Traditional to Roth Conversions this week?

I do it in December, so I know how much headroom I have.
 
If I could still recharacterize conversions, I would. I don't want to accidentally go over 400%FPL. I don't have that much room so there's very little gain in converting what I'd consider safe now.
 
We'll be doing estimated half; the remainder will be in December. Now that we are living off IRA withdrawals, I'm with Gumby in wanting to know our headroom.
 
I converted about half in March 2020. I liked converting when the market was low, but I didn't like the loss of tax planning flexibility. At the end of the year, there was a tax option that I briefly considered but the March conversion prevented me from exercising that option, so I ruled it out.

I think I'll probably do the same this year - if there is a significant dip, I may convert a conservative fraction of what I'm 99% sure I'd do in December anyway. Otherwise I'll wait for December so I can see the lay of the land tax-wise.
 
After doing the numbers I converted $75,500 last year in Dec, this was my first Roth conversion, second year fully retired. I expect to continue with them. If by chance the market goes down again this year, I will try to take advantage of it, I wasn't smart last year.

My first year of retirement I withdrew LTCGs up to the 0% tax max. That was fun, but I think the $4,800 in taxes I pay this year is will result in a long term tax savings.
 
I'll do a good portion of mine in the next few days... and then top it up in December 2021.
 
We’re starting conversions this week because we are creating a new “income stream” for purposes of qualifying for a mortgage, should we decide to move this year.
 
Accidental Retiree said:
We’re starting conversions this week because we are creating a new “income stream” for purposes of qualifying for a mortgage, should we decide to move this year.
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Does this actually work? Do you have any details about how you go about it in order to satisfy the bank?
 
That is interesting. I've heard of regular automated tIRA withdrawals being viewed by lenders as an income stream but it is interesting that a lender would view regular automated Roth conversions as an income stream even though it does indeed show up as income on your tax return.... in substance it is moving money from your left pocket to your right pocket while simultaneously taking a little money out of your back pocket to pay the taxes.
 
pb4uski said:
I'll do a good portion of mine in the next few days... and then top it up in December 2021.
Click to expand...
Can you share your rationale for converting most now? With the equity market near all- time highs, I would expect waiting to be a better approach. I agree that there's little benefit in trying to time the market however. Thanks.
 
Accidental Retiree said:
We’re starting conversions this week because we are creating a new “income stream” for purposes of qualifying for a mortgage, should we decide to move this year.
Click to expand...

I too am interested in whether this works. Years ago when I had basically no income (living off after-tax cash) I tried to refinance and was rejected. I offered to do a Roth conversion to create the income, and they told me that wouldn't satisfy their requirements. Doing it regularly to create an income stream never entered my mind.

I don't need it anymore, having created income using rental properties and a small business we started. But the question gets asked a lot, here and IRL. Let us know how that works out, if you would. Thanks.
 
Trooper said:
Can you share your rationale for converting most now? With the equity market near all- time highs, I would expect waiting to be a better approach. I agree that there's little benefit in trying to time the market however. Thanks.
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I'm converting most now because my tax situation is very predictable and I prefer to get the tax-free benefit of being in the Roth started earlier rather than later.

At least this year, the assets that I am converting are not in equities. But even if they were, I usually convert for the same... equities in tIRA to equities (and usually even the same ticker) in Roth or fixed in tIRA to fixed in Roth.

Why is it that so many people assume that when one does a Roth conversion that it change your AA?
 
Accidental Retiree said:
We’re starting conversions this week because we are creating a new “income stream” for purposes of qualifying for a mortgage, should we decide to move this year.
Click to expand...

I don't see how this even shows up.

Unless you are thinking about having the IRA send you the money, then do the conversion.
Problem with touching the money, is you are only allowed 1 such conversion per year (My understanding, so correct me if I'm wrong).
 
pb4uski said:
Why is it that so many people assume that when one does a Roth conversion that it change your AA?
Click to expand...
I'm not sure that AA is the issue, but rather waiting for depressed prices. Say your IRA has a $10K balance in an equity fund. If the value drops to $8K, you can convert it all and pay taxes on $8K rather than 10K.

A bit of market timing. Most of my tIRA is in short term bonds, so I don't expect much fluctuation.
 
Sunset said:
I don't see how this even shows up.

Unless you are thinking about having the IRA send you the money, then do the conversion.

Problem with touching the money, is you are only allowed 1 such conversion per year (My understanding, so correct if I'm wrong).
Click to expand...

No, I think that they are thinking about doing a $x,xxx conversion from tIRA to Roth IRA on the yyth of each month and since it shows up as income on the Form 1040 that the daft bankers will consider it a steady income for underwriting a loan.

I can see the logic if they were regular tIRA withdrawals that are going to your checking account and that cash flow could be use to pay the loan payments, but where it is Roth conversions rather than tIRA withdrawals it makes no sense to me... but if they will consider them to be income then whatever.
 
RunningBum said:
I'm not sure that AA is the issue, but rather waiting for depressed prices. Say your IRA has a $10K balance in an equity fund. If the value drops to $8K, you can convert it all and pay taxes on $8K rather than 10K.

A bit of market timing. Most of my tIRA is in short term bonds, so I don't expect much fluctuation.
Click to expand...

Ah, I see... but what if instead of dropping to $8k it goes up to $12k? It seems to be that both a drop or an increase are equally likely... not necessarly right now, but in general.

In any event, since I'm converting fixed then that isn't an issue for me.
 
I did my first conversion last month. Haven't quite decided how to do this year's. We might be needing some short-term financing to buy a house in a different area before selling our current home, and I need to look into how different methods could affect our finances.
 
OP here....I think I too will do MOST of mine right now, and top off in Dec 2021..

I have a very predictable income...this year I will get a refund of 57 dollars...that's close!!!

Thanks for answering!

OT...Boy that Line 30 on Form 1040 is fun!! All that calculating to just claim 0 on that line (using the worksheet)....(for the April 2020 stimulus payment)..
 
pb4uski said:
No, I think that they are thinking about doing a $x,xxx conversion from tIRA to Roth IRA on the yyth of each month and since it shows up as income on the Form 1040 that the daft bankers will consider it a steady income for underwriting a loan.

I can see the logic if they were regular tIRA withdrawals that are going to your checking account and that cash flow could be use to pay the loan payments, but where it is Roth conversions rather than tIRA withdrawals it makes no sense to me... but if they will consider them to be income then whatever.
Click to expand...

You are correct. We are converting $xxxx/around the first of each month from a tIRA to a long-established Roth. We don’t necessarily expect to use those Roth funds to make mortgage payments, but we are pulling money from a tIRA on a systematic basis and will pay taxes on that amount while staying in our preferred tax bracket.

Instead of putting the tIRA funds into a regular savings account, we are putting those converted, taxed tIRA funds into a different spot, the Roth, where the $$ can be invested in MM funds, VWIAX, whatever, until such time as we decide to spend the $$.

We are over 59.5 and the Roth is over 5 years old, so as someone posted in a thread back in May 2020, that Roth is really a big checking/savings account. We are no more limited in using those funds than we are in using money from our MM accounts, if we need to.

If somewhere down the line the mortgage underwriters don’t like the place we are putting these taxed tIRA funds—the Roth—then with a few keystrokes we will change the landing spot of the tIRA distribution from the Roth to wherever they want it.

They only need to see one pull, and they need to see that amount is sustainable for 3 years. We can divert the tIRA funds to a regular account for the short time we’d be in underwriting and escrow.

I’ll let you know how it goes.
 
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It is just mind-blowing to me that they consider those Roth conversions to be income... though I guess that one could argue that once it is in the Roth that if you're over 59 1/5 and eligible for penalty free withdrawals then the money can be used to make the loan payments just as if it were in your checking account... but the same argument could be made for money in the tIRA discounted for taxes.

I guess that these bankers never got the "money is fungible" memo since they insist on some sort of source of "income".
 
I do mine late in the year but this year DW had only a little left in her tIRA and a small 401a, so we converted those already this year to get rid of two piddly accounts to take care of. Plenty left in other accounts to maximize the conversion in December without going over.

As an aside, I managed to go over the top of 12% bracket last year by a few hundred bucks. Oh well. :)
 
pb4uski said:
It is just mind-blowing to me that they consider those Roth conversions to be income... though I guess that one could argue that once it is in the Roth that if you're over 59 1/5 and eligible for penalty free withdrawals then the money can be used to make the loan payments just as if it were in your checking account... but the same argument could be made for money in the tIRA discounted for taxes.
Click to expand...

My husband collects a little SS on my record. It’s counted as part of our income stream, but he just stuffs it into a savings account.

The Roth conversion will be along the same lines, it seems to me. At least that’s how I’ll make the case.

Just because we get it and pay taxes on it, it doesn’t mean we have to spend it. Right?

I also listed our HSA funds as “other savings accounts,” set aside to pay monthly Medicare and Rx premiums (but not Medigap).

It’s been 10 years since we went through a mortgage broker to explore getting a mortgage as retirees. That broker taught us about using 72(t)s as an income stream. (That was before I started hanging out here.)
 
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