T-IRA -> ROTH conversion best practices?

[larrytbm]

My technique is based on an Aug., 2002 article written by James Lange, CPA. Early each year, I set up 5 or more Roths, each a different stock or mutual fund. Total amount is about 2.5X more than what I anticipate keeping. Then 14-20 months later (Apr. 15th - Oct. 15th) I decide which Roths to keep and which to recharacterize. And I do the same thing 12 months later, even before making my decision on the previous years conversions.

I have been doing this for 5 completed tax years, paid a conversion tax of 11% while the assets have grown by 61%. The first year's conversions are now fully tax free and as each conversion hits the 5 tax year milestone, I can begin consolidating them. Even in bad years, I have finalized at least one conversion just to fully utilize all other tax breaks and credits. Gains have always been greater than the tax burden. Almost 50% of my portfolio is now in Roths so I guess it will get harder to make beneficial conversions, so some assets may still be in T-IRAs when I reach 70-1/2.

[Animorph]

Dug this thread up to add something, since I'm in the middle of doing some conversions now after waiting for the fourth quarter to avoid tax problems with a larger than expected conversion.

I'm converting each fund into a separate Roth conversion account, maybe twice as much as I want to convert, and will select which ones to recharacterize near tax time in 2014. I'll also convert to three new Roth conversion accounts with $6k, $3k, and $1.5k in cash. Given that most of my individual fund conversions will be about $12k, the cash will allow me to adjust the total amount converted a little closer (should be within $1.5k) to the tax limit I'm targeting. Without them, I could use a few smaller fund conversions, which might not work as nicely if they drop in value in 2014. The cash is a safe neutral investment that I still have laying around. No problem if it gets converted or not.

[Sesq]

Quote:

Originally Posted by larrytbm My technique is based on an Aug., 2002 article written by James Lange, CPA. Early each year, I set up 5 or more Roths, each a different stock or mutual fund. Total amount is about 2.5X more than what I anticipate keeping. Then 14-20 months later (Apr. 15th - Oct. 15th) I decide which Roths to keep and which to recharacterize. And I do the same thing 12 months later, even before making my decision on the previous years conversions..

This is pretty clever. Some of the abusive ideas involve non-correlated assets or hedges or options. This is just picking winners by the nature of what the law permits.

I hope I remember it when I am ready (ha-ha).

[FinancialDave]

What I worry about is the fact that the IRS can change how it views what people might consider an entirely legal transaction and all of a sudden you end up owing more taxes and penalties than you expected.

Sometimes a transaction is entirely legal, but it is how the IRS views the intent of the transaction.

[sengsational]

One additional "best practice" that came up in another thread today would be to leave your 401(k) account open, rather than roll that into your tIRA. There are some caviats, but given low fees and stability, you won't "dilute" the after tax basis in your tIRA with all of the pre-tax 401(k) money, and your conversions will be a higher percentage tax free in the early years.

[Sesq]

Quote:

Originally Posted by FinancialDave What I worry about is the fact that the IRS can change how it views what people might consider an entirely legal transaction and all of a sudden you end up owing more taxes and penalties than you expected. Sometimes a transaction is entirely legal, but it is how the IRS views the intent of the transaction.

You just described my day job.