Choosing MFs in Rollover IRA to Roth Convert over Multiple Years

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RetiredCSProf
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Joined: Tue Feb 28, 2017 4:59 pm

Choosing MFs in Rollover IRA to Roth Convert over Multiple Years

Post by RetiredCSProf »

I have a TRowe rollover IRA mutual fund account (not a brokerage account) that I have started converting into Roth at TRowe. Because these are MF accounts, I can make partial conversions in dollars (partial shares). I am not required to convert "in kind." The only limitation is to hold a minimum of $1000 in each MF. I plan to continue conversions over several years; amounts depend on the tax impact each year.

Should I consider each's fund's past return in choosing which MFs to convert (in any given year)? When I Roth convert "in kind," (in my Fido brokerage account) I think about converting the most shares that I can for a fixed amount of money, so I want to convert when the price is "low," and with the expectation for growth. OTOH, in TRowe, I am converting dollars, so maybe it's just the overall return and the AA of my portfolio that matters. Should I look at the Roth conversion as an opportunity to rebalance the AA in my rollover IRA?

For example, suppose that I currently hold over $40K each in Funds A, B, and C in my rollover IRA, and that Fund A is up 25% YTD, Fund C is up 7%, but Fund B is "underwater." Suppose that I am overweight in Fund C.

Suppose my goal this year is to convert the following into my TRowe Roth IRA:
* $28K into Fund A (large & mid-cap domestic equity) and
* $12K into Fund B (foreign equity).
and I do not currently want to add Fund C to the Roth IRA.

Which of the following makes more sense? Is there no difference?

1) convert from Funds A and B "in kind"
2) convert all $40K from Fund A; splitting it into Funds A and B in the Roth IRA
3) convert all $40K from Fund B; splitting it into Funds A and B in the Roth IRA
4) convert all $40K from Fund C into Funds A and B in the Roth IRA
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Duckie
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Joined: Thu Mar 08, 2007 2:55 pm

Re: Choosing MFs in Rollover IRA to Roth Convert over Multiple Years

Post by Duckie »

RetiredCSProf wrote:For example, suppose that I currently hold over $40K each in Funds A, B, and C in my rollover IRA, and that Fund A is up 25% YTD, Fund C is up 7%, but Fund B is "underwater."
Is that $40K in each fund before the 25% gain or after?
Suppose that I am overweight in Fund C.
It's an IRA, you can swap things around whenever you want.
Which of the following makes more sense? Is there no difference?

1) convert from Funds A and B "in kind"
2) convert all $40K from Fund A; splitting it into Funds A and B in the Roth IRA
3) convert all $40K from Fund B; splitting it into Funds A and B in the Roth IRA
4) convert all $40K from Fund C into Funds A and B in the Roth IRA
I would choose 2 and convert from Fund A. Take advantage of that growth before it drops.
Topic Author
RetiredCSProf
Posts: 506
Joined: Tue Feb 28, 2017 4:59 pm

Re: Choosing MFs in Rollover IRA to Roth Convert over Multiple Years

Post by RetiredCSProf »

Yes, Option 2 probably makes the most sense for me, but better to wait for the fund to drop before the Roth conversion.

I want to avoid effectively "selling" a fund that has lost value (Fund B) to purchase a fund that has significant gain (Fund A). OTOH, I don't want to convert into Roth a fund that I expect to drop soon.
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