Roth Conversions and Rebalancing

[NomDeER]

Yes, but this (1) creates taxable income and (2) does not change the cash and bond holdings already in the Roth.

Yes, but that's true regardless of how you convert from tIRA to Roth, and the OP is converting. The discussion was about whether you had to sell equities in a tIRA before converting to a Roth and then buy equities in the Roth. People are pointing out that you can directly convert ETFs and mutual funds, contrary to what one poster said.

 

[engineernerd]

Yes, but that's true regardless of how you convert from tIRA to Roth and the OP is converting. The discussion was about whether you had to sell equities in a tIRA before converting to a Roth and then buy equities in the Roth. People are pointing out that you can directly convert ETFs and mutual funds, contrary to what one poster said.

I thought OP was asking how to rebalance to be more tax-efficient. But you are absolutely right that holdings can be transferred as-is directly from the tIRA (no need to sell and then buy back) when doing a Roth conversion.

 

[pb4uski]

But I think the more important point is that you can't "move" investments from a tIRA to a Roth without creating tax consequences which one post suggested.

 

[Coaster4Now]

At a minimum I would work towards having all of the 15% Roth and most of 17% of the taxable brokerage (less what is needed for liquidity for spending if any) in equities for the best tax efficiency. The Roth is tax efficient because it is tax-free. The taxable account is tax efficient because donestic equities in a taxable account are subject to preferential tax rates and foreign equities in a taxable account can utilize the foreign tax credit. That would result in 32% in equities.

In the traditional IRA, you could have your entire fixed income allocation and additional equities as needed to get to your equity target.

Thank you (all of you) - I will work towards this, melded with other suggestions.

And yes, I do plan on using Roth - or at least have it available for lumpy expenses - car, new roof, furnance, house expenses that can happen.
EDIT after thinking about it, I'll slowly build up equity in the Roth but keep a reserve each year.

My basic plan has been converting to Roth for any expenses I could have.
Basically, just an accelerated RMD plan - accelerated on my schedule not the IRS's.

Anyway, I thank you.
Stay safe if you are in the path of Snow-Ice-Megladon! I'm not looking forward to it!

 

[Sunset]

Here is what I do, not suggesting to anyone. 5 years expenses in MM or safe funds like sgov etc and let the rest ride in stocks. so far so good. If Market does not come back in 5 years then we are in trouble lol

You might actually be safer than 5 years as your stocks throw off dividends, depending on the total amount of stocks and the dividends they pay, and your spending. It could add another year or two in the calculations.

 

[pb4uski]

Here is what I do, not suggesting to anyone. 5 years expenses in MM or safe funds like sgov etc and let the rest ride in stocks. so far so good. If Market does not come back in 5 years then we are in trouble lol

You might actually be safer than 5 years as your stocks throw off dividends, depending on the total amount of stocks and the dividends they pay, and your spending. It could add another year or two in the calculations.

It really should be x years of gap rather than expenses... so spending less pension less SS less other reliable income like interest and dividends (or at least a good portion of interest and dividends).

Depending on your income sources in relation to your spending it might be a lot less than 5 years of spending. In our case it wuould be 0 years of spending because SS, pension and interest exceed our spending.

 

[SnowballCamper]

I was trying to ask how do others rebalance things out. Perhaps rebalancing isn't for me or important in my situation. Or Perhaps slow as another poster said. Thanks everyone for your help, I really do appreciate it. I'll figure something out, I do have a FA who I'll consult.

I think the asset placement question others have covered (Roth vs TIRA, vs taxable).

Rebalancing presumes you have decided on an asset allocation between stocks/bonds/cash. It seems you haven't made that decision, and so rebalancing is impossible. There isn't an optimal answer for what your asset allocation should be, other than it needs to be stable and not change when Mr. Market decides to take a rollercoaster ride. Also, you can decide on an asset allocation that is more granular than the typical two or three categories most commonly used.

Then when your assets deviate from the prescribed allocation, you sell appreciated (or less depreciated) assets and buy depreciated assets. This is selling high and buying low. It works because you're diversified and your asset classes aren't correlated.

My TIRA is the Thrift Savings Plan where I use four low cost index funds. Whenever I think something is out of whack in the market, the only thing to do is to rebalance among the funds (large cap, small cap, international, govt bonds). This has served me well overall, and I even got 3% return YTD---amazing 23 day performance.

 

[RetiredHappy]

But I think the more important point is that you can't "move" investments from a tIRA to a Roth without creating tax consequences which one post suggested.

I did not read a post which suggested that. It was a post that you have to sell in TIRA and then buy in ROTH for the same holdings, in which a couple of us disputed. Withdrawals or transfers are taxable events.

 

[Coaster4Now]

It really should be x years of gap rather than expenses... so spending less pension less SS less other reliable income like interest and dividends (or at least a good portion of interest and dividends).

Depending on your income sources in relation to your spending it might be a lot less than 5 years of spending. In our case it wuould be 0 years of spending because SS, pension and interest exceed our spending.

I have a small income. Always will until RMDs, unless I decided to do Roth conversions and put in 4%MM (for now). So doing a 5 year buffer with conversions works for me, along with lumpy unexpected amount covered.

I honestly just read about 'efficient tax placement' and couldn't figure out how to do that in a high (to me) market. Sorry for the angst.
EDIT: I sold to take profits - I paid taxes on the full amount out of tIRA from my on hand cash.
I don't see the point in then buying back into the same fund that I feel is overvalued and will drop. And no, I don't have a crystal ball sadly.

 

[pb4uski]

^^^ In that case what you are doing is changing your AA because you believe equities are overvalued at the same time you are twealing the tax efficiency of your portfolio.

I understand what you are doing and why and share your concern about overvaluation of equities. I scaled back on equities as well but long ago and for some inexplicable reason equities just keep on trucking.

Another thing that some posters here do is to keep x years of gap in a TIPs ladder with each year's maturities providing money for spending in the follwing year. Then as part of the rebalancing process they replace the last rung of the ladder. This approach provided for inflation adjusted cash flow for spending.

 

[Coaster4Now]

^^^ In that case what you are doing is changing your AA because you believe equities are overvalued at the same time you are twealing the tax efficiency of your portfolio.

I understand what you are doing and why and share your concern about overvaluation of equities. I scaled back on equities as well but long ago and for some inexplicable reason equities just keep on trucking.

Another thing that some posters here do is to keep x years of gap in a TIPs ladder with each year's maturities providing money for spending in the follwing year. Then as part of the rebalancing process they replace the last rung of the ladder. This approach provided for inflation adjusted cash flow for spending.

Thank you so much for this!!!
Yes, equities just keep on trucking.
I will look at TIPs ladder, which will be an education in itself. I know nothing of them, I hope they are available at VG.

EDIT I do know that Roth isn't the best place to put cash/MM things in most circumstances, but it's better than taxable.
Best to you

 

[NomDeER]

EDIT I do know that Roth isn't the best place to put cash/MM things in most circumstances, but it's better than taxable.

Is it really better to put cash/MM in Roth than taxable? Because you are simply putting more equities in taxable, where their distributions and increase in value at withdrawal will be taxed and counted towards your IRMAA. If all you are doing is putting money into your Roth while waiting to spend it later this year, then your strategy makes some sense. Otherwise, I don't think it does. Because, if you really believe that equities are going to crash soon and remain lower over the next ten or twenty years, why would you invest in stocks at all? If you are just concerned about the next few years, you can put most of the FI in your tIRA.

 

[Coaster4Now]

Is it really better to put cash/MM in Roth than taxable? Because you are simply putting more equities in taxable, where their distributions and increase in value at withdrawal will be taxed and counted towards your IRMAA. If all you are doing is putting money into your Roth while waiting to spend it later this year, then your strategy makes some sense. Otherwise, I don't think it does. Because, if you really believe that equities are going to crash soon and remain lower over the next ten or twenty years, why would you invest in stocks at all? If you are just concerned about the next few years, you can put most of the FI in your tIRA.

Yes cash or MM (or anything) is better in Roth vs. taxable from a taxable standpoint, earnings don't count towards income at all, not for IRMAA or anything (so far, unless changes happen). (EDIT of course there's never an absolute, sometimes taxable is better for deductions on some incomes)

I can convert now to Roth at lower tax rates than in RMD years. At least in my projections currently. Tax smoothing.

I'm using the conversions for income should I need it. You never know.
My income is a single SS. My furnance goes? My Car? Yep things happen.

Sorry, I'm not putting more equities in taxable right now, perhaps I was not clear that I'm happy with my allocations now, but may shift later, gradually.

As for the next 10 or 20 years...well, that's all a crap shoot for all of us whether we last that long. I'll still be in stocks/funds. Just not as much now, as I guess most people with other income sources and that's OK.
Different things for different situations.

 

[pb4uski]

We can move stocks etfs from Rollover IRA to Roth directly without the need to sell.

But I think the more important point is that you can't "move" investments from a tIRA to a Roth without creating tax consequences which one post suggested.

I did not read a post which suggested that. It was a post that you have to sell in TIRA and then buy in ROTH for the same holdings, in which a couple of us disputed. Withdrawals or transfers are taxable events.

I stand corrected. I was incorrect where I inferred that your post suggested that you could move without creating tax consequences. BTW, I didn't refer specifically to your post, but your post is the post that I had in mind.

Your post was silent with respect to the tax consequences of moving stock ETFs from an IRA to a Roth directly. A fairly significant omission IMO that I thought important that it should be clarified for the OP and other readers.

But we agree that securities can be moved from an IRA to a Roth without having to sell, transfer cash and then buy and we also agree that it is a taxable event (unless the amount is replaced in the IRA within 60 days).

 

[pb4uski]

Thinking about the OPs situation more, i cobbled together his current state based on his previous posts as follows:

​	Stocks​	Fixed​	Cash​	Total​
Current State:​	​	​	​	​
Taxable​	8.5​	8.5​	0.0​	17.0​
Tax-Deferred​	33.3​	24.5​	10.2​	68.0​
Tax-Free​	3.8​	3.9​	7.4​	15.0​
Total​	45.6​	36.9​	17.6​	100.0​

Note: Some amount may not add due to rounding.

Reading between the lines, the OP is uncomfortable with his extent of eauity exposure at this time. Let's say for discussion purposes that he would like to slightly reduce equities to 40%. Also, IMO 17.6% in cash is too much, so let's say that he wants to trim it back to 5%. That would mean a target AA of 40/55/5.

Given those parameters,, if it was me I would:

1. Convert Roth to be all stocks by selling fixed income and using cash to buy equities. This optimizes the tax efficiency of the Roth by putting the highest yielding assets in the long run in the Roth.
2. Leave the stocks in the Taxable account as is to avoid any tax consequences. Sell some of the fixed income in the taxable account and hold the 5% of targeted cash in the taxable account. This slightly increases the tax effectiveness of the taxable account by putting lower yielding cash there rather than higher yielding fixed income.
3. Use the Tax-deferred to balance to target since there are no tax consequences of moving money around in the tax-deferred accounr. The tax-deferred account end up with most of his lower yielding fixed income investments and less stocks, which is also tax effective.
4. Overall his equity exposure is reduced to the 40% target and his oversize cash position is trimmed back.

The end result would be:

​	Stocks​	Fixed​	Cash​	Total​
Target​	​	​	​	​
Taxable​	8.5​	3.5​	5.0​	17.0​
Tax-Deferred​	16.5​	51.5​	0.0​	68.0​
Tax-Free​	15.0​	0.0​	0.0​	15.0​
Total​	40.0​	55.0​	5.0​	100.0​

Now if the OP has a different target than 40/55/5 in mind that can be easily accomodated by adjusting the above.

 

[NomDeER]

Sorry, I'm not putting more equities in taxable right now, perhaps I was not clear that I'm happy with my allocations now, but may shift later, gradually.

If you are happy with your allocations, then I'm very confused as to why you started this thread.

You are happy with your overall allocations between equities and FI? Or you are happy with your overall percentage allocations between Roth, tIRA, and taxable? Or both? And how does insisting on having half of your Roth be cash enter into this?

Because the reality is that, if you want to keep a certain equities/FI allocation, then putting cash into Roth means that you are putting more equities elsewhere.

Yes cash or MM (or anything) is better in Roth vs. taxable from a taxable standpoint, earnings don't count towards income at all, not for IRMAA or anything (so far, unless changes happen). (EDIT of course there's never an absolute, sometimes taxable is better for deductions on some incomes)

Again, I am confused. Are you under the impression that capital gains and dividends in your taxable accounts don't count towards income and IRMAA? That is incorrect. And if you are keeping your overall asset allocation (equities v. FI) the same and if you are putting more cash (which generally earns the least) in the Roth and more equities (the asset class that generally earns more) into your taxable, you probably will be increasing your taxable income with this decision. And that will count towards your tax bracket and IRMAA. And, meanwhile, if your tIRA is growing faster because you want to put the cash in the Roth, then your RMDs will be higher, which could impact your tax bracket and IRMAA. (I don't know, though, because you are using percentages and not raw numbers.)

I can convert now to Roth at lower tax rates than in RMD years. At least in my projections currently. Tax smoothing.

Yes, but that would be true - perhaps even more true - if you were to include more equities and less cash in the Roth.

I'm using the conversions for income should I need it. You never know.
My income is a single SS. My furnance goes? My Car? Yep things happen.

I'm a single retiree and understand the challenges. But, that's why I wouldn't be putting my lowest generating asset class into the Roth. I fully expect to tap my Roth when I replace my car. If the market is down, I will sell equities in the Roth, withdraw the money, and buy the car. Then I will use the cash/MM in my traditional to buy the same amount of equities in my traditional to keep my asset allocation the same. As a result, I wouldn't really be selling off equities in a bad market and there would be no tax consequences. Heck, I might even use some of the cash in my traditional to buy a little more equities in the traditional if the market is crashing; I would be buying low and rebalancing my asset allocation at the same time.

At the beginning of your thread, you specifically asked this:

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?

The answer to that question pretty clearly isn't to insist on keeping all that cash in your Roth.

Since you seem absolutely committed to keeping so much cash in your Roth and not in equities, then the answer may simply be that you do not "get there." People make decisions all the time for psychological comfort rather than for better financial outcomes. There are people who will pay off a mortgage earlier even though their mortgage rate is very low and they believe that they are very likely to get a better net return by investing that money elsewhere. A friend of mine did this because he just wanted the feeling of having the house paid off.

Maybe the financial answers people are giving you aren't really relevant because what is most important to you, for whatever reason, is that you keep the cash in the Roth, not that you make the most money overall or that you reduce taxes or IRMAA payments.

 

[Coaster4Now]

Yes, I can see how my post could be regarded as 'a squirrel in the road'.
NomDeER Thank you for your very candid opinion. It took you time for you to write.

No, I would not want to pay 22% taxes on a Roth conversion, invest in the market, and then only find that I need a new car yesterday and have to sell that Roth investment at a loss, after paying taxes on the full amount converted.
Regardless of 'loss investment time in something that will surely go up' year after year.

Everyone has different paths and net worth and safe withdrawal rates and life spans.
I read that tax advantaged placement is a good thing to do. So I asked.

Perhaps everyone, except me, is a straight fund person. I have blended ones, even in taxable (tax Managed fund). (Edit: stock/bond managed funds). And in the posts here, advising, I realized, it's just not that simple to 'rebalance my accounts'. Just posting my percentages wasn't giving the whole picture. It's not that simple.

Thank you to pb4uski and others, I will slowly get into some equaties in roth, in my own time frame.

 

[engineernerd]

[snip]
EDIT: I sold to take profits - I paid taxes on the full amount out of tIRA from my on hand cash.
I don't see the point in then buying back into the same fund that I feel is overvalued and will drop. And no, I don't have a crystal ball sadly.

It's not selling the position that generates a tax bill, it's withdrawing the funds. In both a tIRA and a Roth IRA buying and selling investments never results in taxes. You only pay taxes on money you withdraw from your tIRA. Rebalancing is just changing your investments, not taking money out of the account.

If you believe in your overall percent allocation to stocks, but too much of it is in your tIRA and too little is in your Roth, you can correct the problem without generating a single penny of additional taxes and without "losing money" compared to doing nothing. You just have to do the matching transactions on the same day, and in the case of ETFs or individual stocks use limit orders set at the same price.

I won't say any more about your stock allocation overall, that's your decision.

 

[pb4uski]

...If you believe in your overall percent allocation to stocks, but too much of it is in your tIRA and too little is in your Roth, you can correct the problem without generating a single penny of additional taxes and without "losing money" compared to doing nothing. You just have to do the matching transactions on the same day, and in the case of ETFs or individual stocks use limit orders set at the same price. ...

+1

 

[Coaster4Now]

It's not selling the position that generates a tax bill, it's withdrawing the funds. I

I won't say any more about your stock allocation overall, that's your decision.

Which I did to fund the Roth, so it was taxed.

 

[Coaster4Now]

Wish I never started this thread.

I said this
EDIT: I sold to take profits - I paid taxes on the full amount out of tIRA from my on hand cash

Best to you, thanks for help

 

[NomDeER]

Which I did to fund the Roth

I think @engineernerd is talking about rebalancing and changing your assets within a retirement account, not Roth conversions.

Perhaps everyone, except me, is a straight fund person. I have blended ones, even in taxable (tax Managed fund). (Edit: stock/bond managed funds). And in the posts here, advising, I realized, it's just not that simple to 'rebalance my accounts'. Just posting my percentages wasn't giving the whole picture. It's not that simple.

You can change this within your retirement accounts pretty easily. As I pointed out and others have pointed out, selling within a retirement account is not a taxable event. Separating equities from bonds will make it much easier later on for you to rebalance or change your asset allocation not only within your tIRA, but overall.

IMO, traditional retirement accounts are the easiest place to rebalance, not just to rebalance within a particular account but to rebalance for my overall asset allocation across all my retirement and non-retirement accounts. For tax reasons, I also prefer to make changes there. I usually don't want to rebalance by selling in my taxable account because then I have to pay taxes, and for reasons everyone already has explained, I want my Roth to be mostly equities, so I don't want to rebalance there.

For you, since you don't want to change the allocation in your Roth account for other reasons, being able to rebalance within your tIRA will be very important if you want to avoid selling in your taxable account.

If you want to keep half of your Roth money in cash, over the long term you probably will have to rebalance there as well because the odds are that equities will grow more quickly than your cash in the long run. Again, changing your asset allocation within the Roth is not taxable. It also does not require you to withdraw any of the funds from the Roth.

I think all of this can be overwhelming. Too much to understand with confidence and do all at once. (I've been there and am still there to some extent because stuff happens.) Maybe you can address this in steps, starting out by changing your blended funds within your tIRA to a separate stock index fund and a separate bond fund or CD/Bond ladder, keeping it all within the tIRA. Doing it all within your tIRA will not be taxable and will make things easier for you.

 

[pb4uski]

This shouldn't be hard at all. The only accounts with tax consequences on rebalancing are taxable accounts. For tax-deferred accounts like traditinal IRAs or tax-free accounts like Roth IRAs you can trade as much as you want within the account and there are no tax implications at all.

You could sell everything in those accounts, have it in cash and then invest it as you want with no implications at all.

 

[Eucerin]

Currently our tIRA contains 50% Wellington and 50% Wellesley and we have been happy about the settings. We have been talking between ourselves about when we converting to roth whether we should keep the same % with same funds, or go with 100% equity. Its a hard call for us when the time comes

 

[Al18]

Eucerin,
You could add some VTWAX to your Roth IRA and proportionately less Wellesley to your IRA. Not a fan of going 100% equity in any account.