Roth conversions in down market or up market?

[kgtest]

Is it better to do roth conversions from a tIRA to a Roth IRA when markets are at highs, or after a recent sell-off and relative lows?

What say you? Asking for a friend...

 

[Alan]

I usually wait until end of year unless there is a big market drop. I prefer doing conversions when the market is down because I then transfer a larger percentage of the IRA. (Same amount of money, same taxes). The conversion is from a fund in the tIRA to the exact same fund in the Roth.

 

[pb4uski]

I think a temporarily down market is an ideal time to do Roth conversions... assuming that you reinvest in the same ticker in the Roth, you move more shares.

 

[harley]

I'm planning on doing at least half my intended Roth conversion for the year pretty soon while the market is still down. I usually wait until the last minute to make sure of my numbers, but this is too good an opportunity to miss. Just got to figure out when the approximate bottom will occur. Of course, it I miss it I haven't really lost anything. Just a chance for a bit better deal.

 

[SnowballCamper]

Down Market. The tax hit is lower for the same number of shares. Assuming you keep the same security, and that security is actually down. In contrast, BND is up lately, so not a good time to do a Roth conversion on it.

 

[VanWinkle]

Down Market. The tax hit is lower for the same number of shares. Assuming you keep the same security, and that security is actually down. In contrast, BND is up lately, so not a good time to do a Roth conversion on it.

Good time to move BND over and then buy Vtsax in the Roth. Sell high and buy low!!

 

[Alan]

The only IRA we have left to convert is my wife’s and it is all in Vanguard LifeStrategy Income which is 20/80. It is up $2.4k from the first of the year, so I guess I will watch and wait.

 

[Sunset]

Is it better to do roth conversions from a tIRA to a Roth IRA when markets are at highs, or after a recent sell-off and relative lows?
..

You can move the actual stocks 'IN KIND', no need to sell at all, and avoids a price discrepancy risk.

To answer the question:

Imagine the stock market drops 99.9% , you could move what was $1,000,000 in the IRA of stock to the Roth and pay tax on $1,000 conversion, at 22% that would be $220 tax.
OR
Wait 6 months and the market jumps back up to the $1,000,000 in the IRA, then move it $100,000 per year for 10 years, and each time pay tax of $22,000 assuming a 22% tax rate.

So yeah, the good side of the market decline is the opportunity to move a bunch of stock into the ROTH via conversion.

 

[kgtest]

You can move the actual stocks 'IN KIND', no need to sell at all, and avoids a price discrepancy risk.

To answer the question:

Imagine the stock market drops 99.9% , you could move what was $1,000,000 in the IRA of stock to the Roth and pay tax on $1,000 conversion, at 22% that would be $220 tax.
OR
Wait 6 months and the market jumps back up to the $1,000,000 in the IRA, then move it $100,000 per year for 10 years, and each time pay tax of $22,000 assuming a 22% tax rate.

So yeah, the good side of the market decline is the opportunity to move a bunch of stock into the ROTH via conversion.

Thanks everyone! I sorta knew this was the answer but I wanted to bring viability that when markets tank, sitting and doing NOTHING isn't always the best idea.

 

[RetireBy90]

I did our Roth conversion by moving 300 shares of Boeing at a lower price. Tax at 22% went from about $$23K to about $20K. One month expenses. ;-)

 

[harley]

You can move the actual stocks 'IN KIND', no need to sell at all, and avoids a price discrepancy risk.

Can you do that with funds and ETFs too? If so, that would be the way to go, for me.

 

[Dtail]

I'm planning on doing at least half my intended Roth conversion for the year pretty soon while the market is still down. I usually wait until the last minute to make sure of my numbers, but this is too good an opportunity to miss. Just got to figure out when the approximate bottom will occur. Of course, it I miss it I haven't really lost anything. Just a chance for a bit better deal.

Exactly my thoughts.
Usually convert at the end of year for my DGF to the top of the 12% bracket.
Usually have a good idea of her other income early on.

 

[Sunset]

Can you do that with funds and ETFs too? If so, that would be the way to go, for me.

I've done it with ETF's.
Of course it was within the same brokerage, but shouldn't matter as long as the stock/etf/fund is supported in both brokerages (if different).

 

[davebarnes]

So, how much to convert in this crazy down market?
Convert an amount to stay in the 24% marginal bracket?
Or, convert a larger amount and pay the higher 32% marginal rate?

 

[harley]

I'm trying to stay within the 22% bracket, mostly because I start Medicare this year and don't want to be messing around the IRMAA cliff. If I get a better handle on my overall income later in the year, I might convert a ways into the 24% bracket, just far enough to stay below the IRMAA limit.

 

[RunningBum]

So, how much to convert in this crazy down market?
Convert an amount to stay in the 24% marginal bracket?
Or, convert a larger amount and pay the higher 32% marginal rate?

You're only giving one side of the equation. Much of that question depends on what you forecast your tax bracket to be when RMDs are required. I would not go to the 32% bracket if you'll be paying 12% later.

Depressed share prices allow you to convert more shares in a given bracket, whether it's 12%, 32% or anything in between.

Assuming you believe share prices will recover by the time you have to take RMDs, it may make sense to go slightly higher. If you planned to convert to the top of 22%, it could make sense to convert even more shares at 24%, since if they do recover later you could find yourself in the 24% bracket anyway. But I probably wouldn't jump to 32% unless you thought you'd hit that later without converting that high.

 

[davebarnes]

I would not go to the 32% bracket if you'll be paying 12% later.

With SS, pension, and RMDs, we don’t foresee ever being in the 12% bracket.

 

[Animorph]

A move from 24% to 32% increases your taxes by 1/3 for the additional amount. The market right now is about 1/3 of its peak value for equities. So you are saving 1/3 by converting at the lower current price, versus converting at the peak, but paying an extra 1/3 for the taxes. Convert $1000 at the peak for $240 or $667 (about the same number of shares) now for $213. Save $27 converting now into a higher tax bracket instead of at the market peak. Might be worth it.

I find I can't hit the top of the 22% bracket without going above $250k AGI and hitting the extra 3.8% healthcare tax, which would wipe out this small gain.

 

[Badger]

I wish we could still do this but we are in the RMD stage and unless I am wrong we can't do this anymore. Bummer!


Cheers!

 

[foxfirev5]

I just checked my tIRA and it appears that I've already made a huge conversion of some kind.

 

[RetireBy90]

I wish we could still do this but we are in the RMD stage and unless I am wrong we can't do this anymore. Bummer!

Cheers!

I'm not an expert, but I see no reason you can't do Roth conversions while in the RMD phase. It is in effect a distribution above the RMD but goes into your Roth rather than your after tax account.

 

[CRLLS]

I'm not an expert, but I see no reason you can't do Roth conversions while in the RMD phase. It is in effect a distribution above the RMD but goes into your Roth rather than your after tax account.

I agree. What you cannot do is use the RMD money to convert. What you can do is use the RMD money to pay the taxes on the conversion though.

 

[braumeister]

I agree. What you cannot do is use the RMD money to convert. What you can do is use the RMD money to pay the taxes on the conversion though.

Exactly. Many forget that the M in RMD stands for minimum. You can take as much more of a distribution as you like, and convert that to Roth, paying the taxes on it.

 

[pb4uski]

No conversion for me this year... I decided to do 0% LTCG and take a bunch of highly appreciated equities off the table before they fell off the table and it used up all my headroom for 2020. Best laid plans....

 

[tdv2]

I did half of my conversion $ for the year over this past weekend. I will do the other half before year end.