Timing the market for Roth Conversions. Sin?

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evofxdwg
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Timing the market for Roth Conversions. Sin?

Post by evofxdwg »

I have calculated the total amount to be converted from IRA to Roth IRA for the year, but I have been breaking it into two or three or four tranches and try to coincide with equity market downturns. The goal is to quickly make up for some or all of the taxes that will be due on the conversion amounts. (my top dollar will be the 24% federal bracket)

I converted some VTSAX on Mar 9, and again on Mar 24 2020.
The latest market trend is looking like I might do another one soon, maybe if/when VTSAX is down 10% from peak. I haven't decided to do the full remainder of my planned amount. If I don't complete the year conversion goal by Dec 31 I will just convert the remainder in the last week of the year.

Does anyone else try to time the market for Roth conversions? Is it a Boglehead sin?
Do you have a more defined algorithm than me? What is it?

:mrgreen:
otinkyad
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Re: Timing the market for Roth Conversions. Sin?

Post by otinkyad »

If you could go back and choose between your current strategy and converting everything on March 9th, what would you do?
NotWhoYouThink
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Re: Timing the market for Roth Conversions. Sin?

Post by NotWhoYouThink »

There is no boglehead religion, and no boglehead sin. Ever. Please stop.

Whether market timing makes sense or not you already know. We can't predict the market and no one believes that you can. Sell and convert whenever you choose, and learn to live with uncertainty.
diy60
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Re: Timing the market for Roth Conversions. Sin?

Post by diy60 »

I do about 70% or so in January, followed by more mid-year, with a final in late Dec after tax liability is known. Some years it works out great, some years less than optimal. It all balances out. Pick a strategy and go enjoy life.
Longdog
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Re: Timing the market for Roth Conversions. Sin?

Post by Longdog »

If you're converting equities in a pre-tax account to equities in a Roth account, it's not really market timing because you're not getting into and out of the market. You're just trying to minimize taxes due on the conversion by taking advantage of relative market troughs.

Is that what you are doing?
Steve
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Leif
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Re: Timing the market for Roth Conversions. Sin?

Post by Leif »

I don't try to time the market for conversions, but I want to take advantage of the market when equities are on sale.

My plan is to evenly convert quarterly. If the market is in a bear I up the amount for that quarter. On 4/1 I converted about 1.5X. This means the following quarter, 7/1 I reduced the conversion amount. By the end of the year I've converted the same amount, but took advantage of the reduced conversion cost.
Last edited by Leif on Fri Sep 11, 2020 1:41 pm, edited 2 times in total.
Topic Author
evofxdwg
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Re: Timing the market for Roth Conversions. Sin?

Post by evofxdwg »

Longdog wrote: Fri Sep 11, 2020 1:26 pm If you're converting equities in a pre-tax account to equities in a Roth account, it's not really market timing because you're not getting into and out of the market. You're just trying to minimize taxes due on the conversion by taking advantage of relative market troughs.

Is that what you are doing?
Yes, im doing that! I think it IS timing the market, with a goal of a faster gain that covers the taxes due. I see your point though. Im likely not to sell those converted equity funds to actually pay the taxes since I have some money market funds (either in the Roth and/or in a taxable fund) to pay that year's taxes on the conversion.

I agree its a drop in the bucket but it makes me feel better in that I saved some $$ on taxes.
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evofxdwg
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Re: Timing the market for Roth Conversions. Sin?

Post by evofxdwg »

NotWhoYouThink wrote: Fri Sep 11, 2020 1:16 pm There is no boglehead religion, and no boglehead sin. Ever. Please stop.

Whether market timing makes sense or not you already know. We can't predict the market and no one believes that you can. Sell and convert whenever you choose, and learn to live with uncertainty.
Yes mommy!
Longdog
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Re: Timing the market for Roth Conversions. Sin?

Post by Longdog »

evofxdwg wrote: Fri Sep 11, 2020 1:37 pm
Longdog wrote: Fri Sep 11, 2020 1:26 pm If you're converting equities in a pre-tax account to equities in a Roth account, it's not really market timing because you're not getting into and out of the market. You're just trying to minimize taxes due on the conversion by taking advantage of relative market troughs.

Is that what you are doing?
Yes, im doing that! I think it IS timing the market, with a goal of a faster gain that covers the taxes due. I see your point though. Im likely not to sell those converted equity funds to actually pay the taxes since I have some money market funds (either in the Roth and/or in a taxable fund) to pay that year's taxes on the conversion.

I agree its a drop in the bucket but it makes me feel better in that I saved some $$ on taxes.
Ideally, if possible you should pay the taxes from your taxable account to maximize the amount you end up with in Roth space. That will save you taxes going forward, since you'll have less in taxable accounts and more in Roth accounts.
Steve
JBTX
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Re: Timing the market for Roth Conversions. Sin?

Post by JBTX »

While it is advantageous to do it when market is lower, it isn't as much as you may think, depending on where the tax money on conversion came from

Let's assume you have $100k in traditional IRA, and also a taxable investments account invested the same was as the ira.

Look at 2 options:

1. Convert now at $100k
2. Wait until it grows to $200k and convert

Assume 20% marginal tax rate for simplicity.

Option 1 you pay $20k taxes on conversion.
Option 2 you pay $40k taxes on conversion.

So option 2 is better, right? Yes, but not by $20k. In option 2, the $20k in taxable that was paid in taxes in option 1 grows to $40k. But there will be capital gains or other taxes on the $20k appreciation to $40k. Assume 15% capital gains, so $20k times 15% = $3k. That is the amount saved by converting at $100k vs converting $200k. $3k. It's not nothing, but it isn't as much as you'd think. It's mostly a timing issue of when you pay the tax. What would be far more important is if an IRA market drop dipped your conversion into a lower tax bracket.

Edit: I think the formula for converting lower vs higher, paying taxes out of a taxable account invested similarly, would be

Marginal tax rate on conversion * applicable capital gains rate * appreciation of amount of ira.

In the example above it would be 20% times 15% times $100k = $3k
Last edited by JBTX on Fri Sep 11, 2020 2:51 pm, edited 1 time in total.
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celia
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Re: Timing the market for Roth Conversions. Sin?

Post by celia »

You have a sensible, tax-savings plan.

I wasn't planning on converting in 2008 when I was near the highest income of my career, but getting ready to retire in a few years. When the markets went down in June, I converted some money. (Back then, you could easily re-characterize if you put each conversion in a new Roth account.) The market went down some more, so I converted again. Rinse and repeat. By October, I had converted all of our Traditional IRAs and the final conversion was done on the day with the largest October drop. You can pretty much guess which conversions were recharacterized. But my conversion done when the share price was HALF of its earlier price meant that I could convert TWICE as many shares for the same cost. Another way of looking at it is that when the prices recovered, I paid half price on the taxes even though our tax bracket wasn't low!

Best financial move I ever made.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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celia
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Re: Timing the market for Roth Conversions. Sin?

Post by celia »

JBTX wrote: Fri Sep 11, 2020 2:24 pm Let's assume you have $100k in traditional IRA, and also a taxable investments account invested the same was as the ira....
Your assumption wouldn't likely be true if you followed Bogleheads' Tax-efficient Fund Placement concepts. Your fastest-growing assets (stocks) should be in Roths, where possible, while bonds would be in tax-deferred accounts. If you have international funds that pay foreign taxes, they should be in taxable, along with your remaining stocks.

As you are doing a Roth conversion, you are free to convert into a stock fund in the Roth. To maintain your asset allocation, you could change an equivalent amount of stocks funds elsewhere to bonds. It doesn't make tax sense to hold the same asset allocation in all your accounts.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
JBTX
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Re: Timing the market for Roth Conversions. Sin?

Post by JBTX »

celia wrote: Fri Sep 11, 2020 2:47 pm
JBTX wrote: Fri Sep 11, 2020 2:24 pm Let's assume you have $100k in traditional IRA, and also a taxable investments account invested the same was as the ira....
Your assumption wouldn't likely be true if you followed Bogleheads' Tax-efficient Fund Placement concepts. Your fastest-growing assets (stocks) should be in Roths, where possible, while bonds would be in tax-deferred accounts. If you have international funds that pay foreign taxes, they should be in taxable, along with your remaining stocks.

As you are doing a Roth conversion, you are free to convert into a stock fund in the Roth. To maintain your asset allocation, you could change an equivalent amount of stocks funds elsewhere to bonds. It doesn't make tax sense to hold the same asset allocation in all your accounts.
Like you, I tend to put most stocks in Roth and bonds in traditional. But being realistic, in actuality that is likely increasing my stock allocation on an after tax basis. If you decided to pull cash out of taxable to pay for a Roth conversion, and didn't change your Roth allocation, in actuality you have increased your stock allocation.

I only present it the way I did to make the comparison the cleanest and most apples to apples.
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Re: Timing the market for Roth Conversions. Sin?

Post by Dottie57 »

diy60 wrote: Fri Sep 11, 2020 1:22 pm I do about 70% or so in January, followed by more mid-year, with a final in late Dec after tax liability is known. Some years it works out great, some years less than optimal. It all balances out. Pick a strategy and go enjoy life.
+1. No one knows what will happen. DCA your ROTH conversions works just fine.
tibbitts
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Re: Timing the market for Roth Conversions. Sin?

Post by tibbitts »

I did some conversions in March and April, but have since recalculated and... wow was I ever off, and I'll have to do more than twice as much (well, I don't have to, just think I should) by the end of the year. So yes, I've been watching for a pullback, but just like with any other timing, you never know when will be the optimal time. I converted some early in the year too and that certainly didn't prove optimal.

I do have international in my Traditional that I will move to Roth, only because it was the only practical way for me to have enough international. Most of my taxable purchases of equities were long ago and moving any of that money to international would have triggered large capital gains. And I didn't have any new taxable funds to contribute.
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FIREchief
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Re: Timing the market for Roth Conversions. Sin?

Post by FIREchief »

evofxdwg wrote: Fri Sep 11, 2020 12:37 pm Does anyone else try to time the market for Roth conversions? Is it a Boglehead sin?
Do you have a more defined algorithm than me? What is it?

:mrgreen:
Never. Since the death of recharacterizations, I just convert substantially all of my annual target on Jan 2. I did consider increasing my target when the market dropped earlier this year, but I never did.

viewtopic.php?f=2&t=305298
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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WoodSpinner
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Re: Timing the market for Roth Conversions. Sin?

Post by WoodSpinner »

OP,

I am also an opportunist for ROth Conversions.

Typically I DCA and convert VTI monthly in-kind. During the major corrections in March I accelerated my conversions and converted on each market low. Completed 90% of my target in March.

I resumed normal DCA conversions in August for the remainder. Will accelerate on a 20% drop.

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Eagle33
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Re: Timing the market for Roth Conversions. Sin?

Post by Eagle33 »

I try to minimize the tax acceleration caused by my Roth conversions. If that is a sin, then I'm a sinner - so be it! I know I'm not perfect.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
markcoop
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Re: Timing the market for Roth Conversions. Sin?

Post by markcoop »

I'm sort-of doing something similar. I've been on a quest to get more stock into my Roth and less stock in traditional. I'll be making a neutral move between traditional and Roth (I do tax-adjust my AA, so assuming the tax-adjust is accurate, then it truly is neutral. Of course, it will never be 100% tax accurate). The goal is to be able to convert alot of what is left in my 401K from age 60-70. So, if the market drops, I will make a big shift that will hopefully mean I won't need to convert as much at some future point. If the market doesn't drop, not the worst problem to have. Will just need to convert more at some future time. Is it market timing? I think so. But it doesn't seem as bad because really just talking about future potential taxes.
Mark
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