The BEST Roth Conversion Strategy in 2022? | Roth Conversion Timing

[SecondCor521]

And really, isn't it just the initial conversion that is affected by the calendar timing (I have $100K to convert in Jan, but hold off until Dec to pull the trigger). In my mind, when you start converting, once a year conversions don't care about the calendar timing.

Each conversion can be done at any time during the calendar year, so using optimal strategy yearly impacts each conversion to a certain degree. 30 years of conversions means 30 individual impacts, which all add up.

I understand the convert during the dip logic. Many of us have cash cushions to protect our investments during the big dips. How do you pay your taxes on that conversion? If I use my cash cushion, then I don't have that to protect me from a prolonged down market. If I sell stocks to pay the taxes, I am selling them in a down market, which is what I was trying to avoid by having cash in the first place. What, do you more experienced converters, do? Use your cash? Sell devalued stocks?

(A) I personally am converting at very low to 0% tax rates, so in general I don't have to pay taxes at all, thus this question really doesn't apply. But also (B) you don't have to sell stocks to pay the tax bill at the time of conversion; for example, I made a conversion on 4/29/22, but any income tax bill for that conversion isn't due for almost a year, at which time I think most of us hope that the market has recovered at least somewhat. And in any case, (C) the tax bill is always some moderate fraction of the amount converted, so even if one had to sell stocks in a down market, the benefit of a $100K conversion at a market low would outweigh the losses incurred in a $20K stock sale to pay the taxes. Oh, and (D) the $20K stock sale in that example would, if happening in a taxable account at a loss, provide a tax benefit in offsetting capital gains or income.

 

[pb4uski]

On the last part, you need to either include the tax in estimated payments so when you file a 2210 you demonstrate that you paid the tax in the quarter that it accrued in OR include it in federal tax withholdings.

My entire tax is due to Roth conversions, most of which I do in January but I have the tax due withheld from my pension over the course of the whole year.

 

[SecondCor521]

On the last part, you need to either include the tax in estimated payments so when you file a 2210 you demonstrate that you paid the tax in the quarter that it accrued in OR include it in federal tax withholdings.

My entire tax is due to Roth conversions, most of which I do in January but I have the tax due withheld from my pension over the course of the whole year.

Ah, of course, you're right.

I've been spoiled by paying nothing in and still getting refunds the past couple of years. In my case, with two kids in college the FAFSA effects on higher AGI (plus income taxes plus ACA subsidy loss) make taxable Roth conversions a no go zone.

Perhaps in a year or two; I'm currently waiting to see what my kids' ever-evolving college plans will be.

 

[rwdflynavy]

Just thought this video was interesting showing studies of various Roth conversion timing strategies - the narrator says the most common approach is the least cost effective. The drawdown scenario may be worth considering this year.

https://youtu.be/0p3RebkLWKs

Thanks for this video link Midpack.

Talked it over with my better half and pulled the trigger on a chunk (~75%)of conversion for this year. It is a bit of market timing, but doing this in Bear territory seems like a smart play. I'll do the rest closer to the end of the year when I have a better handle on final income tweaks.

We are at the very low end of the 22% bracket based on my pension, so we are looking to get close to the top of that bracket.

 

[MarieIG]

My plan was to convert 50k a year (split equally over four quarters) for 22, 23, 24, and 25 - and reassess in 26. That one drain the IRA, but will give me a better Roth/Regular ratio.

I forgot to convert in the first quarter, but converted 12.5 in the second quarter. (I did pay estimated taxes in the first and second quarter). The plan now is to convert 12.5 in the third quarter, and 25k in the fourth quarter. I have cash in my traditional IRA, so have been sending that over to the Roth settlement fund, and putting in limit orders on ETFs.

If there is a blood bath in the fall (in the order of March 2020 levels or below) which would not surprise me, I may convert some stock funds directly; and may push it to 75k.