immediately after conversion earned 9% tax-free, I think at least this year converting in the 24% tax bracket ended up being better than paying lower % tax over more years.

No limit on Roth conversions, just limited by how much you have in an IRA. No re-characterization now, but multiple roth conversions are allowed in the same year.

 

[pb4uski]

I'm confused. I thought Roth conversion was allowed only once in a calendar year, no? I made my first one this fall in the beginning of October, because stocks regularly tend to dip in October. The market indeed took a tiny dive the day before I made conversion, which suited me perfectly (ie, my new Roth account made about 9% profit in 2.5 months after the conversion, tax-free forever). I want to convert everything as soon as possible (which will take 2 more years), so am converting in the 24% tax bracket. But since I pretty immediately after conversion earned 9% tax-free, I think at least this year converting in the 24% tax bracket ended up being better than paying lower % tax over more years.

No limit on number of conversions. I think you are confusing conversions with rollover contributions that are not trustee-to-trustee.... those are once every 12 months.

https://www.irs.gov/retirement-plans/ira-one-rollover-per-year-rule

Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement 2014-15 and Announcement 2014-32). The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.

• Trustee-to-trustee transfers between IRAs are not limited
• Rollovers from traditional to Roth IRAs ("conversions") are not limited

 

[RTR1]

I have made several IRA to ROTH conversions and all have been after I know my taxable income. December is my choice.

 

[rathail]

This is the first year having an inherited IRA that I'm using the RMD's to pay the taxes of a conversion within my 401K to ROTH. I'm doing this at the end of the year so the funds stay invested for the year and is not sitting too long until I do the taxes.
I guess one is not necessary for the other, so I just shot my post in the foot.
Why would timing really matter, it is hopefully, just going from one investment to another. Both I would hope are LONG TERM. Timing should be of little interest. Pun intended