Roth conversion tax savings vs market

[thatguy]

What if I'm doing roth conversions now to avoid 10% higher tax on RMDs later and the market happens to be down, like 10%, at the time of the conversion.
Am I better off to skip the roth conversion and hope the market recovers and lose the tax savings?

 

[RunningBum]

What if I'm doing roth conversions now to avoid 10% higher tax on RMDs later and the market happens to be down, like 10%, at the time of the conversion.
Am I better off to skip the roth conversion and hope the market recovers and loose the tax savings?

Just the opposite, if the market is poised to recover you are best off converting to a Roth immediately so that you're never paying any taxes on the recovery gains.

Another strategy is to always convert at the start of the year, and if the markets lose (not 'loose') ground you can recharacterize the conversion to make it as if it never happened.

 

[UpAnchor]

Just the opposite, if the market is poised to recover you are best off converting to a Roth immediately so that you're never paying any taxes on the recovery.

Yep. You actually "want" the market to be down so that you're able to convert more shares per $. Let the recovery-whenever-take place on your converted shares in tax-free space.

 

[thatguy]

Thank you. I don't know why I didn't see it that way. I try to do my RMD on a market high. I was applying the same thought to the roth conv.

 

[jebmke]

If you were reinvesting an RMD in a taxable account (same asset class) you would want to do that at a low point also - especially equity.

 

[Louis2]

OK, so let me ask a related question. I have an traditional IRA, 2/3 total stock index, 1/3 total bond index. I open a ROTH and plan to do my first conversion right now, a fixed dollar amount based on tax bracket. Do I just convert 2/3 stock and 1/3 bond? Or is there logic to converting all bonds "since they are down".

I can always rebalance within each fund to better match long term goals, right?

Is there a sound strategy, or is it all just market timing by another name?

 

[Sunset]

Yep. You actually "want" the market to be down so that you're able to convert more shares per $. Let the recovery-whenever-take place on your converted shares in tax-free space.

The ideal would be for a nice 99% drop in the market lasting 3 months and do one big conversion of all $$$ , taxes would be small even on 2 M.

 

[Alan]

OK, so let me ask a related question. I have an traditional IRA, 2/3 total stock index, 1/3 total bond index. I open a ROTH and plan to do my first conversion right now, a fixed dollar amount based on tax bracket. Do I just convert 2/3 stock and 1/3 bond? Or is there logic to converting all bonds "since they are down".

I can always rebalance within each fund to better match long term goals, right?

Is there a sound strategy, or is it all just market timing by another name?

I usually do my Roth conversion at the start of the year and if I am at my AA then I convert like for like. If bonds are down then I would take the opportunity to rebalance by buying some more bond shares when doing the conversion.

 

[thatguy]

The roth conv goes into cash and I try to move it later. Only about a 3rd of the roth has been moved to an index fund.
Although the accumulated RMD account and the roth are too much in cash, the tax deferred accounts, where most of the money is, are too much in equities for my age.

Bonds & bond funds baffle me. As I think I understand it, If interest rates go up, bonds go down. Interest rates got no where to go but up. I'm too much in equities. I might have a loss if the market turns bad. If I move some to bonds it seems that I guarantee a loss. Saving accounts and CDs won't lose money and may go up if interest rates go up. My thoughts are let the growth happen in the equities in the tax deferred accounts and start moving more to cash savings for safety. Haven't moved enough yet.

 

[Sunset]

The roth conv goes into cash and I try to move it later. Only about a 3rd of the roth has been moved to an index fund.
Although the accumulated RMD account and the roth are too much in cash, the tax deferred accounts, where most of the money is, are too much in equities for my age.

Bonds & bond funds baffle me. As I think I understand it, If interest rates go up, bonds go down. Interest rates got no where to go but up. I'm too much in equities. I might have a loss if the market turns bad. If I move some to bonds it seems that I guarantee a loss. Saving accounts and CDs won't lose money and may go up if interest rates go up. My thoughts are let the growth happen in the equities in the tax deferred accounts and start moving more to cash savings for safety. Haven't moved enough yet.

You could consider a time limited etf where the bonds all expire in a certain year and you get cashed out.

In a big market downdraft, these might still go down, but as long as you don't sell, you would be cashed out at the full price at the end of the term.

for example: BSJJ - Exchange Traded Funds | Guggenheim Investments - Investment Management for Financial Professionals

 

[dvalley]

I never saw a reason to do Roth conversions since I'm in the 25-28% tax bracket now and I think my tax bracket will be much lower when I retire since I have no pension etc. I'm guessing 15% tax bracket at most but no one knows what happens over the next many years until I take the dirt nap.

 

[2017ish]

I never saw a reason to do Roth conversions since I'm in the 25-28% tax bracket now and I think my tax bracket will be much lower when I retire since I have no pension etc. I'm guessing 15% tax bracket at most but no one knows what happens over the next many years until I take the dirt nap.

We also have done none while working. Once we retire and all deferred comp is paid (one calendar year post-retirement), we'll convert to the top of the 25/28 limit for quite a while to avoid the higher taxes when RMDs kick in...

Goal is to never pay over 28% fed tax marginal rate in retirement, which would result in a huge savings from the deferral ....

 

[RunningBum]

I don't think anyone suggests doing conversions while still working unless there are some special circumstances. The best time for conversion is after you retire early, before you start collecting SS and pension and have to take RMDs. Note I said "best", not "only".

 

[Gotadimple]

OK, so let me ask a related question. I have an traditional IRA, 2/3 total stock index, 1/3 total bond index. I open a ROTH and plan to do my first conversion right now, a fixed dollar amount based on tax bracket. Do I just convert 2/3 stock and 1/3 bond? Or is there logic to converting all bonds "since they are down".

I can always rebalance within each fund to better match long term goals, right?

Is there a sound strategy, or is it all just market timing by another name?

If you want to convert now, look at your portfolio total amount without the converted $$. Asset allocation: is it where it needs to be without the excess cash?

So you have decisions to make about what to sell and where to reinvest it (the Roth conversion). With that plan in mind, then, you can do the conversion this year. If the market goes down, as others have said, you can recharacterize the conversion.

That said, I tend to make the plans for re-balancing and conversion this time of year (waiting for dividends/interest/capital gains earnings to post in December). Then when the final numbers are known, I re-balance (sell) to create the cash for conversion, convert, and then reallocate to get to the desired asset allocation. The whole thing takes (for me) about 2 weeks as I need to wait for transactions to post before commiting funds in the reallocation. YMMV.

 

[gauss]

I don't think anyone suggests doing conversions while still working unless there are some special circumstances. The best time for conversion is after you retire early, before you start collecting SS and pension and have to take RMDs. Note I said "best", not "only".

If you marginal income rate in retirement is the same as when you are working then it may be best to start while you are still working.

I got a 5 year leap on retirement wrt DW. With only her income for the pass few years, this has been a great time to start our yearly Roth Conversions.

-gauss

 

[jonat]

Roth conversions are also a good way to generate income to offset deductions you already have, if need be.