Author Topic: Now’s the time to do a fat Roth conversion!  (Read 1383 times)

ChpBstrd

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Now’s the time to do a fat Roth conversion!
« on: March 12, 2020, 09:00:17 AM »
Suppose a stock in your traditional IRA is down 25-50%.
Also, there’s a good chance you’ll be laid off before year-end, reducing your tax bracket.
Or just suppose you’re already retired.

All these factors seem to suggest now is the time to convert assets into your Roth.
You can move 25-50% more shares into the Roth now for the same taxable amount than a month ago.
Plus, you’ll be earning less this year anyway, so maybe you can take the ordinary income from the conversion while in a lower tax bracket.

When stocks come back someday, as they always do, your Roth gets fat instead of your traditional or taxable account and you are that much wealthier because withdraws are now tax free. Yes, you paid a low tax earlier instead of a higher tax later, and there’s a time value argument there, but at today’s discount rate I’m pretty sure it works in favor of locking in the lower income amount and tax rate now.

There’s an even stronger case for tax loss harvesting from taxable accounts and contributing the full $6k or $7k (if over 50) before doing the conversion from your traditional IRA.

Thoughts?

Dibbels81

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Re: Now’s the time to do a fat Roth conversion!
« Reply #1 on: March 12, 2020, 09:06:13 AM »
Great idea. Like most people, I have my money tied up in Vanguard accounts without ability to take advantage of rock bottom share prices. This would be a nice way to take advantage of the down market without risk exposure

SubL stache

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Re: Now’s the time to do a fat Roth conversion!
« Reply #2 on: March 12, 2020, 09:15:16 AM »
crap should have posted here instead of separate thread.

Spitfire

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Re: Now’s the time to do a fat Roth conversion!
« Reply #3 on: March 12, 2020, 12:38:01 PM »
I don't have a traditional IRA to convert, but this is a very good idea!

CarolinaGirl

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Re: Now’s the time to do a fat Roth conversion!
« Reply #4 on: March 12, 2020, 01:20:43 PM »
Agreed!  I moved a chunk yesterday and plan to move more today!

DavidAnnArbor

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Re: Now’s the time to do a fat Roth conversion!
« Reply #5 on: March 12, 2020, 04:17:10 PM »
Really good idea.

Keep in mind if you are dependent on subsidies from the ACA then you will be paying about a 10% tax on every dollar you convert.

Mr. Green

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Re: Now’s the time to do a fat Roth conversion!
« Reply #6 on: March 12, 2020, 04:24:08 PM »
In looking at rebalancing and tax loss harvesting, I'd completely overlooked the thought of doing our Roth conversion now. This is indeed an excellent idea that I'll research in depth tonight. I'm expecting another big drop tomorrow now that states are closing schools and major sports are basically all suspended now.

moneytaichi

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Re: Now’s the time to do a fat Roth conversion!
« Reply #7 on: March 12, 2020, 04:31:09 PM »
Thanks for reminding us! A great strategy!

I have $7700 T.IRA in money market with $4K contributed on March 3. If I convert them to IRA, would I be taxes with ordinary income?

On the other hand, if I use them to buy stocks and keep it in T.IRA, and WHEN the stocks drop more, I will then sell them and occur smaller amount of tax. Is that right?

Thank you for your feedback!

Fru-Gal

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Re: Now’s the time to do a fat Roth conversion!
« Reply #8 on: March 12, 2020, 04:39:52 PM »
Would this be for 2019 taxes or 2020?

moneytaichi

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Re: Now’s the time to do a fat Roth conversion!
« Reply #9 on: March 12, 2020, 04:51:26 PM »
It would be for 2020 tax season.

Padonak

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Re: Now’s the time to do a fat Roth conversion!
« Reply #10 on: March 12, 2020, 04:55:11 PM »
For a single filer, what's the maximum total income to make sure you'll pay zero tax on the conversion?

BigMoneyJim

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Re: Now’s the time to do a fat Roth conversion!
« Reply #11 on: March 12, 2020, 05:02:50 PM »
As a new retiree with no income planned for this year—and still on COBRA not ACA—I had figured on a sizable Roth conversion this year, anyway.

I had figured on doing it near the end of the year considering that I might stumble into some income by then, but this may be too good an opportunity. No rush, though.

Come to think of it, given my activity the first 5 months of retirement and my plans for the next 2-4 months, I doubt I'll be making any income this year. (e.g. blogs or YouTube ads). So I'll start looking into this soon.

Alternatepriorities

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Re: Now’s the time to do a fat Roth conversion!
« Reply #12 on: March 12, 2020, 05:16:41 PM »
I wish I had more money in a taxable account that I could TLH and then use that amount for a tax free roll over. Sadly my taxable investments are mostly in real estate so there isn't a good way to take advantage. As a self employed person i was feeling a little overly excited about the prospect of 0% payroll tax... would have let me put that much more into the market this year, but they don't seem to have a solid plan in DC yet.

frugalJD

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Re: Now’s the time to do a fat Roth conversion!
« Reply #13 on: March 12, 2020, 05:23:59 PM »
Thank you for this!  Great idea.

secondcor521

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Re: Now’s the time to do a fat Roth conversion!
« Reply #14 on: March 13, 2020, 02:51:46 PM »
For a single filer, what's the maximum total income to make sure you'll pay zero tax on the conversion?

Depends on your tax situation.

Typically it's going to be the standard deduction, which for 2020 filing single is $12,400.

Of course, if you had a job that earned $3,000, you'd have to subtract that out, so only $9,400.

And then it's possible, with refundable credits such as the CTC, APTC, AOTC, and the EITC, that you could convert more and still pay zero tax at the federal level.

Finally, there are other weird things that could happen, like the foreign tax credit, or QBI, or loss carryforwards, that would affect the number as well.

secondcor521

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Re: Now’s the time to do a fat Roth conversion!
« Reply #15 on: March 13, 2020, 02:53:45 PM »
Yes, in general it's a good idea to look at a Roth conversion.

Two points to think about:

1.  Consider all tax ramifications, including federal income taxes, state income taxes, ACA subsidy loss, and FAFSA effects if anyone in your tax family is going to school.

2.  Consider that it's only March, and your tax situation might change in the next nine months.

For me, it's a good deal to do now, but because of the second point above, I'm still in the pondering stage.

EliteZags

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Re: Now’s the time to do a fat Roth conversion!
« Reply #16 on: March 13, 2020, 04:26:00 PM »
with the market jumping up and down 5% day to day, isn't it a bit dangerous, unless most conversions can happen instantly?

secondcor521

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Re: Now’s the time to do a fat Roth conversion!
« Reply #17 on: March 13, 2020, 05:29:10 PM »
with the market jumping up and down 5% day to day, isn't it a bit dangerous, unless most conversions can happen instantly?

Well that's another good point.  I only use mutual funds, so I end up getting close of day pricing.  There are three solutions, only the first two of which are ones I would use:

1.  Wait until just before market close to make Roth conversions (like at 3:55 ET).  This reduces the uncertainty.  (Although today would have been problematic for this strategy.)

2.  Allow some margin.  If you want to convert $10K, maybe just convert $8K.

3.  Switch brokers and investments so you get relatively instant conversions.

There's sort of a strategy involved in the second item, also.  If you want to do $10K and do $8K, that $8K could become $9K or $7K pretty easily.  But if you do $8K first and then see what the results end up being, then you can do a second transaction for $1K, which will only likely vary between $800 and $1200.  So you can hone in on your target with multiple transactions of progressively smaller magnitude.

ChpBstrd

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Re: Now’s the time to do a fat Roth conversion!
« Reply #18 on: March 13, 2020, 05:48:25 PM »
with the market jumping up and down 5% day to day, isn't it a bit dangerous, unless most conversions can happen instantly?

I don't know about other brokerages, but TD Ameritrade offers the opportunity to transfer shares rather than selling, transferring dollars, and buying again. The transfer amount (read: taxable income) is calculated as the value at time of transfer. Things get more complicated if your traditional or taxable account is with a different brokerage than your Roth.

Tass

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Re: Now’s the time to do a fat Roth conversion!
« Reply #19 on: March 13, 2020, 08:06:50 PM »
I don't know a lot about tax optimization. This sounds promising, but I could use some reading material to understand it a little better. Any suggestions beyond just googling "tax loss harvesting"?

If someone would be willing to guide a young  person, I have some specific questions...

1. I have a taxable account and a Roth, no tIRA, and $1350 of space before I hit the $6000 Roth contribution limit for 2020. So this would involve selling that much of my taxable long-term holdings, transferring it, and buying it in the Roth? I believe Fidelity will let me do this pseudo-instantly (using mutual funds whose prices are determined after the market closes).

2. Do wash sale rules not apply when you're transferring between account types?

3. How do you suggest predicting the benefit? Could I try entering this loss into turbotax 2019 as an estimate? What section am I looking for?

4. Is this worthwhile for someone with a relatively low tax burden already? (Under $3000, about 6% of my income for 2019.)

This is the kind of learning I have missed on the forum as of late! Thanks for the thread!

MoneyGoatee

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Re: Now’s the time to do a fat Roth conversion!
« Reply #20 on: March 13, 2020, 09:09:22 PM »
My traditional IRA account has only bonds, which haven't fallen that much, so this method doesn't really work for me.  When I set up this IRA, I intended it to be a safe cushion that I could count on giving me safe, reliable income, so that's why I put bonds in it.  Putting stocks funds in it like you guys seem to be doing is fine too, but...  Falling stocks are nice for doing doing rollover like this, but it would NOT be nice if you are actually relying on them as income.  It would NOT be nice if you are actually REQUIRED to withdraw from them as RMD.  And that's why I didn't put any stocks in my traditional IRA. 

Gone Fishing

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Re: Now’s the time to do a fat Roth conversion!
« Reply #21 on: March 14, 2020, 01:37:41 PM »
Ugh...I'm trying to sell a rental that would trigger some significant capital gains, or I'd be all over it.  I might see if I have some losses I can harvest, but 4 years into retirement, those have pretty much dried up.

FireAnt

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Re: Now’s the time to do a fat Roth conversion!
« Reply #22 on: March 14, 2020, 01:39:29 PM »
Thanks for the idea! I moved a good chunk of my traditional IRA to a Roth IRA. Both are in VFIFX so it works out.

TeeNixx

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Re: Now’s the time to do a fat Roth conversion!
« Reply #23 on: March 14, 2020, 11:01:41 PM »
PTF

EliteZags

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Re: Now’s the time to do a fat Roth conversion!
« Reply #24 on: March 16, 2020, 12:01:49 PM »
are those that don't expect any lost wages this year still entertaining this idea? if the traditional IRA is down ~20%, but the conversion amount would be in the 24% federal bracket would converting some amount still be worth it in the long run?

FireAnt

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Re: Now’s the time to do a fat Roth conversion!
« Reply #25 on: March 16, 2020, 12:34:14 PM »
are those that don't expect any lost wages this year still entertaining this idea? if the traditional IRA is down ~20%, but the conversion amount would be in the 24% federal bracket would converting some amount still be worth it in the long run?

I only converted enough to make sure I stay in the 12% bracket.

ChpBstrd

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Re: Now’s the time to do a fat Roth conversion!
« Reply #26 on: March 16, 2020, 01:27:21 PM »
are those that don't expect any lost wages this year still entertaining this idea? if the traditional IRA is down ~20%, but the conversion amount would be in the 24% federal bracket would converting some amount still be worth it in the long run?

Considering the tax brackets, in this case one would be better off converting during retirement.

However, considering how shares are on sale, this is an opportunity to move a greater percentage of one's portfolio into Roth while triggering less in taxes.