Time to consider I.R.A. to Roth rollovers.

[eyenitnoy]

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.

 

[SevenUp]

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.

 

[2HOTinPHX]

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.

 

[MarieIG]

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.)

 

[TheWizard]

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...

 

[TheWizard]

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...

 

[MarieIG]

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 . . .

 

[MarieIG]

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.

 

[rwdflynavy]

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.

 

[eyenitnoy]

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.

 

[COcheesehead]

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.

 

[Chuckanut]

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.

 

[gcgang]

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.

 

[RetireBy90]

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.

 

[eyenitnoy]

+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!

 

[vdesalvo]

Widow/Widower

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.

 

[Trailwalker]

The substantial health insurance subsidies, along with an unexpected but welcome capital gain, are going to keep me from doing any conversion this year.

 

[MarieIG]

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.

 

[DawgMan]

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-income-tax-rates-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.

 

[braumeister]

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.

 

[COcheesehead]

Tax brackets just went up. Standard deduction just went up and legislation pushing RMDs out further is under consideration. ACA subsidies at risk with too high of income. Do I want to prepay taxes today under that kind of trend/scenario? Things that make you go, hmmmm.

 

[DawgMan]

Tax brackets just went up. Standard deduction just went up and legislation pushing RMDs out further is under consideration. ACA subsidies at risk with too high of income. Do I want to prepay taxes today under that kind of trend/scenario? Things that make you go, hmmmm.

I think the wild card is if RMDs go away (excluding inherited). If they do, it sure make you scratch your head on Roth conversions unless you are totally legacy focused.

 

[athena53]

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 kicks in with substantial funds in taxable accounts well we all know what happens. Not to mention IRMAA cost on top of that.

Yep. I'm a widow and always saved in the 401(k) first (later rolled over into IRAs). Roths were available as an employer option only late in my career. The silver lining to this years' horrible investment results is that it looks like I'll be able to convert about $15,000 to fill up the 12% bracket. I'll monitor this as I get closer to the end of the year. A drop in the bucket compared to the IRA balances but I'll take it. Even with the conversion I'll have overpaid on my estimates so no need to hunt up extra cash for taxes on the conversion. This is all based on TurboTax 2021 so I need to fine-tune for the changes in brackets, limits, etc.

I do see from this discussion that I need to think carefully about whether to convert cash or securities.

 

[RunningBum]

I think the wild card is if RMDs go away (excluding inherited). If they do, it sure make you scratch your head on Roth conversions unless you are totally legacy focused.

Are you saying if RMDs go away, you wouldn't withdraw from your tIRA at all? You can't spend money in a tIRA until you pay the tax on it. If a law passed tomorrow that did away with RMDs I'd still be converting. I like having that money I saved available to me to use. I don't get the reluctance to pay some taxes to free up a much larger amount for me to use.

Not meaning to single you out; I've seen a lot of people wish to not have RMDs. I'm trying to understand the benefit.

As far as legacies go, my plan is to leave taxable investments with large unrealized gains, so that neither I nor my heirs pay tax on those gains. If the step up in basis goes away, that will change my plans.

 

[SecondCor521]

I do see from this discussion that I need to think carefully about whether to convert cash or securities.

Unless I'm missing something, it really shouldn't matter much what you convert.

You can buy and sell within your traditional and Roth IRAs to your heart's content with no tax implications.

Whatever you convert is taxed at the FMV on the date of the transfer, whether cash or securities.

I do think it matters how you allocate your investments within your traditional and your Roth, but that is mostly independent of what stuff you transfer, because of the above two statements.

(I follow the BH advice for tax efficient allocation. My small bond allocation is in my traditional IRA, and my Roth is all stocks.)