Roth Conversions and Rebalancing

[Coaster4Now]

Apologies if this was discussed in previous threads, I've searched without success.

I'm in retirement, (now filing single) doing Roth conversions, prior to RMDs, up to the very small IRMAA limit for singles. No pension to speak of, on SS. Approx 4 years until RMDs and I plan on converting smaller amounts in the RMD years, depending on market returns and taxable events.
I want the Roth for lumpy/unexpected expenses, lessen the impact of IRMAA, tax smoothing and heir.
I've read that slower growing funds in TIRA and more growth funds in Roth are recommended at this stage.
But how do I get there?

With the current market being what it is (high) and being in retirement (shorter time line than just starting off, preserving rather than wanting to grow TIRA) - how do you rebalance?

I have sold some TIRA for profits and put it in my MM settlement account. My Roth conversions come from there.
And the Roth dollars are valuable, so I'm hesitant to buy equities with the conversions as I would like for them to grow, but don't want the risk of a big downturn (I know, you can't predict...but...).
I would use those Roth (&some taxable)dollars for expenses if everything crashed. (And if TIRA crashed, I would convert shares instead of dollars). But my goal is to increase Roth.

I hope I'm making some sense of my dilemma.
TIRA% approx 68%
Roth% approx 15% (it is growing with every conversion)
Brokerage approx 17%

EDIT: Perhaps I'm just asking a crystal ball question

 

[Koolau]

With the current market being what it is (high) and being in retirement (shorter time line than just starting off, preserving rather than wanting to grow TIRA) - how do you rebalance?

Rebalance stocks vs bonds vs cash or rebalance % tIRA vs Roth?

Not sure if I know what your question is. Sorry.

 

[Coaster4Now]

Sorry,Koolau, rebalance tIRA to less equities - is MM the answer or short term/intermediate bonds? Or Wellsely income/Target Date Income fund?

And how to rebalance Roth from MM to something fairly safe.

 

[imjustawarrior]

If you list what you have in each account to include the overall percentage and your desired allocations, we can tell you what to do. Otherwise, it sounds like you know what you should do, but you don't want to do it.

equities to Roth first
bonds/"cash" to IRA first

 

[imjustawarrior]

Sorry,Koolau, rebalance tIRA to less equities - is MM the answer or short term/intermediate bonds? Or Wellsely income/Target Date Income fund?

And how to rebalance Roth from MM to something fairly safe.

Looks like you don't know what you want. Figure out what you want first, and then we can tell you where to place each item.

 

[Coaster4Now]

If you list what you have in each account to include the overall percentage and your desired allocations, we can tell you what to do. Otherwise, it sounds like you know what you should do, but you don't want to do it.

equities to Roth first
bonds/"cash" to IRA first

Yes I'm hesitant to post details, sorry.
And I'm hesitant to buy at 'highs' in my Roth. No solution.
Perhaps it's a silly question.

 

[Koolau]

Maybe you could list the "kinds" of things in the tIRA (like growth stocks or funds or maybe they're Reits or maybe you have mostly value stocks or funds.

BY the way - no silly questions!

 

[imjustawarrior]

Yes I'm hesitant to post details, sorry.
And I'm hesitant to buy at 'highs' in my Roth. No solution.
Perhaps it's a silly question.

If you don't want to post details, then it is hard to help. Posting general things about your portfolio like Koolau recommended is not a security issue. Even listing what you have and just percentages isn't an issue. I won't list dollar amounts, but I'll list my holdings.

 

[mrfeh]

Yes I'm hesitant to post details, sorry.
And I'm hesitant to buy at 'highs' in my Roth. No solution.
Perhaps it's a silly question.

Yeah, not clear what you are asking.

Some thoughts that popped into my head while reading your post:

• don't try to time the market
• "rebalancing" means trading to get your portfolio closer to a desired target; doesn't sound like this is what you're doing
• are you thinking about changing your AA? if so, why?

Holding certain types of assets in specific account types is usually done for tax efficiency.

 

[Al18]

FYI you don’t need to sell funds and move cash to your RothIRA. You can simply move the funds directly from IRA to RothIRA. You will need to pay Federal Tax on the converted funds.

 

[Coaster4Now]

I'm really sorry I posted and apparently can't delete.

Yes, timing the market is not for those with a long time frame. Or so the saying goes.

I am retired and need to rebalance to change my AA - Or at least I wish to.
However - with volility and given that I am in retirement it is not easy to do given the time frame.
Sorry, I should have deleted my post when I had the chance.

 

[Coaster4Now]

• are you thinking about changing your AA? if so, why?

Holding certain types of assets in specific account types is usually done for tax efficiency.

Because I'm retired and now push comes to shove, wake up to some years of growth when you were just trying to figure things out.
It can happen when you go into a single filer when previously MFJ and things were set up for growth in a tIRA...such is life.

 

[pb4uski]

Apologies if this was discussed in previous threads, I've searched without success.

I'm in retirement, (now filing single) doing Roth conversions, prior to RMDs, up to the very small IRMAA limit for singles. No pension to speak of, on SS. Approx 4 years until RMDs and I plan on converting smaller amounts in the RMD years, depending on market returns and taxable events.
I want the Roth for lumpy/unexpected expenses, lessen the impact of IRMAA, tax smoothing and heir.
I've read that slower growing funds in TIRA and more growth funds in Roth are recommended at this stage.
But how do I get there?

With the current market being what it is (high) and being in retirement (shorter time line than just starting off, preserving rather than wanting to grow TIRA) - how do you rebalance?

I have sold some TIRA for profits and put it in my MM settlement account. My Roth conversions come from there.
And the Roth dollars are valuable, so I'm hesitant to buy equities with the conversions as I would like for them to grow, but don't want the risk of a big downturn (I know, you can't predict...but...).
I would use those Roth (&some taxable)dollars for expenses if everything crashed. (And if TIRA crashed, I would convert shares instead of dollars). But my goal is to increase Roth.

I hope I'm making some sense of my dilemma.
TIRA% approx 68%
Roth% approx 15% (it is growing with every conversion)
Brokerage approx 17%

EDIT: Perhaps I'm just asking a crystal ball question

You really have three separate but connected concepts to consider. First is what is your target for AA? Second, what is your plan for tax efficient placement of that targeted AA? Third, how do I protect myself from the risk of a big downturn?

You are correct in that it is usually rcommended that higher growth assets like equities be in Roths and lower growth assets like bonds be in tIRAs. That is because the growth in a Roth IRA won't get taxed and the growth in a tIRA will not only get taxed, but will get taxed at ordinary rates rather than preferential rates. However, that isn't always possible depending on your target AA and the mix of taxable/tax-defered and tax-free accounts.

The last question is the $64,000 question. Many here would say just stick with equities and don't worry because any downturn will likely be short-lived. Others might buy put options that would appreciate if the market has a downturn and the profits on the options offset the losses on the equities. Others would invest some of their equity allocation in long-short funds that have similiar return to equities but less volatility. No right answer.

What category was the money that was sold int the tIRA and are now in money market funds in the TIRA? Did you sell stocks or bonds?

 

[pb4uski]

Yes I'm hesitant to post details, sorry.
And I'm hesitant to buy at 'highs' in my Roth. No solution.
Perhaps it's a silly question.

You don't need to post numbers. You can post percentages. For example, taxable, tax-deferred and tax-free are x%, y% and z% of the total. And what your target AA is in percentages between stock, fixed income and cash.

 

[pb4uski]

I'm really sorry I posted and apparently can't delete.

Yes, timing the market is not for those with a long time frame. Or so the saying goes.

I am retired and need to rebalance to change my AA - Or at least I wish to.
However - with volility and given that I am in retirement it is not easy to do given the time frame.
Sorry, I should have deleted my post when I had the chance.

Ok, so what is your current AA across all of your retirement potfolio? IOW, how much of the total is stock, fixed and cash? If you could wave a magic wand what would your ideal AA be?

The "conventional" AA in retirement is 60/40, but the reality is that all else being equal, success rates are pretty similiar from 40/60 to 100/0. Below is the success rate for an initial 4% WR with withdrawals adjusted for inflation for 30 years at various AAs. Note that the success rate isn't all that different. Whoever, what would be different are the terminal values.

 

[sengsational]

Coaster, One concept I use in working through this kind of problem is to realize that asset allocation is global. While it's true that growth in a tIRA, growth in a Roth, and growth in after-tax are all a little different, those are not THAT different. If we knew tax rates and laws would stay the same (which we don't, but if we did), one could certainly say asset allocation across all tax categories would have zero confounding aspects. As it is, it's easy to accept that one should not allow the tax tail to wag the investment strategy dog.

It sounds like you think the market is high and want to reduce exposure to equities. Fine, as long as you're not going to reverse yourself before the crash. If you promise yourself that you're stuck with low equity exposure, even if the market soars, then ok...that becomes your asset allocation target that "never" changes.

You might like different asset classes in different tax buckets, but worried if you try to optimize that, what about cash flow and having to "sell low"? That's where the second principle comes in: sell to yourself. Let's say the market is down, you need to spend some money, and all you have in after-tax are equities. You're loath to "lock in your loss". So what you do is sell equities in after-tax, and the same day, buy equities in your tIRA or Roth. Your asset allocation remains the same, and you didn't really "sell low"!

It can be more complicated if you are holding equities in after-tax that have significant capital gains. That's usually a wrinkle when the market is flying high, though. And I'm not sure that's an issue for you.

Anyway, good luck getting more comfortable with what to do at this stage of your life. Interacting here probably gives you a better shot at not making a really poor choice, and avoiding the bad move gets you most of the way there.

 

[Coaster4Now]

Ok, so what is your current AA across all of your retirement potfolio? IOW, how much of the total is stock, fixed and cash? If you could wave a magic wand what would your ideal AA be?

The "conventional" AA in retirement is 60/40, but the reality is that all else being equal, success rates are pretty similiar from 40/60 to 100/0. Below is the success rate for an initial 4% WR with withdrawals adjusted for inflation for 30 years at various AAs. Note that the success rate isn't all that different. Whoever, what would be different are the terminal values.
View attachment 61216

Overall, recently...
45%stock/37%bond/18%MM cash
Firecalc gives no failure

And if I have a magic wand, I'd like a 5% return. But less, 3% wouldn't break the bank.
So as for AA in retirement...it's becoming more difficult than in saving mode. I didn't care when we had income. I have no idea what AA I want. How does one predict that?
And the market can swing widely.

 

[mrfeh]

Overall, recently...
45%stock/37%bond/18%MM cash
Firecalc gives no failure

And if I have a magic wand, I'd like a 5% return. But less, 3% wouldn't break the bank.
So as for AA in retirement...it's becoming more difficult than in saving mode. I didn't care when we had income. I have no idea what AA I want. How does one predict that?
And the market can swing widely.

Are you thinking about getting more conservative? Because 45/55 is already on the conservative side.

I suggest having a really good reason to go even lower on equities.

 

[Coaster4Now]

It can be more complicated if you are holding equities in after-tax that have significant capital gains. That's usually a wrinkle when the market is flying high, though. And I'm not sure that's an issue for you.

Anyway, good luck getting more comfortable with what to do at this stage of your life. Interacting here probably gives you a better shot at not making a really poor choice, and avoiding the bad move gets you most of the way there.

Thank you. I actually do have some after-tax things have signifigant gains lots.
I've sold off a smidge of lower gains ones, to be able to do more Roth conversions.

I guess my basic question, when you are in retirement - and perhaps you've answered that, perhaps rebalancing when you have perhaps few years or a bit left doesn't matter.

I have been reading that I should have More in bonds/fixed in tIRA so was wondering how the heck do I do that and still move Roth into more high flying equities made sense?
Perhaps I read too much. Perhaps that advice is for younger folks and not in retirement.

 

[Coaster4Now]

Are you thinking about getting more conservative? Because 45/55 is already on the conservative side.

I suggest having a really good reason to go even lower on equities.

I am sorry - but the advice I was reading was to have stocks in Roth, fixed safe in tIRA and was wondering about a way to get there. Not to change overall.
IRA is 49stk/36bond/15cash
Roth 25stk/26bond/49cash
Broker50/50

 

[imjustawarrior]

I am sorry - but the advice I was reading was to have stocks in Roth, fixed safe in tIRA and was wondering about a way to get there. Not to change overall.
IRA is 49stk/36bond/15cash
Roth 25stk/26bond/49cash
Broker50/50

In your Roth and taxable go 100% equities. IRA would have the remaining equities, bonds, and cash. Making this change could have no tax implications. It would make your portfolio more tax efficient. You want you most tax efficient equities in your taxable account.

In taxable you could hold 1-X months in "cash" depending on your comfort level.

Our Roths are 100% equities. Our taxable is equities and 2 months expenses in a MMF. Our 401k is bonds and equities. It is very tax efficient.

 

[Sunset]

I am sorry - but the advice I was reading was to have stocks in Roth, fixed safe in tIRA and was wondering about a way to get there. Not to change overall.
IRA is 49stk/36bond/15cash
Roth 25stk/26bond/49cash
Broker50/50

I have some cash (short term treasuries, and longer term ones that I could sell if needed in my Roth. I do this because I want some $$$ available that I could withdraw during a 50% drop in the stock market, and not have the withdrawal add to my income.

At the same time I have some stock in my IRA, but since stocks were at a high, I've sold off some to buy Treasuries. It's a non-taxable event and when stock is a high it's a good time to sell it, if wanting to get more interest bearing things.

OP - you haven't said which brokerage you are at, but most will allow you to buy Treasuries (Vanguard's is very easy) Treasuries are paying 3.6% -> 4.8% these days. I tend not to buy CD's as so many are callable.

I see you have 2 concerns:
Asset allocation
Having cash available in Roth in case of stock market crash.

You don't need to be purely perfect in asset allocation and then you can have $$ (mm/short bonds/treasuries) in Roth.

 

[Coaster4Now]

Are you thinking about getting more conservative? Because 45/55 is already on the conservative side.

I suggest having a really good reason to go even lower on equities.

In your Roth and taxable go 100% equities. IRA would have the remaining equities, bonds, and cash. Making this change could have no tax implications. It would make your portfolio more tax efficient. You want you most tax efficient equities in your taxable account.

In taxable you could hold 1-X months in "cash" depending on your comfort level.

Our Roths are 100% equities. Our taxable is equities and 2 months expenses in a MMF. Our 401k is bonds and equities. It is very tax efficient.

Selling in taxable would reduce my space for Roth, to keep under IRMAA.
Just curious are you retired? If not...my situation may not apply to you.
My taxable, now that not reinvesting, supplies dividend income.
Sure not perfect setup, but it works.
It gets complicated when you are retired and have what you have

 

[Coaster4Now]

I have some cash (short term treasuries, and longer term ones that I could sell if needed in my Roth. I do this because I want some $$$ available that I could withdraw during a 50% drop in the stock market, and not have the withdrawal add to my income.

At the same time I have some stock in my IRA, but since stocks were at a high, I've sold off some to buy Treasuries. It's a non-taxable event and when stock is a high it's a good time to sell it, if wanting to get more interest bearing things.

OP - you haven't said which brokerage you are at, but most will allow you to buy Treasuries (Vanguard's is very easy) Treasuries are paying 3.6% -> 4.8% these days. I tend not to buy CD's as so many are callable.

I see you have 2 concerns:
Asset allocation
Having cash available in Roth in case of stock market crash.

You don't need to be purely perfect in asset allocation and then you can have $$ (mm/short bonds/treasuries) in Roth.

Thanks much Sunset
I will look into Treasuries, yes I'm at VG

And yes, I was concerned about trying to mess with my asset allocation (finding perfect), but perhaps I don't have to...be perfect...or strive to be

 

[Phroig]

It might help to take little steps. Increase your stock allocation in the Roth by, say, 5% of your portfolio, and exchange the same amount of equities in your portfolio IRA for fixed income. For fixed income, pick a multi-sector bond ETF or fund so the fund manager does the heavy thinking for you.