Should we use the coronavirus drop to do Roth conversion?

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GenawithanE
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Should we use the coronavirus drop to do Roth conversion?

Post by GenawithanE »

We are in the process of doing Roth conversions. We move stock from our IRA to Roth. Makes sense to me that now is a good time to get a lot of bang for our buck. We don't plan to change our portfolio in light of the current drop, so why not move shares now?
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Brianmcg321
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by Brianmcg321 »

The tax is the same regardless. You convert $20k, that's what your taxed on.
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tibbitts
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by tibbitts »

Brianmcg321 wrote: Wed Feb 26, 2020 10:07 am The tax is the same regardless. You convert $20k, that's what your taxed on.
No, the tax is not the same. You convert more shares when prices are lower. I was otherwise occupied on Monday, but did $2k yesterday.

Ideally you want the market to drop 90%+ for one day, convert, and then have the market recover the next day. Buying more shares with new money (sorry, it's Bogleheads... "rebalancing") on a 90% on-day drop would take courage. Converting would take none.
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Brianmcg321
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by Brianmcg321 »

tibbitts wrote: Wed Feb 26, 2020 10:13 am
Brianmcg321 wrote: Wed Feb 26, 2020 10:07 am The tax is the same regardless. You convert $20k, that's what your taxed on.
No, the tax is not the same. You convert more shares when prices are lower. I was otherwise occupied on Monday, but did $2k yesterday.

Ideally you want the market to drop 90%+ for one day, convert, and then have the market recover the next day. Buying more shares with new money (sorry, it's Bogleheads... "rebalancing") on a 90% on-day drop would take courage. Converting would take none.
The IRS won't ask you how many shares were transferred. $2k is $2k.
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retired@50
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by retired@50 »

Brianmcg321 wrote: Wed Feb 26, 2020 10:22 am
tibbitts wrote: Wed Feb 26, 2020 10:13 am
Brianmcg321 wrote: Wed Feb 26, 2020 10:07 am The tax is the same regardless. You convert $20k, that's what your taxed on.
No, the tax is not the same. You convert more shares when prices are lower. I was otherwise occupied on Monday, but did $2k yesterday.

Ideally you want the market to drop 90%+ for one day, convert, and then have the market recover the next day. Buying more shares with new money (sorry, it's Bogleheads... "rebalancing") on a 90% on-day drop would take courage. Converting would take none.
The IRS won't ask you how many shares were transferred. $2k is $2k.
True, $2k is $2k.

However, if your traditional IRA holds 1,000 shares of something, and your goal is to move most or all of those shares to your Roth IRA, then moving when the share price is lower allows you to fit more shares inside the $2k box. So, same tax impact this year, but fewer "$2k boxes" to move. So, fewer $2k boxes to move means less in taxes overall.

Somewhere on the Vanguard website a while back, Maria Bruno, who works for Vanguard, discussed this issue during one of the Vanguard webcast shows. I remembered it. Now, you know it too...

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Johnsson
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by Johnsson »

Yes. It's better than last week. However, it may not be a good a next week...
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dodecahedron
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dodecahedron »

How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.

On the other hand, if it is part of your long-run well-thought-out Investment Policy Statement to rebalance in various accounts, it might be a sound part of an overall sensible plan. But rather an unlikely coincidence to be happening right now.
Last edited by dodecahedron on Wed Feb 26, 2020 10:51 am, edited 2 times in total.
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retired@50
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by retired@50 »

dodecahedron wrote: Wed Feb 26, 2020 10:47 am How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.
Retired people can't directly contribute to a Roth IRA, since they don't have any earned income. The only way an ineligible (retired) person can add to a Roth IRA is by conversion from traditional IRA.

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dodecahedron
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dodecahedron »

retired@50 wrote: Wed Feb 26, 2020 10:50 am
dodecahedron wrote: Wed Feb 26, 2020 10:47 am How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.
Retired people can't directly contribute to a Roth IRA, since they don't have any earned income. The only way an ineligible (retired) person can add to a Roth IRA is by conversion from traditional IRA.

Regards,
Regardless of whether they can contribute more, retired people could still buy more equities *inside* their already existing Roths (unless they are already at 100% equities in those existing Roth accounts.)
tibbitts
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by tibbitts »

dodecahedron wrote: Wed Feb 26, 2020 10:47 am How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.
Completely different than market timing in one respect: no change to AA, no more or less market risk going forward. Also, because stocks have the highest expected return, normally Roths contain mostly stocks already, so transferring into stocks from another asset class is unlikely to be possible. Buying, if you mean from outside money, is very limited in annual contribution amount - $0 for many of us due to lack of employment income.

Completely the same as market timing in that we're guessing when is the best time to pay taxes. Just like when we choose Traditional vs. Roth, etc.
02nz
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by 02nz »

dodecahedron wrote: Wed Feb 26, 2020 10:47 am How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.

On the other hand, if it is part of your long-run well-thought-out Investment Policy Statement to rebalance in various accounts, it might be a sound part of an overall sensible plan. But rather an unlikely coincidence to be happening right now.
Since the OP is already in the process of doing Roth conversions, this is not really market-timing, unless you're one of those dogmatic BH's who insist on labeling anything and everything market-timing (and I just don't know how that's useful or helpful). Presumably OP has projected taxes for the year and worked out how much he/should convert, and is only trying to figure out when during the year to do the conversion. Nothing wrong with taking advantage of a dip. In a sense this is like the DCA vs lump sum question - since the market goes up on average, most of the time you come out ahead by doing the Roth conversion sooner rather than later, although many people hold off at least a portion of their planned Roth conversion until the end of the year, when they have more clarity on their tax situation.
Last edited by 02nz on Wed Feb 26, 2020 10:58 am, edited 1 time in total.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by tibbitts »

dodecahedron wrote: Wed Feb 26, 2020 10:53 am
retired@50 wrote: Wed Feb 26, 2020 10:50 am
dodecahedron wrote: Wed Feb 26, 2020 10:47 am How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.
Retired people can't directly contribute to a Roth IRA, since they don't have any earned income. The only way an ineligible (retired) person can add to a Roth IRA is by conversion from traditional IRA.

Regards,
Regardless of whether they can contribute more, retired people could still buy more equities *inside* their already existing Roths (unless they are already at 100% equities in those existing Roth accounts.)
Retirees would normally be at 100% equity in a Roth at all times - except me with a few HY bonds. Smarter retirees are probably 100% equity in their Roths (unless they've already converted all tax-deferred investments, possibly.)
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dodecahedron »

tibbitts wrote: Wed Feb 26, 2020 10:54 am
dodecahedron wrote: Wed Feb 26, 2020 10:47 am How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.
Completely different than market timing in one respect: no change to AA, no more or less market risk going forward.
Arguably it is a change to asset allocation and you are exposed to more risk when you hold stocks in a Roth than in a traditional IRA. You bear 100% of the risk of equities held in your Roth accounts. You get to share the risk of equities held in your traditional tax-deferred accounts. (You also get 100% of the return of equities in your Roths, but share the return of equities held in tax-deferred.)
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happymob
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by happymob »

We do backdoor both conversions (viewtopic.php?f=10&t=86262) every year when we pay our taxes. We get $10k/person state-tax-free on Roth conversions. We haven't paid our taxes yet (late K-1s means I have another month before we actually pay our taxes). I am very tempted to pull the trigger and convert some IRA to Roth right now. But Coronavirus could get worse. The Markets could go down more. Maybe I should hedge and do some now and some later. In any case, we have decided to not convert until we file our 2019 taxes. Might be a good choice. Might not be.

The evidence on dollar cost averaging suggests delaying is likely a bad idea. Invest early and often. Similarly, convert early and often. Chances are, 1 month, 3 months, 3 years later, stocks will be higher.
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dodecahedron
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dodecahedron »

tibbitts wrote: Wed Feb 26, 2020 10:57 am Retirees would normally be at 100% equity in a Roth at all times - except me with a few HY bonds. Smarter retirees are probably 100% equity in their Roths (unless they've already converted all tax-deferred investments, possibly.)
I guess I am not normal. I am (almost entirely) retired but have very little equity in my Roth and use most of my Roth for TIPS. My tax-deferred is all in TIAA Trad and I have zero equity in tax-deferred.

I am in a time-window when it makes sense to do some Roth conversions at some point this year, but that decision is independent of how much equity I decide to maintain in my Roth account. I will wait to do my Roth conversions until closer to the end of the year when I have a clearer picture of my effective marginal tax rate due to a variety of things I won´t know until later.

I hold most of my equities in my taxable account, since they are more tax efficient there. Qualified dividends taxed at 0%, tax-loss-harvesting is an option, donating appreciated charities is another option, and step-up in basis at death is another option.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by tibbitts »

dodecahedron wrote: Wed Feb 26, 2020 10:59 am
tibbitts wrote: Wed Feb 26, 2020 10:54 am
dodecahedron wrote: Wed Feb 26, 2020 10:47 am How exactly is this different from the argument for just buying more stocks inside your already existing Roth right now?

It´s all market-timing. It could work out well--or not.
Completely different than market timing in one respect: no change to AA, no more or less market risk going forward.
Arguably it is a change to asset allocation and you are exposed to more risk when you hold stocks in a Roth than in a traditional IRA. You bear 100% of the risk of equities held in your Roth accounts. You get to share the risk of equities held in your traditional tax-deferred accounts. (You also get 100% of the return of equities in your Roths, but share the return of equities held in tax-deferred.)
That's a valid point that I hadn't thought of, although I don't believe it will change most peoples' Roth strategy.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by tibbitts »

dodecahedron wrote: Wed Feb 26, 2020 11:10 am
tibbitts wrote: Wed Feb 26, 2020 10:57 am Retirees would normally be at 100% equity in a Roth at all times - except me with a few HY bonds. Smarter retirees are probably 100% equity in their Roths (unless they've already converted all tax-deferred investments, possibly.)
I guess I am not normal. I am (almost entirely) retired but have very little equity in my Roth and use most of my Roth for TIPS. My tax-deferred is all in TIAA Trad and I have zero equity in tax-deferred.

I am in a time-window when it makes sense to do some Roth conversions at some point this year, but that decision is independent of how much equity I decide to maintain in my Roth account. I will wait to do my Roth conversions until closer to the end of the year when I have a clearer picture of my effective marginal tax rate due to a variety of things I won´t know until later.

I hold most of my equities in my taxable account, since they are more tax efficient there. Qualified dividends taxed at 0%, tax-loss-harvesting is an option, donating appreciated charities is another option, and step-up in basis at death is another option.
Partly due to the history of the availability of Roth accounts I think most people have more in deferred vs. Roth accounts, but that might change in the future. I think most people with bonds in retirement accounts place them in deferred. With taxable I have mixed feelings: current tax law does favor equities in taxable, however during accumulation most people want to spend out of taxable. They don't want to be vulnerable to keeping all their taxable money in equities and wanting it for a large expense during a downturn.
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dodecahedron
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dodecahedron »

happymob wrote: Wed Feb 26, 2020 11:00 am The evidence on dollar cost averaging suggests delaying is likely a bad idea. Invest early and often. Similarly, convert early and often. Chances are, 1 month, 3 months, 3 years later, stocks will be higher.
*Converting* early and often was sound back when the law allowed recharacterization of conversions all the way until tax filing deadlines of the following year. Now you are no longer allowed to recharacterize conversions.

Thus, converting early in the tax year could be a mistake if something unpredictable happens later in the year that dramatically affects your effective marginal tax rate. Small changes in my AGI could make my effective marginal tax rate go from 18.5% to 49.95%. So prudence dictates waiting. The same is true for anyone precariously near a ¨cliff¨ of some type (e.g., for ACA credits, for IRMAA, for qualifying for senior citizen property tax exemptions, etc.)
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GenawithanE
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by GenawithanE »

Thanks all for the sanity check. We are mostly retired, with a pension for a quarter of our needs, get about half our needs from the income from taxable accounts, and most of our retirement in 401k/403b/tIRA, and each have a little bit of consulting income. We moved half of the planned Roth conversion today, and will see what the future brings to choose the time for the rest.

Curious about the concept of this changing our AA, since we moved ETF shares from one account to another. I get the idea that we don’t get taxed on the future increase but it doesn’t strike me as a risk issue that keeping shares in the tIRA means we get an advantage. Every dollar coming out of the tIRA is ordinary income and we expect to take only our RMDs when the time comes. If we leave money on the tIRA and it gets inherited, seems like an even bigger problem for our heir.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by vtMaps »

tibbitts wrote: Wed Feb 26, 2020 10:57 am Retirees would normally be at 100% equity in a Roth at all times - except me with a few HY bonds. Smarter retirees are probably 100% equity in their Roths (unless they've already converted all tax-deferred investments, possibly.)
We started out using our Roths for our emergency fund and savings account, thus a low equity allocation. As we do conversions, we are moving towards a higher equity allocation in our Roths.

--vtMaps
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quantAndHold
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by quantAndHold »

I’m wondering the same thing. I’m thinking about dollar cost averaging the conversion over the next few months. I don’t think think what’s going on in the market is anywhere close to over, but really, I don’t know nothin’.

And yes, my Roth is already 100% equities, so shifting my asset allocation wouldn’t work.
Yes, I’m really that pedantic.
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dodecahedron
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dodecahedron »

tibbitts wrote: Wed Feb 26, 2020 11:19 am Partly due to the history of the availability of Roth accounts I think most people have more in deferred vs. Roth accounts, but that might change in the future. I think most people with bonds in retirement accounts place them in deferred. With taxable I have mixed feelings: current tax law does favor equities in taxable, however during accumulation most people want to spend out of taxable. They don't want to be vulnerable to keeping all their taxable money in equities and wanting it for a large expense during a downturn.
I am fortunate enough to be not *most people* in that my portfolio is about 50% taxable, 23% tax-deferred, and 27% Roth*. My overall asset allocation is about 25% equities and 75% fixed income. Charitable giving is a large component of my budget so holding equities in taxable is a tax-efficient way to fund that. My other expenses are covered by SS, a small pension, and the dividends and interest thrown off by my taxable account.

(*It should be noted that one reason my Roth percentage is so high is that my late husband did use our Roths aggressively and quite successfully for equity investments *in the past* and that worked out quite well, but I find my current arrangement less stressful and sufficient for my needs.)
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dodecahedron
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dodecahedron »

GenawithanE wrote: Wed Feb 26, 2020 11:23 am Thanks all for the sanity check. We are mostly retired, with a pension for a quarter of our needs, get about half our needs from the income from taxable accounts, and most of our retirement in 401k/403b/tIRA, and each have a little bit of consulting income. We moved half of the planned Roth conversion today, and will see what the future brings to choose the time for the rest.

Curious about the concept of this changing our AA, since we moved ETF shares from one account to another. I get the idea that we don’t get taxed on the future increase but it doesn’t strike me as a risk issue that keeping shares in the tIRA means we get an advantage. Every dollar coming out of the tIRA is ordinary income and we expect to take only our RMDs when the time comes. If we leave money on the tIRA and it gets inherited, seems like an even bigger problem for our heir.
Since you said you are curious about the idea that relocating equity can change your asset allocation, check out the Boglehead wiki article on tax-adjusted asset allocation.

That said, unless you are talking about a *huge* Roth conversion, moving a small portion of your equity holdings from one type of account to another is not a big change in asset allocation, even taking taxes into account.
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GenawithanE
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by GenawithanE »

Since you said you are curious about the idea that relocating equity can change your asset allocation, check out the Boglehead wiki article on tax-adjusted asset allocation.

That said, unless you are talking about a *huge* Roth conversion, moving a small portion of your equity holdings from one type of account to another is not a big change in asset allocation, even taking taxes into account.
[/quote]

Interesting, thanks!
SpideyIndexer
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by SpideyIndexer »

Also, not converting now may be a small mistake. I agree that taking advantage of dips by converting is a good time to change one's asset location. Many retirees would prefer to move more of their equities into a Roth. So it makes sense to convert now or soon; no real need to wait until the end of the year, just stay prudently far back from any cliffs and consider fine-tuning towards the end of the year with another conversion.

Also if one believes in tax-adjusting one's AA (as do I) one could still maintain the same AA after a Roth conversion by simple calculation. For example if one believes one will pay 20% tax on distributions, a 50/50 AA could be (500K stock plus 500K bonds) in an IRA or 400K stock in a Roth plus 500K bonds in an IRA.

No one knows know for sure when the local minimum in stock prices will be, so don't expect clear advice on whether to convert now, next week or next month.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by 557880yvi »

Question about timing of paying Estimated Taxes on the conversion if we take advantage of the dip:

We have been doing our Roth conversions in late December of each year (a 12-yr plan to reduce future very high RMD's and tax rates) and paying the total federal and state taxes on the conversions at that time. It looks like it makes sense for us to take advantage of the market dip to move some equity positions from our IRA's to our Roth IRA's. Some have dipped almost 10% so we can move more shares for the same $ value as our planned conversion for the year. They are very solid stocks and we fully expect them to recover from the dip.

Do we have to pay all of the taxes due on the amount converted in the 1st quarter by April 15th (due date for 2020 Q1 Estimated Tax Payments) or can they be paid over the 4 quarters? For example, if we convert $150,000 this week, which will result in a total Federal Tax bill in 2020 of about $20,000, do we have to pay the $20,000 by April 15th or can we pay it 1/4th per quarter or $5,000 per quarter? I have found "definitive answers" saying both!

Thank you!
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by Mando19 »

I am converting 25% of my total Roth each quarter to align with estimated tax payments.
I did the conversion yesterday, If the market continues to drop I may convert more.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by GrowthSeeker »

Assume one has decided to do a Roth conversion of a certain number of dollars but then the market makes a large move up or down.

Sure, the dollar amount of the Roth Conversion is the same.
But the percentage of the IRA which got converted to Roth varies with how the market moved.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by Nightowl99 »

I did most of my planned Roth conversion for the year the other day when there was a dip in the market, just to get it done. The market could drop some more but I figure there will be more time, by doing this earlier in the year, for the reinvested dividends to buy more shares in the Roth this way. There could be some flaw in my thinking about it that way but I'm not going to agonize over it.

A couple of years ago, I decided to make partial Roth conversions each year and used Taxcaster to estimate the additional taxes. Now I pay 1/4th of the annual estimated taxes quarterly. I'm not a tax expert by any means but luckily the IRS hasn't had any complaints so far. Reading about how to do this on this Bogleheads website (and irs.gov) helped a lot because I hadn't heard about safe harbor rules or IRMAA limits before.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by tomd37 »

Someone please correct me if I am incorrect in my understanding of the following. Those of us age 72 or over must complete our RMD before a Roth conversion can be done because the first distribution is considered a RMD until the RMD amount is met. :?:
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by fposte »

GrowthSeeker wrote: Wed Feb 26, 2020 8:03 pm Assume one has decided to do a Roth conversion of a certain number of dollars but then the market makes a large move up or down.

Sure, the dollar amount of the Roth Conversion is the same.
But the percentage of the IRA which got converted to Roth varies with how the market moved.
Yup. That's why I was able to complete my Roth conversions last year--the January dip meant that I could do the entire remaining amount without triggering NIIT, when I'd originally planned to spread them into this year.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by dwickenh »

tomd37 wrote: Thu Feb 27, 2020 8:14 am Someone please correct me if I am incorrect in my understanding of the following. Those of us age 72 or over must complete our RMD before a Roth conversion can be done because the first distribution is considered a RMD until the RMD amount is met. :?:
This is true, you must satisfy your RMD in the same year. Your Conversion does not satisfy your RMD.
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by WoodSpinner »

557880yvi wrote: Wed Feb 26, 2020 6:53 pm Question about timing of paying Estimated Taxes on the conversion if we take advantage of the dip:

We have been doing our Roth conversions in late December of each year (a 12-yr plan to reduce future very high RMD's and tax rates) and paying the total federal and state taxes on the conversions at that time. It looks like it makes sense for us to take advantage of the market dip to move some equity positions from our IRA's to our Roth IRA's. Some have dipped almost 10% so we can move more shares for the same $ value as our planned conversion for the year. They are very solid stocks and we fully expect them to recover from the dip.

Do we have to pay all of the taxes due on the amount converted in the 1st quarter by April 15th (due date for 2020 Q1 Estimated Tax Payments) or can they be paid over the 4 quarters? For example, if we convert $150,000 this week, which will result in a total Federal Tax bill in 2020 of about $20,000, do we have to pay the $20,000 by April 15th or can we pay it 1/4th per quarter or $5,000 per quarter? I have found "definitive answers" saying both!

Thank you!
OP,

I have been paying in 4 equal installments to the Fed to make sure I am within a Safe Harbor. This year the goal is to be within $1,000 of 2020 tax since 110% of 2019s tax would generate a refund.

Similar approach for my State taxes since they follow the Fed Safe Harbor rule BUT require 3 payments not 4 (30%, 40%, 0%, 30%) — gotta love CA.

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Re: Should we use the coronavirus drop to do Roth conversion?

Post by Big Dog »

I'm doing Roth conversions on the dip. Yes, $20k is $20k, but $20k of a lower value transfers more shares today to the Roth. They'll bounce back eventually, so the overall tax hit will be lower. (hopefully)
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by mmoneytalks »

I am a retired 59yo who has been converting $40-50K each year from my trad IRA to my Roth. I haven’t completed the conversion yet this year and was wondering:

(1) Would it make more sense to complete this year’s Roth conversion using cash from my MM or convert $40-$50K shares of my mutual fund to Roth?
(2) Is now is a good time to complete the conversion or should I make partial conversions over a set period of time?

FYI—I do not/have not needed to withdraw funds from my IRA/Roth to supplement the pension (w/cola) I am receiving.

Thank you!
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Third Son
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Tax payments?

Post by Third Son »

OK I will ask this question since I already did a search and nothing I was useful to my specific case.

My income for the first two months is $40K. I want to make a conversion up to the 12% bracket which is $103,500 or so ( i know it changed slightly..MFJ). Can I make a $60K conversion and just pay the Fed and State taxes on that from cash? If so, how do I do that? Mail a check? Online?

Granted, my numbers will be slightly different from the above but for sake of clarity, I kept them to round numbers.

Thanks....
"A part of all you earn is yours to keep" | | -The Richest Man in Babylon
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WoodSpinner
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Re: Tax payments?

Post by WoodSpinner »

Third Son wrote: Fri Feb 28, 2020 9:23 am OK I will ask this question since I already did a search and nothing I was useful to my specific case.

My income for the first two months is $40K. I want to make a conversion up to the 12% bracket which is $103,500 or so ( i know it changed slightly..MFJ). Can I make a $60K conversion and just pay the Fed and State taxes on that from cash? If so, how do I do that? Mail a check? Online?

Granted, my numbers will be slightly different from the above but for sake of clarity, I kept them to round numbers.

Thanks....
You can do that, but you might find other choices are more optimal. Here is what I do:

1. Figure out which Safe Harbor method will cover me this year (e.g. 100% of last years Taxes, within $1,000 of current years taxes etc.).
2. Figure out what additional taxes I need to pay
3. Determine a plan for how to pay enough to meet the Safe Harbor and save the rest in Short term savings (e.g. MM or CDs). This might involve, Estimated Tax Payment’s, increasing withholding etc.

WoodSpinner.
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WoodSpinner
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by WoodSpinner »

OP,

Well I did an extra conversion Yesterday and another for today. Hate to see the marketplace drop so fast but am sleeping well at night.

All told this is about 1/3 of the conversions I had planned for the year.

WoodSpinner
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Third Son
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Re: Tax payments?

Post by Third Son »

WoodSpinner wrote: Fri Feb 28, 2020 10:23 am
Third Son wrote: Fri Feb 28, 2020 9:23 am OK I will ask this question since I already did a search and nothing I was useful to my specific case.

My income for the first two months is $40K. I want to make a conversion up to the 12% bracket which is $103,500 or so ( i know it changed slightly..MFJ). Can I make a $60K conversion and just pay the Fed and State taxes on that from cash? If so, how do I do that? Mail a check? Online?

Granted, my numbers will be slightly different from the above but for sake of clarity, I kept them to round numbers.

Thanks....
You can do that, but you might find other choices are more optimal. Here is what I do:

1. Figure out which Safe Harbor method will cover me this year (e.g. 100% of last years Taxes, within $1,000 of current years taxes etc.).
2. Figure out what additional taxes I need to pay
3. Determine a plan for how to pay enough to meet the Safe Harbor and save the rest in Short term savings (e.g. MM or CDs). This might involve, Estimated Tax Payment’s, increasing withholding etc.

WoodSpinner.
Yeah this whole safe harbor thing has me a bit confused (not saying that is hard). My income is easy. I worked two months this year. I know how much state and federal I paid so far. I will be living off of cash savings for the rest of the year. I want to convert up to the 12% bracket for 2020. I can pay for the taxes with cash. Do I just subtract off the earned income from the 12% bracket ($104,650-$xx= roth conversion amount) and do that?

Makes sense to me. Also as I asked before, how do I physically pay these taxes? Send in a cheque?
"A part of all you earn is yours to keep" | | -The Richest Man in Babylon
lkar
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Re: Should we use the coronavirus drop to do Roth conversion?

Post by lkar »

GrowthSeeker wrote: Wed Feb 26, 2020 8:03 pm Assume one has decided to do a Roth conversion of a certain number of dollars but then the market makes a large move up or down.

Sure, the dollar amount of the Roth Conversion is the same.
But the percentage of the IRA which got converted to Roth varies with how the market moved.
This is me. I won’t know the exact amount I want to convert until December when my tax picture is clear but at this point I can make a decent guess. I am tempted for sure to hope that this is a dip and not a cliff and that now will be a better time than December to convert. I think I am going to give it another week or two before doing anything but I could imagine doing a modest percentage of the conversion now. I don’t change the investment when I convert but convert the shares of my etf in kind so the AA effect is nominal given the relatively small conversion size.
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