Beginning Roth Conversions/Mechanics

[SunnyOne]

I'm a recent retiree beginning for the first time, to do Roth conversions.

My first one will be in 2022.

Please pardon my ignorant questions, but
are the mechanics as simple as selling out of my 401K or IRA (or both) and simply transferring that dollar amount to my Roth?

If I do not have those accounts at the same brokerage, are there additional complications (beyond anything typical with moving $$ from one brokerage to another?)

RE: Market timing, I understand it's advantageous to do conversions in a down market, but are there any other timing considerations to note?

 

[Midpack]

You’ll have to first open a Roth IRA account at the new brokerage.

There aren’t any additional complications --- but let the sending and receiving brokers do the transaction on your behalf, no need for you to withdraw from one and deposit in the other yourself. At year end they will provide the 1099-R you’ll need for your 2022 tax return. And you will show the distribution(s) went to a Roth on your return for IRS records.

I’m sure you realize it’s a taxable event for your 401(k) and your TIRA unless that was all non-deductible contributions.

There aren’t any other timing issues I’m aware of, just be aware if you’re pushing yourself into a higher marginal tax bracket.

[My TIRAs and Roth IRA are the same brokerage, just easier]

 

[Animorph]

I have our tIRA's and Roths at the same brokerage. There, a Roth conversion is as simple as specifying which shares I want transferred to the Roth account. Just one simple transfer transaction. No selling and buying required. Very seamless. A little difficult to hit an exact dollar number since I'm selecting shares that will be valued later.

If your accounts are at separate brokerages it would probably be easier to start a new Roth account at the tIRA brokerage than to sell/transfer/buy between the two. You can have as many Roth accounts (or tIRA's) as you want.

 

[xlf11]

Once you have a brokerage account for both Roth and tIRA, you don't have to do one shot for the yearly conversion: you can do as many conversions as you like between now and the end of year. Look like a good strategy is to do a large amount while market is down and top up before the end of year for a desired total when most of yearly tax info is settled.

 

[Alan]

When I retired I had a non-deductible tIRA with a large basis so I opened a Roth at the same brokerage and did a Roth conversion of the whole IRA. The following year I did a direct rollover from my 401k (which was all pre+tax) to an IRA at the same brokerage as my Roth. I then started doing Roth conversions. Reason for the timing was to completely get my basis converted in year 1 rather than drag it out over the next 10 to 12 years.

 

[RetireBy90]

I believe that if you have untaxed (you took a deduction on your taxes) and taxed (no tax deduction) then you will need to do a “pro rate” transfer. Simply, if you have say $1,000 in deductible and $1,000 in taxed then any conversion must be accounted for with 50% from each on your taxes. If you have only funds that were untaxed at contribution time as many do this isn’t an issue for you. I just have read many stories about those that have both.
One other issue to be aware of is “cliffs” where you not only owe taxes on the converted amount but like Medicare there are higher charges at higher income levels.

 

[Koolau]

I suggest the following book on ROTH IRAs.

https://fairmark.com/retirement/roth-accounts/

or the original:

https://www.amazon.com/Fairmark-Guide-Roth-Kaye-Thomas/dp/0967498104

 

[Dash man]

If you open a Roth at your existing brokerage, you can transfer shares in kind. No need to liquidate for a conversion.

 

[Exchme]

I believe that if you have untaxed (you took a deduction on your taxes) and taxed (no tax deduction) then you will need to do a “pro rate” transfer. Simply, if you have say $1,000 in deductible and $1,000 in taxed then any conversion must be accounted for with 50% from each on your taxes. If you have only funds that were untaxed at contribution time as many do this isn’t an issue for you. I just have read many stories about those that have both.
One other issue to be aware of is “cliffs” where you not only owe taxes on the converted amount but like Medicare there are higher charges at higher income levels.

I use Vanguard and they don't care or even know my after tax basis. It's just shares or $ moving from one account to another. They issue a 1099-R showing the $ amount moved.

I have had to calculate my after tax basis on my 8606 tax form every year since I made the original non-deductible contributions (in the 90's). Now that I'm doing Roth Conversions, I follow the "pro-rata" rule that says that whatever I convert this year is treated as non taxable vs taxable in proportion to how much after tax basis I had and the start of the year. About 1% of my IRA is after tax basis, so the whole tracking exercise seems rather pointless - however as they say, I'll pay every dollar I owe, but I'm not leaving a tip!

 

[TheWizard]

OP doesn't mention any after-tax contributions to his tax-deferred plans so I'm not sure that's an issue.

Also doesn't mention age, so unclear if Medicare IRMAA tiers are yet a consideration.

Back when I did bigger Roth conversions, I did a fixed amount each month, topped off with a carefully computed amount each December to get my AGI up close to but not over the next higher IRMAA tier threshold...