Good time for a Roth Conversion?

[Dreaming of Freedom]

The markets have taken a bit of a tumble this week; of course we never know where the bottom is, or when the market will turn around. Keeping that in mind, would now be a good time to do a Roth Conversion? I have never done one before, so I would love some feedback from ya'll. Can I just choose to convert equities &/or international funds? What is your Roth Conversion plan for this year?

 

[mpeirce]

That was my thought too.

I just need to get around to doing it before the market recovers...

 

[Animorph]

I can be a good time, unless a better time comes before the end of the year.

I convert some of the shares of one mutual fund or ETF into one new Roth account. I do that for several different funds at the start of the year. If any of those funds hits -10% from the first conversion price, I convert the same mutual fund a second time. If it keeps going down I'll try to keep converting, as long as the shares last. Normally I'll end up with 2x to 3x more Roth conversions than I can keep. In March the next year I pick out the best performing funds and keep those Roth accounts. The rest get recharacterized back into an IRA, as if they were never converted (although there are tax form explanations required).

So yeah, it's a good time to Roth convert. I just converted into 3 or 4 new Roth accounts. But you may need to do it again before the end of the year. And if you decide at tax time next year that you shouldn't have converted, you can recharacterize all or part of your conversions. So no real risk other than paperwork.

 

[pb4uski]

I would think it would be.... something to consider.

 

[kaneohe]

Have you gone through the basic "TIRA vs Roth" question yet?
from Roth IRA Rules of Thumb - Fairmark.com Fairmark.com

"Roth account vs. deductible contribution
The choice between saving in a Roth account and making a deductible contribution to a traditional retirement account is more difficult. The traditional account gives you a deduction when you contribute, but the Roth gives you a chance to have earnings that are entirely tax-free for decades to come. Here are the main ideas here:

If you’re saving the maximum amount each year, the Roth account is likely to be better.
If you’re in a low tax bracket when saving, the Roth account is likely to be better.
Conversely, if you’re in a high tax bracket when you contribute and expect to be in a much lower tax bracket when you withdraw your earnings, a deductible contribution to a traditional retirement account may be the better choice, although the Roth can still win if you keep the money in the account for a long time period."

 

[Dreaming of Freedom]

We will be in the 15% tax bracket before and after retirement. We might even be able to barely wiggle into the 10% tax bracket for the first few years of retirement for ACA subsidies and to play it safe on withdrawls the first few years. I am a little worried about my fiance's future RMD's, and I like the idea of paying taxes on mutual funds when they are "on sale" instead of full price (or over-priced).

Sent from my EVO using Early Retirement Forum mobile app

 

[harley]

The markets have taken a bit of a tumble this week; of course we never know where the bottom is, or when the market will turn around. Keeping that in mind, would now be a good time to do a Roth Conversion? I have never done one before, so I would love some feedback from ya'll. Can I just choose to convert equities &/or international funds? What is your Roth Conversion plan for this year?

Since you'd be converting from what's in your tIRA, you should be able to transfer whatever specific investments you are holding in there. You just have to calculate the value at the conversion time and pay taxes on that value.

I always do my conversion at the end of the year, when I know about how much I can convert. And I usually convert to cash to do the conversion. So I've never given any thought to doing the conversion to time the market. But it's not a bad idea. Of course you never know if it will drop further, or whatever, but converting when a holding is down would allow you to move more assets for the same amount of taxes. I'll have to think about that.

 

[Ed_The_Gypsy]

Yes.

 

[kaneohe]

I always do my conversion at the end of the year, when I know about how much I can convert.............................................

As Animorph discussed, you can always recharacterize any excess early next yr when you know for sure what your tax situation is. Also the market goes down further, you can convert more and recharacterize the less optimum original conversions.

 

[ChrisC]

As Animorph discussed, you can always recharacterize any excess early next yr when you know for sure what your tax situation is. Also the market goes down further, you can convert more and recharacterize the less optimum original conversions.

How does this work for recharacterizing a conversion for securities that have dropped in value at the time of your original conversion but you still want to use those securities at the end of the year for a conversion? Say for example, you converted 1000 shares X security on September 1 at $50, but on December 1, X security is now worth $25. Can I take another $1000 shares of X security from my tIRA and convert those shares at $25 fair market value on December 1 and on April 1 of the following year recharacterize the conversion I made on September 1 and reverse that conversion? Seems like this would be a good strategy to me if the market might be going down in value for specific securities you wish to transfer and convert to a Roth IRA.

 

[kaneohe]

That should work.........be sure you do each into a separate Roth account so you can get the true performance of each group
https://www.kitces.com/blog/splitti...investments-for-strategic-recharacterization/

 

[Animorph]

How does this work for recharacterizing a conversion for securities that have dropped in value at the time of your original conversion but you still want to use those securities at the end of the year for a conversion? Say for example, you converted 1000 shares X security on September 1 at $50, but on December 1, X security is now worth $25. Can I take another $1000 shares of X security from my tIRA and convert those shares at $25 fair market value on December 1 and on April 1 of the following year recharacterize the conversion I made on September 1 and reverse that conversion? Seems like this would be a good strategy to me if the market might be going down in value for specific securities you wish to transfer and convert to a Roth IRA.

Yes, that's it. It takes most of the risk out of conversion timing.

There's even more flexibility with a partial recharacterization. If you figure out you're $100 over the 15% tax bracket, you could recharacterize $100 of the 12/1 conversion, leaving only $900 Roth converted.

 

[Throwdownmyaceinthehole]

So, let me see if I have this right, simplified example. Earlier this year I moved 100 shares @10,000 from IRA to Roth. Same fund to same fund, just differently classed. The Roth fund had 5000 from previous year conversion, so that Roth fund had 15k. The fund is now down to 13000. Do I simply move back 100 shares at current value to IRA? Then move another 10k to the Roth fund at the current market rate? Or should I have set up each movement into the Roth as a separate account? I'm at vanguard.

 

[LOL!]

Also a good time for a recharacterization of a Roth conversion made earlier in the year.

 

[kaneohe]

So, let me see if I have this right, simplified example. Earlier this year I moved 100 shares @10,000 from IRA to Roth. Same fund to same fund, just differently classed. The Roth fund had 5000 from previous year conversion, so that Roth fund had 15k. The fund is now down to 13000. Do I simply move back 100 shares at current value to IRA? Then move another 10k to the Roth fund at the current market rate? Or should I have set up each movement into the Roth as a separate account? I'm at vanguard.

You don't have to convert into a separate Roth but things are simpler, perhaps very much simpler, if you do. If you are trying to reverse the whole conversion, you have to take into account not only the movement of the conversion shares but also the other stuff that was in the Roth. Usually the
brokerage firm will do the calculation for you........you tell them the $$ amount (in terms of your starting conversion amount) you want to recharacterize and
they figure out what those starting $$ are worth now. If you have several different securities in the Roth, the final "growth" (shrinkage) will be a blend
of the growth of the various securities. If you want to check the brokerage calculation see here Recharacterizing Your IRA Contribution Or Roth Conversion

You probably will remember the separate account thing the rest of your life
after going through this once.

 

[GrayHare]

Wouldn't surprise me to see the recharacterization loophole closed via a limitation to cases of excess contributions.

 

[pb4uski]

I could see them reducing the amount that could be recharacterized to a small percentage of the amount converted to allow for estimating error (say 5%) but close the door to converting way more than what you intend to leave converted and then cherry pick with 20/20 hindsight.

 

[sengsational]

Wouldn't surprise me to see the recharacterization loophole closed via a limitation to cases of excess contributions.

This is one of those rules that I'd almost like to see closed, but only because I'm not sure it's worth the paperwork for my smallish conversions, but still, I hate to be leaving anything on the table.

 

[Throwdownmyaceinthehole]

After today's tumble, I checked the value of the 10k I moved earlier this year. It's dropped $400, so if I went thru all the gyrations of recharacterizing, I'd only save about 60 bucks in taxes. After all the panic on the news, I was expecting a bigger drop. So, I'm doing nothing.

 

[Animorph]

I've got FRN converted on 1/2/2015 at $13.80/share and now at $10.645/share. Over 20% down. Three more conversions that are 15% down. All now replaced at lower prices. Way more converted now than I want to pay taxes for, so a bunch will be recharacterized. Just a matter of which ones.