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The BEST Roth Conversion Strategy in 2022? | Roth Conversion Timing
Old 05-02-2022, 04:46 AM   #1
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The BEST Roth Conversion Strategy in 2022? | Roth Conversion Timing

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
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Old 05-02-2022, 06:46 AM   #2
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Pretty good but I found it hard to listen to because of his edits to remove any "dead" time between his sentences.

I've actually been following his last strategy for the past couple of years. I make 50% conversions in January and wait for any opportunity to do the rest later in the year. I did slightly over convert last year - its hard to precisely predict dividends and capital gains. In 2020, the opportunistic conversion was made in March and I gained a nice chunk of tax free money when the markets recovered; last year, no notable benefit (by me) using this strategy.

This year I converted 50% of my planned amount in January (as usual). I haven't made my final conversion yet this year - I (unfortunately) expect the market to drop further over the next few weeks...
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Old 05-02-2022, 08:06 AM   #3
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I think that Roth conversion "strategies" nowadays are close to useless.
What matters most is the amount converted.

For past several years, I had an automatic monthly conversion in place and then in December I'd compute my likely AGI for the year and then do another 13th Roth conversion to bring that AGI up close to the next IRMAA threshold.

Now that I'm in RMD-land, the automatic monthly conversions have stopped but I still might do a small one in December as before...
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Old 05-02-2022, 08:06 AM   #4
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We’ve already made most of our Roth conversions for the year. We may make one more this week. If the market goes down much further, we might go over our plan like we did in March 2020. We’re paying for that in IRMAA this year, but I think it was a good long term decision.
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Old 05-02-2022, 09:28 AM   #5
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Thanks for sharing the link. Interesting information.



I am all bond in my IRAs, so I'm glad he addressed that scenario - one that a lot of ROTH conversion articles ignore.



Given the drop in bond funds this year and the lack of a ACA cliff, I may guess at my ROTH conversion amount for the year and do most of the conversion now.
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Old 05-02-2022, 09:31 AM   #6
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Quote:
Originally Posted by Midpack View Post
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
Great video. I used to use the year-end conversions for the very reason that he described... that I had a really good read on our tax situation. Back when we could do recharacterizations I could really fine tune it and my taxable income was exactly equal to the top of the 0% preferenced income tax bracket for many of the years.

A few years ago I convinced myself that beginning of the year was preferable. Out tax situation is now very predictable so I do 90% in January and the remainder in December. Given that my tax-deferred accounts are all fixed income, that seems to be the optimal strategy.

I like the way that he tested it with rolling 8 year periods beginning in 1972... very FIRECalc-like.

Since my tIRA money is all fixed income I think I stick with what I currently use. If it had a lot of equities, I might consider a drawdown approach.
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Old 05-02-2022, 12:12 PM   #7
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I like the video as well. I appreciate the analysis.

There are a couple of nuances that I think he glossed over; neither is a big deal:

1. He glosses over the tax certainty aspect relative to the second half of the conversion. I think a more sophisticated analysis would take into account how bad the next cliff might be. If one is in their early 60s, married, and on ACA, then going $1 over the 400% FPL cliff (when it returns next year) could be a big deal. If it's just bleeding over from the 22% into the 24% bracket, probably not so much of a big deal.

To address this one could imagine a hybrid approach of 50% on January 1st, 30% more after any 20% drop, then the last 20% in December.

2. He talked a bit about the time and effort associated with monthly conversions. But if one uses a "drawdown trigger", then from January 1st until some point in the year, one in theory would need to keep track of the market and how much it is down to decide when to trigger the second half of the conversions. If the market never draws down, then one would have to keep track of the market every day for the entire year.

One could mitigate this by setting up a trigger in Excel or having an FA (gasp!) monitor it for you.

Personally I just convert chunks when I think the market seems "low", which is usually based on how scared or worried I am or when I start to see worried posts here (like the current "V-shaped recovery Dow down 1000" thread). This year I've done three chunks on 3/7, 3/10, and 4/29 which represent about half of my likely 2022 target.

Overall it's definitely an improvement and probably worth fiddling with for most of us. The bigger deal is the bigger picture of things like delaying SS, planning for the widow's trap, and doing Roth conversions between FIRE and SS start - topics he addresses in the video linked at the end of the one in the OP, and ideas that I generally agree with.
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Old 05-02-2022, 12:30 PM   #8
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I watched the next two videos. This guy seems to be really good and the themes and ideas are very similiar to things that we debate here.
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Old 05-02-2022, 01:11 PM   #9
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Thanks for posting the video. It confirms my current plan to do another Roth conversion if the market continues it's downward trend for this year. Time will tell.

I also liked this video
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Old 05-02-2022, 01:50 PM   #10
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I have always done quarterly conversions in roughly equal amounts, though I always use the last to make a trim adjustment, in my case it's to stay under the next IRMAA threshold while still converting well into the 22% bracket (my objective). My first three are the same amounts (WTH, my goal is $170K/year and my first three conversions are $40K each). This year I haven't done any conversions since my IRAs are all bond funds and it's pretty clear the NAVs will probably continue to decline, so I convert more shares by waiting - hence my drawdown comment in the OP. I won't wait until Dec for all of it, but I'm in no hurry to start conversions this year. As always I will make a trim adjustment in Dec no matter the timing of earlier conversion amounts.
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Old 05-02-2022, 07:46 PM   #11
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Quote:
Originally Posted by Midpack View Post
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 posting this. I just did my first Roth conversion at the end of last year but will reconsider that, particularly with the market down.
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Old 05-02-2022, 11:41 PM   #12
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OP - Thanks for posting this.

I have been doing them around the end of the year because I needed to know how much, but then just fell into the habit of it.

Wasn't even thinking about it, but really should do some now as the market is a bit low.
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Old 05-02-2022, 11:43 PM   #13
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Originally Posted by TheWizard View Post
I think that Roth conversion "strategies" nowadays are close to useless.
What matters most is the amount converted.

For past several years, I had an automatic monthly conversion in place and then in December I'd compute my likely AGI for the year and then do another 13th Roth conversion to bring that AGI up close to the next IRMAA threshold.

Now that I'm in RMD-land, the automatic monthly conversions have stopped but I still might do a small one in December as before...
Monthly conversions is a strategy, and a decent one compared to the default one most folks do
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Old 05-03-2022, 06:43 AM   #14
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I have watched his videos before and find he uses a common sense approach to Roth conversions. I have just this year done 1/2 of my conversion amount in January and will do the second based on the draw down strategy. I do have about 20% of my IRA in equities, so I will transfer part of those. My Roth is 100% equities so I don't convert bond funds to the Roth in most cases.

VW
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Old 05-04-2022, 07:42 AM   #15
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Monthly conversions is a strategy, and a decent one compared to the default one most folks do
True, but the big strategy gimmick used to be the recharacterization feature which is no longer allowed.

Trying to time your conversions over the course the year based on when the stock market highs and lows will happen is mostly a guessing game...
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Old 05-04-2022, 08:50 AM   #16
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Pretty good but I found it hard to listen to because of his edits to remove any "dead" time between his sentences.

I've actually been following his last strategy for the past couple of years. I make 50% conversions in January and wait for any opportunity to do the rest later in the year. I did slightly over convert last year - its hard to precisely predict dividends and capital gains. In 2020, the opportunistic conversion was made in March and I gained a nice chunk of tax free money when the markets recovered; last year, no notable benefit (by me) using this strategy.

This year I converted 50% of my planned amount in January (as usual). I haven't made my final conversion yet this year - I (unfortunately) expect the market to drop further over the next few weeks...
I found his removal of dead time between sentences to be annoying as well. While he's certainly a fast talker by nature, he may also be using a slight speed-up in his playback, perhaps 10%. Possibly to keep his videos short enough not to have unrelated commercials inserted by YouTube to remove attention from his own money management firm.

I've been using the monthly conversion plan since 2020, on an automatic basis. It has no time cost to me except for adjusting my withholding at midyear based on how much of that conversion will fall into the 12% vs. 22% bracket.

While I wouldn't interrupt that monthly strategy, what his video suggests to me is the possibility of doing an additional conversion (or conversions) into a market drop such as we're in right now.
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Old 05-04-2022, 01:54 PM   #17
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While I agree 100% with his theory that using the drawdown methodology is the correct approach there is one problem, when is the correct market drop to trigger the conversion.

Since he never said otherwise, I'm assuming his analysis which resulted in the draw down method being above all the other methods used the lowest market close in each year to do the $100K conversion. So if you use the absolute lowest market valuation in each year then you can see better results than say the BOY or monthly method.

But how would you ever know the lowest value? If I could do this year after year, Roth conversion would be the least of my priorities.
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Old 05-04-2022, 02:17 PM   #18
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While I agree 100% with his theory that using the drawdown methodology is the correct approach there is one problem, when is the correct market drop to trigger the conversion.

Since he never said otherwise, I'm assuming his analysis which resulted in the draw down method being above all the other methods used the lowest market close in each year to do the $100K conversion. So if you use the absolute lowest market valuation in each year then you can see better results than say the BOY or monthly method.

But how would you ever know the lowest value? If I could do this year after year, Roth conversion would be the least of my priorities.
I think somewhere in the video his algorithm for the draw down method was:

1. First 50% on January 1st
2. Second 50% as soon as the market drops 20% from January 1st
3. Second 50% on December 31st if the market never drops 20%

It was very brief and sort of implied, so easily missed.

ETA: Start listing at about 6:12 in the OP video, where he gives an example of being down 20% in August.
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Old 05-04-2022, 05:24 PM   #19
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I couldn’t tell if the 20% was ad hoc, and just used for his illustration, or something he determined in his simulations. Also, 20% is quite a drop. Have there been many years in which the market dropped that much from January levels? He seemed to say a couple times that anybody wanting to know the drawdown threshold should contact them.
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Old 05-05-2022, 06:57 AM   #20
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I couldn’t tell if the 20% was ad hoc, and just used for his illustration, or something he determined in his simulations. Also, 20% is quite a drop. Have there been many years in which the market dropped that much from January levels? He seemed to say a couple times that anybody wanting to know the drawdown threshold should contact them.
Yeah, I agree.

I didn't know the stats on intra-year 20% drops, but found:

https://www.calamos.com/insights/vol...ns-are-common/

which, just eyeballing it, I'd say a 10% drop is probably a better trigger point. I would logically think that you'd want the drawdown trigger to happen most years; otherwise you're just doing the barbell strategy, and since most years have been up years over the testing period they mentioned, it seems that even a 10% intra-year discount is worth trying for.

I personally did about half of my conversions for this year on 3/7, 3/10, and 4/29 and I think the market was down about 12% or so at those points. But as noted elsewhere, I may turn out to be a genius or an idiot based on those data points.

I think the "contact them" thing is just revealing/confirming that these YT videos they do are essentially marketing. Which is fair - they want you to pay them for their expertise, not give it away.
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