serial Roth IRA conversion - monthly v yearly

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Topic Author
rehr22
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serial Roth IRA conversion - monthly v yearly

Post by rehr22 » Thu Apr 02, 2015 9:53 am

Newbie here. Love the site, a lot!

I have a question on the serial Roth IRA conversion and when it makes sense to do monthly or yearly.

1) monthly - Roth IRA account already funded in LifeStrategy (VSMGX), person makes monthly ($450) contributions to a tIRA at Vanguard and within week converts into the rIRA account (VSMGX). Benefit of more money in the rIRA account but more administrative burden.
2) yearly - Roth IRA account already funded in LifeStrategy (VSMGX), person makes monthly ($450) contributions to a tIRA at Vanguard and end of year converts into the rIRA account (VSMGX). Benefit of less administrative burden but less money in the rIRA account.

Cheers,
rehr22

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cheese_breath
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Re: serial Roth IRA conversion - monthly v yearly

Post by cheese_breath » Thu Apr 02, 2015 10:29 am

I'm confused. :confused You're contributing to a tIRA and then converting it to a Roth? Why don't you just contribute directly to the Roth in the first place? What did I miss?

I don't see any advantage to putting it into the tIRA. In fact I see a disadvantage. When you convert to the Roth you will be taxed on the initial contribution plus any earnings that may have accrued. When you contribute directly to the Roth the earnings aren't taxed.
The surest way to know the future is when it becomes the past.

Topic Author
rehr22
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Re: serial Roth IRA conversion - monthly v yearly

Post by rehr22 » Thu Apr 02, 2015 10:45 am

cheese_breath wrote:I'm confused. :confused You're contributing to a tIRA and then converting it to a Roth? Why don't you just contribute directly to the Roth in the first place? What did I miss?

I don't see any advantage to putting it into the tIRA. In fact I see a disadvantage. When you convert to the Roth you will be taxed on the initial contribution plus any earnings that may have accrued. When you contribute directly to the Roth the earnings aren't taxed.
In light of the details, I thought it would be understood that I'm a high earner and ineligible to contribute directly to a Roth.

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cheese_breath
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Re: serial Roth IRA conversion - monthly v yearly

Post by cheese_breath » Thu Apr 02, 2015 10:52 am

rehr22 wrote:
cheese_breath wrote:I'm confused. :confused You're contributing to a tIRA and then converting it to a Roth? Why don't you just contribute directly to the Roth in the first place? What did I miss?

I don't see any advantage to putting it into the tIRA. In fact I see a disadvantage. When you convert to the Roth you will be taxed on the initial contribution plus any earnings that may have accrued. When you contribute directly to the Roth the earnings aren't taxed.
In light of the details, I thought it would be understood that I'm a high earner and ineligible to contribute directly to a Roth.
Guess you should have stated that specifically because I didn't grasp it from the details. But given that knowledge I would think the more frequent conversions (assuming Vanguard permitted it) would be better because it would get more into the Roth earlier, resulting is more earnings in the Roth and less in the tIRA.
Last edited by cheese_breath on Thu Apr 02, 2015 10:56 am, edited 1 time in total.
The surest way to know the future is when it becomes the past.

DSInvestor
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Re: serial Roth IRA conversion - monthly v yearly

Post by DSInvestor » Thu Apr 02, 2015 10:55 am

For simplicity, I'd do one TIRA contribution to MMF and then one conversion to Roth into the LifeStrategy fund each calendar year. I'd also make sure the the contribution and conversion is completed in the calendar year. I.e. 2015 contribution and conversion completed calendar 2015. This will simplify your 8606 forms in the event your TIRA contributions are non-deductible.

If you want to DCA, you can still do so with a lump sum contribution. Contribute $5500 to MMF in TIRA, Convert all of TIRA to MMF in Roth IRA, then use monthly exchanges from MMF to LifeStrategy inside the Roth IRA.
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jacoavlu
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Re: serial Roth IRA conversion - monthly v yearlyU

Post by jacoavlu » Thu Apr 02, 2015 11:59 am

I have the same question as the OP. High earner, doing backdoor Roth for wife and myself.

In the past I've lump contributed to the tIRA and done the conversion after. Going forward though I plan monthly contributions (non deductible) to tIRA just for budget purposes, and prefer to leave funds in money market while in the tIRA for simplicity with taxes.

Question is, will serial (monthly) conversions from the tIRA to Roth generate a 1099-R for each conversion? Is there any other downside to doing serial conversions? I'd prefer to get the money into the Roth sooner and then get it invested.

Alan S.
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Re: serial Roth IRA conversion - monthly v yearlyU

Post by Alan S. » Thu Apr 02, 2015 12:25 pm

jacoavlu wrote:I have the same question as the OP. High earner, doing backdoor Roth for wife and myself.

In the past I've lump contributed to the tIRA and done the conversion after. Going forward though I plan monthly contributions (non deductible) to tIRA just for budget purposes, and prefer to leave funds in money market while in the tIRA for simplicity with taxes.

Question is, will serial (monthly) conversions from the tIRA to Roth generate a 1099-R for each conversion? Is there any other downside to doing serial conversions? I'd prefer to get the money into the Roth sooner and then get it invested.
You will get a single combined 1099R for all your conversions (per TIRA account). If you end up converting slightly more than your basis (non deductible contributions) due to earnings generated prior to the conversions, you will have a small taxable amount to report as calculated on Form 8606. There is no major downside for doing several conversions other than checking to make sure that each one is done right, and the 1099R at year end is correct. Since these conversions are almost completely tax free, it is highly unlikely that you would recharacterize them, but technically each date is a separate conversion, so would have to be recharacterized separately if it came to that.

letsgobobby
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Re: serial Roth IRA conversion - monthly v yearly

Post by letsgobobby » Thu Apr 02, 2015 12:31 pm

rehr22 wrote:
cheese_breath wrote:I'm confused. :confused You're contributing to a tIRA and then converting it to a Roth? Why don't you just contribute directly to the Roth in the first place? What did I miss?

I don't see any advantage to putting it into the tIRA. In fact I see a disadvantage. When you convert to the Roth you will be taxed on the initial contribution plus any earnings that may have accrued. When you contribute directly to the Roth the earnings aren't taxed.
In light of the details, I thought it would be understood that I'm a high earner and ineligible to contribute directly to a Roth.
If you're a high earner the obvious solution is to put the maximum annual amount ($5500 if under age 50, otherwise $6500) into your TIRA on January 2 and convert it immediately. Anything less is wasting time (in the market), and creating more administrative headaches.

DSInvestor
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Re: serial Roth IRA conversion - monthly v yearlyU

Post by DSInvestor » Thu Apr 02, 2015 12:46 pm

Alan S. wrote:Since these conversions are almost completely tax free, it is highly unlikely that you would recharacterize them, but technically each date is a separate conversion, so would have to be recharacterized separately if it came to that.
Alan, I assume this means that each conversion will need to be tracked individually for Roth conversion basis as well?
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Alan S.
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Re: serial Roth IRA conversion - monthly v yearlyU

Post by Alan S. » Thu Apr 02, 2015 2:13 pm

DSInvestor wrote:
Alan S. wrote:Since these conversions are almost completely tax free, it is highly unlikely that you would recharacterize them, but technically each date is a separate conversion, so would have to be recharacterized separately if it came to that.
Alan, I assume this means that each conversion will need to be tracked individually for Roth conversion basis as well?
No, they can be combined under the "aggregation rules" per Pub 590 B, p 33 (except where a distribution occurred in prior year and rolled into a Roth in following year). For example, assume monthly contributions and bi monthly conversions. That's 6 conversions in the year, and assume 3 of them had small gains converted. All will be combined on the 1099R, but the taxable amount not known until the 8606 is completed for that year. If a distribution from conversions done in this year is withdrawn prior to 5 years, the total gains from all of them come out first per these aggregation rules subject to 10% penalty instead of having to treat each single conversion separately. This makes the 8606 easier to complete than it otherwise would be.

ThisTimeItsDifferent
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Re: serial Roth IRA conversion - monthly v yearly

Post by ThisTimeItsDifferent » Thu Apr 02, 2015 2:53 pm

I used to dca my backdoor Roth monthly through the Vanguard automatic investment plan but they don't have an automatic Roth conversion plan, so now I just contribute to the non deductible tIRA at the start of the year and convert immediately thereafter. The new contributions are a small part of the balance so I feel less need to dca now.

I had a deductible ira earlier but I already rolled that into my 401k earlier so now the conversions are all basis, non taxable, non deductible contributions.I started making the non deductible contributions in 2006, when the income limitation on conversions still existed but was legislated to disappear in 2010.

Topic Author
rehr22
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Re: serial Roth IRA conversion - monthly v yearly

Post by rehr22 » Fri Apr 03, 2015 6:23 am

Thank you for the many responses, much appreciated :happy

Topic Author
rehr22
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Re: serial Roth IRA conversion - monthly v yearly

Post by rehr22 » Tue Apr 07, 2015 8:36 am

The one difference I found between Fidelity and Vanguard is, Fidelity let me open a FDIC Insured Deposit Peoples Bank IRA account and fund as little as $200 to get started. With Vanguard, it appears my minimum is $1,000 to get into a money market account.

I am not sure what to do. As soon as I converted my tIRA to rIRA, the tIRA has $0 balance. I was hoping with Vanguard I could fund a few hundred dollars a month into a money market type account in the tIRA, then convert to the rIRA once a year. With Fidelity this was an option, but now that I have moved to Vanguard this is not an option (unless I meet the minimum of $1,000).

letsgobobby
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Re: serial Roth IRA conversion - monthly v yearly

Post by letsgobobby » Tue Apr 07, 2015 8:47 am

You described yourself as a high earner in a somewhat testy second post. The type of problem you are describing is not usually a problem for high earners. Not to pry too much, but is there a way you can lump sum $1000 at a time if not the whole $5500? We are talking about $110 per week for someone making at least $116,000 per year mAGI.

Topic Author
rehr22
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Re: serial Roth IRA conversion - monthly v yearly

Post by rehr22 » Tue Apr 07, 2015 8:54 am

letsgobobby wrote:You described yourself as a high earner in a somewhat testy second post. The type of problem you are describing is not usually a problem for high earners. Not to pry too much, but is there a way you can lump sum $1000 at a time if not the whole $5500? We are talking about $110 per week for someone making at least $116,000 per year mAGI.
Agreed, second post was kind of grumpy :)

I can definitely lump sum if needed, was just curious if there was something I am missing with Vanguard.

To be honest, even as a high earner, discretionary funds have been just a tad tight these days as our infant recently started daycare.

letsgobobby
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Re: serial Roth IRA conversion - monthly v yearly

Post by letsgobobby » Tue Apr 07, 2015 9:01 am

If married then your mAGI is actually over $183,000, but point taken. In your situation I would just wait til I had $1000 the first time. The TIRA balance with $0 is not a problem. We have two as well, they just get filled up every Jan 2 and then immediately emptied with a quick Roth conversion.

Topic Author
rehr22
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Re: serial Roth IRA conversion - monthly v yearly

Post by rehr22 » Tue Apr 07, 2015 9:02 am

letsgobobby wrote:If married then your mAGI is actually over $183,000, but point taken. In your situation I would just wait til I had $1000 the first time. The TIRA balance with $0 is not a problem. We have two as well, they just get filled up every Jan 2 and then immediately emptied with a quick Roth conversion.
Thanks, Bobby!

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