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Time to consider I.R.A. to Roth rollovers.
Old 10-07-2022, 11:07 PM   #1
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Time to consider I.R.A. to Roth rollovers.

Greetings all:

For folks like myself who are heavily invested in index funds-or just about anything else for that matter-this year has been very painful. So what to do now, if one has some cash on hand? Is it time to buy "low"? It it time to look at bonds? Alternate investments?

I suggest, for those who have I.R.A.'s or other such taxable accounts, considering rolling them over to Roth's and paying the tax on the rollovers with that extra cash. My feeling is that this is a great time for such conversions.

While the market certainly may go lower, you only have until year end to make such conversions. If you think the bottom is in, or near, you could make a conversion now and then again, for next year, right after the first of the year. And, while the rolled investments could do down further, you are limited to your "loss" of the taxes paid if you are holding the investments long term, which, for people like me, is the whole point of index investing.

Nothing is ever a sure thing of course.

But this is the path I have chosen in these perilous times. Any thoughts or feedback appreciated.
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Old 10-08-2022, 02:59 AM   #2
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Whether the market is up or down, the things that matter for Roth conversions are the marginal tax rate to convert now, vs. the marginal tax rate you expect if you delay the conversion to a future year.
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Old 10-08-2022, 05:59 AM   #3
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Roth conversions count as income for Affordable Care Act subsidies, so a large enough transaction could increase the premiums you pay.*

Something to be aware of.
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Old 10-08-2022, 06:17 AM   #4
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I have both cash and stock funds in my traditional IRA. I sold off the bond funds in the spring and have bought a limited number of treasuries and brokered CDs. I did cash conversions during the second quarter.

I did my first "in kind" conversion last quarter. Someone mentioned a Vanguard growth fund which was down - more than the S&P. I checked, and I had it. I waited till it dropped below a target price and converted in kind. I since converted a bit of an international fund which had dropped like a stone. It is a bit painful, but since I am trying to diversify a bit, that means holding some international. Yuck.

So, my thought has been if the markets go up, convert cash. If they go down, convert the funds which are down the most. I set targets in my head, i.e. if the down dips below 27,000 convert a set portion. If it dips below 25,000 convert more. If it dips below 22,000 more. Look for funds that are down at least 30 percent. And yes, I know the minute I convert they will drop more, but I can't control that.

I do have some limit orders pending (IRA and non-IRA) in the case of further market drops.

Paying taxes with non IRA funds (cash kept in separate bank account for the purpose of paying taxes.)
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Old 10-08-2022, 09:43 AM   #5
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Originally Posted by SevenUp View Post
Whether the market is up or down, the things that matter for Roth conversions are the marginal tax rate to convert now, vs. the marginal tax rate you expect if you delay the conversion to a future year.
That's the big one, yes, but having a tax-free slush fund for major purchases in the future is another good reason, even if no immediate tax savings.

Another reason is to reduce your tax-deferred balance a bit so that RMDs at age 72+ don't get your AGI into higher IRMAA tiers...
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Old 10-08-2022, 09:49 AM   #6
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I'm 72, so getting SS and doing RMDs both from now on.
I did larger Roth conversions in prior years but will only be able to do a small one this December, maybe $10k(?), without getting into next higher IRMAA tier for 2024.

But IRMAA tiers adjust with inflation now, and my RMD for 2023 could quite likely be a lower dollar amount than this year's.
So maybe a larger Roth conversion at the end of 2023...
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Old 10-08-2022, 10:28 AM   #7
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Whether the market is up or down, the things that matter for Roth conversions are the marginal tax rate to convert now, vs. the marginal tax rate you expect if you delay the conversion to a future year.
Barring a black swan, with two social securities, RMDs, and the national debt, I don't see it going down . . .
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Old 10-08-2022, 10:31 AM   #8
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I'm 72, so getting SS and doing RMDs both from now on.
I did larger Roth conversions in prior years but will only be able to do a small one this December, maybe $10k(?), without getting into next higher IRMAA tier for 2024.

But IRMAA tiers adjust with inflation now, and my RMD for 2023 could quite likely be a lower dollar amount than this year's.
So maybe a larger Roth conversion at the end of 2023...
This year will be my largest conversion. I'm flirting with pushing DH into a higher IRMAA for his first year on Medicare, but it wouldn't be for a full year. I am also hoping for sustancial conversions in 23, 24, and 25 - barring a substantive change in income tax ramifications.
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Old 10-08-2022, 11:30 AM   #9
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We did a big conversion that kept us in the 22% bracket. We had cash on hand for the taxes, so pretty happy about all of it.
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Old 10-12-2022, 07:41 PM   #10
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Originally Posted by 2HOTinPHX View Post
Roth conversions count as income for Affordable Care Act subsidies, so a large enough transaction could increase the premiums you pay.*

Something to be aware of.
The same is true for the calculation for the premium paid for Medicare.
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Old 10-12-2022, 08:11 PM   #11
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If it matters, legislative is being considered currently to push out RMDs even further.
Carefully consider whether a conversion makes sense. It’s not a given.
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Old 10-12-2022, 10:23 PM   #12
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Originally Posted by COcheesehead View Post
If it matters, legislative is being considered currently to push out RMDs even further.
Carefully consider whether a conversion makes sense. It’s not a given.
Another thing to consider is that if one coverts a stock or bond holding to a Roth account now after it has fallen 15% or more in value, there will be less tax to pay since there is less profit. Assuming (<-- always a dangerous word) the equity/bond/etc increases in value in the future, that gain will be tax free in the shelter of the Roth.

I thought I was pretty much done with Roth conversions. But, if the market takes another big dive as we approach 12/31 saving some tax dollars may be a way to make a bit of lemonade from the lemons.

Just another thing to consider.
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Old 10-13-2022, 02:00 AM   #13
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Whether the market is up or down, the things that matter for Roth conversions are the marginal tax rate to convert now, vs. the marginal tax rate you expect if you delay the conversion to a future year.
+1

For joint, 24% bracket goes up to 32% at $324,100 (rate goes from 22% to 24% at $178,150).

The other big jump in marginal rate occurs at $83,550, from 12% to 22%.

Seems like you ought to convert up to $83k if taxable income is below that, and if you think there’s a chance rates will increase, you’re not giving up a whole lot accelerating income up to the top of the 24% bracket now, assuming TI of >$100k in the future.
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Old 10-13-2022, 08:50 AM   #14
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Back to OP, I agree if you have 100 shares at $10 and convert that adds $1,000 for taxes. If it drops 30% and you convert, only $700. I did some conversion earlier but due to IRMAA I’m at the top for this year. Next year I’ll look to do some more opportunistic conversions but will stay under IRMAA cliff. Lots of reasons to convert, as have been discussed in other threads many times. However, I recently started working with my brother and it sure appears that he will be in lower tax rates in retirement, except when they go from married joint to single tax rates. If you file joint I don’t see how your tax rate won’t be subject to increase unless you have no income.
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Old 10-15-2022, 07:34 PM   #15
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+1

For joint, 24% bracket goes up to 32% at $324,100 (rate goes from 22% to 24% at $178,150).

The other big jump in marginal rate occurs at $83,550, from 12% to 22%.

Seems like you ought to convert up to $83k if taxable income is below that, and if you think there’s a chance rates will increase, you’re not giving up a whole lot accelerating income up to the top of the 24% bracket now, assuming TI of >$100k in the future.
The amount you can roll would actually be a bit higher than the amounts on the tax tables.
Remember, your personal and other deductions!
Single individuals have a $13,850 personal deduction so you can roll about $97,000 if you have this deduction and still remain in the 12% bracket!
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Old 10-22-2022, 06:54 AM   #16
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I’m taking a slightly different view on my conversions. I’m doing mine so when the day comes and it is a party of one (wife/me) left on this green earth that the tax man won’t take whomever to the cleaners. When you are a single tax payer and RMD kick in with substantial funds in taxable accounts well we all know what happens. Not to mention IRMAA cost on top of that.
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Old 10-22-2022, 07:43 AM   #17
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The substantial health insurance subsidies, along with an unexpected but welcome capital gain, are going to keep me from doing any conversion this year.
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Old 10-22-2022, 08:46 AM   #18
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I’m taking a slightly different view on my conversions. I’m doing mine so when the day comes and it is a party of one (wife/me) left on this green earth that the tax man won’t take whomever to the cleaners. When you are a single tax payer and RMD kick in with substantial funds in taxable accounts well we all know what happens. Not to mention IRMAA cost on top of that.
That is one of my considerations.
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Old 10-23-2022, 03:19 PM   #19
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Yep, the more research I do on historical tax rates relative to today, impacts of IRMAA and NIIT, I'm convinced we are probability in the lowest income tax environment we may be in for some time. While there is a chance the the current tax rates may be extended after 2025 (depending upon mid-term election results), I plan on filling up the 24% bracket starting this year until I hit 63. Interesting, the historical tax code has as few as 2 and as many as 16 brackets!
https://taxfoundation.org/historical...ates-brackets/

Based on what we know today (and past history), IMHO, a good argument to fill up the 24% bracket if you are top heavy in tax deferred accounts.
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Old 10-23-2022, 03:48 PM   #20
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I'm convinced we are probability in the lowest income tax environment we may be in for some time.
I agree. Considering that within the lifetime of some here there were tax brackets of over 90%, we're not really doing too badly now.
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