What should I know before doing Roth conversion?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
fortfun
Posts: 2447
Joined: Tue Apr 19, 2016 7:31 pm

What should I know before doing Roth conversion?

Post by fortfun » Sat Nov 02, 2019 11:16 am

DW & I are almost certainly in a lower tax bracket this year than we will be in retirement. We've used up 100k pretax space this year. A few questions before I convert:

1. What should I know? Current situation: viewtopic.php?f=1&t=293620
2. When is the deadline for doing it this year? Midnight Dec 31?
3. What's the best way to estimate our current year taxable income?
4. Any reason we shouldn't do the Roth conversion now?

We may use some of this converted money to get us from age 53 to 59.5 (when we can access work 403Bs, 401Ks, etc).

Thanks,
FortFun

neilpilot
Posts: 2833
Joined: Fri Dec 04, 2015 1:46 pm
Location: Memphis area

Re: What should I know before doing Roth conversion?

Post by neilpilot » Sat Nov 02, 2019 12:11 pm

If your taxable holdings include mutual funds that are expected to pay all or a majority of the yearly dividend and/or capital gain in December, then you can easily underestimate your annual income if you don't take them into account. Last year I came dangerously close to the IRMAA cliff by not taking end-of-year returns of VUVLX and VTRIX into account.

cherijoh
Posts: 6357
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: What should I know before doing Roth conversion?

Post by cherijoh » Sat Nov 02, 2019 12:18 pm

fortfun wrote:
Sat Nov 02, 2019 11:16 am
DW & I are almost certainly in a lower tax bracket this year than we will be in retirement. We've used up 100k pretax space this year. A few questions before I convert:

1. What should I know? Current situation: viewtopic.php?f=1&t=293620
2. When is the deadline for doing it this year? Midnight Dec 31?
3. What's the best way to estimate our current year taxable income?
4. Any reason we shouldn't do the Roth conversion now?

We may use some of this converted money to get us from age 53 to 59.5 (when we can access work 403Bs, 401Ks, etc).

Thanks,
FortFun
1. Be sure and calculate the incremental taxes owed on the conversion. This isn't necessarily the same as your marginal tax bracket - e.g., if some of your capital gains/quaified dividends get pushed from 0% tax rate to 15% tax rate. Then instead of adding $0.22 tax for each dollar of conversion, you end up adding $0.37. There is also NIIT, phaseout of tax credits, and MAGI for IRMAA. At your ages I know the latter doesn't apply, but I'm not sure of the rest.

2. I think the transaction must be completed by Dec 31st. If you were doing the conversion between mutual funds at the same custodian you could initiate the transaction on the 31st. But if you have a brokerage account or two different custodians I don't think it would work to wait until Dec31st.

3. Wait until cap gain distributions and dividends are all announced for your taxable investment funds. Then run everything through an early copy of tax software or a tax calculator.

4. Yes. I think you are missing something if you think your income is lower now than it will be between 53 and 59.5. Also, current valuations are high, so your per share conversion costs would also be high. (A major stock market correction could be a reason to do Roth Conversions while still working). Finally, you need to be aware of the 5-year rule that applies to Roth conversions prior to 59.5. See this article by Michael Kitces.

neilpilot
Posts: 2833
Joined: Fri Dec 04, 2015 1:46 pm
Location: Memphis area

Re: What should I know before doing Roth conversion?

Post by neilpilot » Sat Nov 02, 2019 12:38 pm

One other suggestion.....if you want to keep some or all of your investments the same, consider moving them in kind.

When I did my conversion in 2018 I was able to move the equities in kind from my tIRA to my Roth, which are held by the same broker. It was easier than if I had sold in one account, moved the proceeds over, and then bought the same holdings in my Roth. That was before zero commission, so I also saved a little as well.

tibbitts
Posts: 9368
Joined: Tue Feb 27, 2007 6:50 pm

Re: What should I know before doing Roth conversion?

Post by tibbitts » Sat Nov 02, 2019 12:48 pm

fortfun wrote:
Sat Nov 02, 2019 11:16 am
DW & I are almost certainly in a lower tax bracket this year than we will be in retirement. We've used up 100k pretax space this year. A few questions before I convert:

1. What should I know? Current situation: viewtopic.php?f=1&t=293620
2. When is the deadline for doing it this year? Midnight Dec 31?
3. What's the best way to estimate our current year taxable income?
4. Any reason we shouldn't do the Roth conversion now?

We may use some of this converted money to get us from age 53 to 59.5 (when we can access work 403Bs, 401Ks, etc).

Thanks,
FortFun
I would do the conversion comfortably before the deadline, although obviously it would be nice for doing it if the funds are in equities and the market was lower. I have already done as much conversion as I think I want to do this year, although if the market drops significantly I might reconsider.

retiredjg
Posts: 38408
Joined: Thu Jan 10, 2008 12:56 pm

Re: What should I know before doing Roth conversion?

Post by retiredjg » Sat Nov 02, 2019 12:51 pm

I would not do this on 12/31. I'd do it on Thursday 12/26 which gives 4 business days for it all to happen on time. Or do it anytime between now and then.

I'm at Vanguard on the old mutual fund platform. I just "exchange" into the same fund in the Roth account. I don't know how it works on other platforms.

I always leave a buffer of at least $1k under whatever limit I don't want to go over just in case I forget something or make an error.

User avatar
Topic Author
fortfun
Posts: 2447
Joined: Tue Apr 19, 2016 7:31 pm

Re: What should I know before doing Roth conversion?

Post by fortfun » Sat Nov 02, 2019 12:55 pm

cherijoh wrote:
Sat Nov 02, 2019 12:18 pm
fortfun wrote:
Sat Nov 02, 2019 11:16 am
DW & I are almost certainly in a lower tax bracket this year than we will be in retirement. We've used up 100k pretax space this year. A few questions before I convert:

1. What should I know? Current situation: viewtopic.php?f=1&t=293620
2. When is the deadline for doing it this year? Midnight Dec 31?
3. What's the best way to estimate our current year taxable income?
4. Any reason we shouldn't do the Roth conversion now?

We may use some of this converted money to get us from age 53 to 59.5 (when we can access work 403Bs, 401Ks, etc).

Thanks,
FortFun
1. Be sure and calculate the incremental taxes owed on the conversion. This isn't necessarily the same as your marginal tax bracket - e.g., if some of your capital gains/quaified dividends get pushed from 0% tax rate to 15% tax rate. Then instead of adding $0.22 tax for each dollar of conversion, you end up adding $0.37. There is also NIIT, phaseout of tax credits, and MAGI for IRMAA. At your ages I know the latter doesn't apply, but I'm not sure of the rest.

2. I think the transaction must be completed by Dec 31st. If you were doing the conversion between mutual funds at the same custodian you could initiate the transaction on the 31st. But if you have a brokerage account or two different custodians I don't think it would work to wait until Dec31st.

3. Wait until cap gain distributions and dividends are all announced for your taxable investment funds. Then run everything through an early copy of tax software or a tax calculator.

4. Yes. I think you are missing something if you think your income is lower now than it will be between 53 and 59.5. Also, current valuations are high, so your per share conversion costs would also be high. (A major stock market correction could be a reason to do Roth Conversions while still working). Finally, you need to be aware of the 5-year rule that applies to Roth conversions prior to 59.5. See this article by Michael Kitces.
Thanks for the thoughtful post Cherijoh. I have some work/calculations to do!

heyyou
Posts: 3572
Joined: Tue Feb 20, 2007 4:58 pm

Re: What should I know before doing Roth conversion?

Post by heyyou » Sat Nov 02, 2019 8:42 pm

As a retiree, my taxable portfolio share holdings change very little from year to year. Using prior annual brokerage statements, I averaged my previous paid-in-December dividends, cap gains, etc. then converted a somewhat smaller amount earlier, knowing I could convert more after the Dec. 10th info was posted on the funds' website. All of my funds are from the same provider which helps when looking for that December info for each fund. There is an argument for a three fund portfolio, Roth conversions are more simple to execute due to fewer holdings in the taxable account.

After a few years of annual conversions, the process feels so much easier than the first year or two.

Post Reply