Roth Conversions and Rebalancing

[Coaster4Now]

After much thought, for me,
If you are happy with a fund and want to do a Roth conversion consider keeping the same fund.
You're only paying the taxes now, instead of later, you end up with the same fund, now tax free.
You end up with the same thing if your tax rates are the same.

I've realized that this tax efficiency thing isn't for me, moving to more stock in a Roth now just doesn't seem right. Just because it's in Roth? Nope.
Not with the high values of the market and the concentration on only a few companies.
And I won't go into 'other things' which can't be spoken of.

Thanks to all that chimed in on this thread, we all have different paths to follow and I appreciate the take of other folks, it will be considered in my future things.

Edit: Wellington and Wellesley are very good funds!
Bottom Line: You have to sleep well at night and do what's comfortable

 

[pb4uski]

You aren't getting it, but that's ok. Sleeping well and comfortable is a function of the overall mix, not the mix in any particular account... so in your case an overall mix of 45.6 stock/36.9 fixed/17.6 cash.

Let's say stocks return 10% going forward from dividends and appreciation and your tax rate on tIRA withdrawals or Roth conversions is 20%. For stock in an tIRA your after-tax return is 8% because you end up paying 20% on those returns when they are withdrawn. For stock in a Roth you end up with a 10% after-tax return. 10% after-tax is better than 8% after-tax.

Go back to your current state:

	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.

Let's say that you didn't change the overall asset mix at all, but did a few different things:

• In taxable, sold 7.4 of fixed and bought 7.4 of cash (which becomes your spending money)
• In Roth, sold 3.9 of fixed and 7.4 of cash and bought 11.3 of stocks (so higher yielding assets are placed in tax-free account),
• In tIRA, sell 11.3 of stocks and buy 11.3 of fixed (to reduce converting tax preferenced equity returns into taxable returns)

	Stocks	Fixed	Cash	Total
After:
Taxable	8.5	8.5-7.4=1.1	0.0+7.4=7.4	17.0
Tax-Deferred	33.3-3.9-7.4 =22.0	24.5+3,9+7.4=35.8	10.2	68.0
Tax-Free	3.8+3.9+7.4=15.0	3.9-3.9=0	7.4-7.4=0	15.0
Total	45.6	36.9	17.6	100.0

Note: Some amount may not add due to rounding.

You end up with the exact same asset mix between stocks/fixed/cash, but it is just more tax efficient.

• Taxable is slightly more tax efficient because lower yielding cash replaced fixed income.
• Roth is more tax efficient because it is all equities
• tIRA absorbs the differences.

 

[NomDeER]

Bottom Line: You have to sleep well at night and do what's comfortable

This is the most important thing, assuming that you are not going to go broke, which seems unlikely.

You aren't getting it, but that's ok. Sleeping well and comfortable is a function of the overall mix, not the mix in any particular account... so in your case an overall mix of 45.6 stock/36.9 fixed/17.6 cash.

Let's say stocks return 10% going forward

Roth is more tax efficient because it is all equities

The thing is that the OP thinks that stocks are going down, not up 10%. The OP does not think that Roth is more tax efficient because they already paid taxes on that money and think that the stock market is going to go down and they will have to withdraw money at a lower price than they paid taxes on. They also apparently think the stock market will stay down until they withdraw the majority of their money from the Roth and they will have to withdraw it at a lower price than the price they paid taxes on.

It doesn't matter whether we think it's likely that the OP will, on average, be withdrawing from the Roth at a higher price or whether we see a way to rebalance things across accounts or whether we think the OP is likely to be paying more taxes on the tIRA. (And, since we don't know raw dollar amounts or the OP's spending plans, it's hard for us to really know; the OP could be planning to withdraw the entire Roth in the next month to buy a car.) What matters is what the OP believes and will lead to a good night's sleep.

 

[mrfeh]

The thing is that the OP thinks that stocks are going down, not up 10%. The OP does not think that Roth is more tax efficient because they already paid taxes on that money and think that the stock market is going to go down and they will have to withdraw money at a lower price than they paid taxes on. They also apparently think the stock market will stay down until they withdraw the majority of their money from the Roth and they will have to withdraw it at a lower price than the price they paid taxes on.

It doesn't matter whether we think it's likely that the OP will, on average, be withdrawing from the Roth at a higher price or whether we see a way to rebalance things across accounts or whether we think the OP is likely to be paying more taxes on the tIRA. (And, since we don't know raw dollar amounts or the OP's spending plans, it's hard for us to really know; the OP could be planning to withdraw the entire Roth in the next month to buy a car.) What matters is what the OP believes and will lead to a good night's sleep.

Probably the core problem with this thread. The OP is attempting to time the market, via his/her gut.

Can't really have a logical discussion when emotions are involved.

 

[Coaster4Now]

Sorry I was speaking about the poster who has 50-50 Wellington and Wellesley and are happy with having just the 2 funds and are considering a conversion. Would it be such a terrible thing to just convert a portion of each to roth vs adding a third fund and having to adjust the percentage of one of the others?
Would the tax savings be so substantial that it's worth adding a bit more complication to the portfolio?

As for my situation, yes, I'm still on the fence regarding tax eff. placement and whether it's worth it for me, (and yes I have funds such as Wellesley which contains both stocks and bonds). As for my current AA, everyone is different. Thank you all, especially pb4uski for all the calculations and patience.

 

[pb4uski]

To answer your question, terrible..no, suboptimal...yes.

Wellington is ~65/35 and Wellesley is ~40/60, so it would be just slightly more tax efficient to have just Wellington in the Roth. And IMO it would be simpler as well since the Roth would presumably only have one fund and not two funds.

 

[Eucerin]

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.

AI18. That idea is floating in my mind as well. However rather than world index, I am leaning towards to US market index. The thought behind is that US companies have plenty of international exposures which influence the domestic market

 

[Coaster4Now]

To answer your question, terrible..no, suboptimal...yes.

Wellington is ~65/35 and Wellesley is ~40/60, so it would be just slightly more tax efficient to have just Wellington in the Roth. And IMO it would be simpler as well since the Roth would presumably only have one fund and not two funds.

Thank you for your reply. It seems like most folks are in index funds and can just move something to another thing. (And not worry about a fall, ha)!
I'm happy with my funds and would like to keep them as simple as possible. I have other funds similar in tax deferred/free. I'm ok with suboptimal (because it depends on the market). But thanks for pointing out - the optimal.
I have read on bogleheads that it's not a sin to keep blended in a roth. But as is such things, it depends...

Exchme wrote: Tue Jan 27, 2026 9:57 am
The choice of a target date fund doesn't really work for tax efficiency. Consider tax efficient fund placement per the wiki.
https://www.bogleheads.org/wiki/Tax-eff ... _placement
Briefly, that means putting bonds/CDs, etc are preferentially in tax deferred. Their primary source of return will be taxed as ordinary income, which matches the taxation of the account. That leaves more space in taxable and Roth for stocks.

"This is a relatively minor issue once you control for risk.

Suppose you are in a 22% tax bracket, and you have $100K in a traditional IRA and $78K in a Roth IRA. If you invest the Roth IRA in stock and the traditional IRA in bonds, you gain $78K if the stock market doubles or lose $39K if the stock market drops by half. If you invest the traditional IRA in stock and the Roth IRA in bonds, you also gain $78K if the stock market booms and lose $39K if it crashes, since the IRS takes 22% of the gain and gives back 22% of the loss. And if you invest each account 50/50, you are still in the same situation. So these investments have the same return and risk. If you know you will withdraw at a 22% marginal tax rate, it doesn't matter what you have where.

The advantage of stock in the Roth is caused by the progressive tax code. If you have stock in the traditional IRA and the stock market booms, you might pay 24% rather than 22% on some of the gains; if the stock market crashes, the IRS might give back 12% rather than 22% of some of the losses. This is the small cost you pay for the simplicity of using target-date funds.
David Grabiner"

As for my taxable, they are tax efficient, exempt income (now not reinvested) and the gains I've already taken. It seems all the boglehead stuff is about where to not place your taxable and gives your Grace on where to place "tax advantaged".

Thanks much... I will slowly (perhaps) move some 'funds' into roth being aware of their stock/bond percentage.

 

[Coaster4Now]

...The thing is that the OP thinks that stocks are going down, not up 10%. The OP does not think that Roth is more tax efficient because they already paid taxes on that money and think that the stock market is going to go down and they will have to withdraw money at a lower price than they paid taxes on.They also apparently think the stock market will stay down until they withdraw the majority of their money from the Roth and they will have to withdraw it at a lower price than the price they paid taxes on........

Very true.
If I take it out, I guess it's not very tax efficient if I sold at a loss.
All depends when you need it and what the market does.
The thoughts of 'Saving on taxes' would really stink selling in a down market

 

[Coaster4Now]

Probably the core problem with this thread. The OP is attempting to time the market, via his/her gut.
Can't really have a logical discussion when emotions are involved.

Timing the market is funny thing. We all do it.

I drink coffee, every morning.
I buy coffee on sale and stock up when they have a sale. 1.99 a can on sale- chock full of nuts, stocked up!
It's something I Regularly buy and use.

Did you buy coffee when the tariffs were ("on" "off" "on") threatened?
I sure did. And now I have a supply of cheaply bought coffee.

Do you buy TVs when you 'guess' the price will go down?
Do you shop for sales? Why?

Do you spend extra dollars on something that you feel is overpriced, even if you don't need it?

What is market timing?

 

[pb4uski]

I'm not sure why you even started this thread when it is clear that you already had your mind made up on what you were going to do.

 

[Coaster4Now]

Fair enough...
I was looking at the future as to optimize my portfolio.
I look ahead to what I Can do
And thank you for your take on it.
And others, thank you.
Breaking apart blended investments.

 

[Coaster4Now]

Ok I'll get off the island

 

[NomDeER]

Suppose you are in a 22% tax bracket, and you have $100K in a traditional IRA and $78K in a Roth IRA. If you invest the Roth IRA in stock and the traditional IRA in bonds, you gain $78K if the stock market doubles or lose $39K if the stock market drops by half. If you invest the traditional IRA in stock and the Roth IRA in bonds, you also gain $78K if the stock market booms and lose $39K if it crashes, since the IRS takes 22% of the gain and gives back 22% of the loss.

But, historically, the market trends up. I'm not assuming that the market will be up this year or next year, but I am assuming that, on average, the market will be up. Since I started my Roth a number of years ago, even if I took some out of the Roth to buy a car during a market downturn later this year, the market still would be higher than when I initially started putting after-tax money in there. That is true even though I have been adding to the Roth as recently as this week.

 

[PointBreeze]

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.

When I do my Roth conversions, I move the actual investments, so I'm not "buying high" - are you able to do that instead of converting MM funds? For reference, I'm doing this at Vanguard.

 

[Coaster4Now]

Thanks for all the input, my financial advisor has helped me sort this out.

 

[Koolau]

Thanks for all the input, my financial advisor has helped me sort this out.

Thanks for the update. Feel free to share (or not) details you w*rked out with your FA.

All the best!