Can you educate me on Roth conversions please

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ColoRetiredGirl
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Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

Please forgive me for asking this stupid question but I need help in understanding converting funds with substantial gains when the market dips or has a correction. In the past, I have converted funds with unrealized losses but never with unrealized gains. Today, when I saw the market was down I looked over my equities in my IRA account and found all had gains. My brother-in-law said to pick a fund which throws off the most dividends and convert that fund. Does this makes sense? For instance, I have Schwab’s SCHD (Schwab US Dividend Equity ETF). I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over. That makes more sense to me. Please explain the benefits of moving funds with substantial unrealized gains and/ or point me any guidance. Thank you in advance.
aristotelian
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Re: Can you educate me on Roth conversions please

Post by aristotelian »

You don't convert funds, you convert dollars. You can always rebalance your retirement accounts at any time. Cost basis is irrelevant since the entire conversion is taxable.
tibbitts
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Re: Can you educate me on Roth conversions please

Post by tibbitts »

It's important to differentiate cost basis from tax basis. Cost basis doesn't matter if the funds are in a tIRA now. Tax basis definitely does matter when converting, but it applies to your entire tIRA, not more or less to any individual fund.

I wouldn't get too excited about the dip today unless you were equally excited the last time your tIRA position was at the same price it closed at today. I will confess that I did twice my usual daily conversion, but only because I missed one day previously and promised myself the next time the fund dropped below it had been on the day I missed (if ever, of course), I'd catch up.

In general the idea is to leave lower-returning assets in a tIRA vs. a Roth, although there are exceptions. For example if you want a chunk of money you can access without paying taxes some year in the future, sort of a not-really-emergency fund, you might want that in a fairly stable investment in a Roth. But that depends on what funds you have in taxable and other resources.
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arcticpineapplecorp.
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Re: Can you educate me on Roth conversions please

Post by arcticpineapplecorp. »

ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm Please forgive me for asking this stupid question but I need help in understanding converting funds with substantial gains when the market dips or has a correction. In the past, I have converted funds with unrealized losses but never with unrealized gains. Today, when I saw the market was down I looked over my equities in my IRA account and found all had gains. My brother-in-law said to pick a fund which throws off the most dividends and convert that fund. Does this makes sense? For instance, I have Schwab’s SCHD (Schwab US Dividend Equity ETF). I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over. That makes more sense to me. Please explain the benefits of moving funds with substantial unrealized gains and/ or point me any guidance. Thank you in advance.
there are a couple things going on here. I think we need more info or at least some clarification because I can't tell if you're talking about a trad IRA or a taxable acct.

1. Is the SCHD you're referring to that you bought at $55/share that is now worth $74 a share inside your IRA or a taxable acct?

2. losses are irrelevant within a traditional IRA from a tax perspective because you can't tax loss harvest in a trad IRA.

3. losses can be relevant in a trad IRA if you convert a fund that has decreased in value to a Roth IRA because you're paying less tax than you otherwise would have.

ex: If you originally invested $10,000 in your trad IRA and now it's worth $5000 because the investment fell and you convert now to Roth IRA, you'd pay tax on $5000 rather than $10,000 even though it's the same number of shares (just the value has changed). When the investment recovers to $10,000 in the Roth, it's all tax free when withdrawn. So you avoided paying tax on $5000 of the original $10,000 (plus future gains on that as well).

4. Gains are relevant in a taxable acct because you will pay cap gains taxes.

5. Gains are only relevant in a trad IRA to the extent that you will pay tax on the gains (as ordinary income) when withdrawn from the trad IRA (or when converted to Roth IRA).

6. I understand SCHD was worth MORE than $74 until today, but that doesn't mean it's worth converting. It might (based on other circumstances, like if your income is in 0% tax bracket even with the conversion, that could make sense), or it might not. You have to be willing to pay the tax on money converted. Do you understand what the tax implication will be if you sell?

7. But if you want to change funds, you don't have to convert to Roth to do that. You can simply switch funds within the trad IRA with no tax implications (if your goal is simply to switch funds).

8. what does converting a fund (SHCD) with the most dividends have to do with anything? Whether that's in a trad IRA or Roth IRA it would be irrelevant. What was your brother's rationale/explanation? Is this in a taxable account??

9. if you switch funds in a taxable acct there can be a taxable event even if the price fell recently (like it went from $79 to $74) because if you bought it at $55 and sell it at $74, that's a gain, not a loss and you will owe cap gains taxes (if taxable acct).

does that help?
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

arcticpineapplecorp. wrote: Mon Sep 20, 2021 8:33 pm
ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm Please forgive me for asking this stupid question but I need help in understanding converting funds with substantial gains when the market dips or has a correction. In the past, I have converted funds with unrealized losses but never with unrealized gains. Today, when I saw the market was down I looked over my equities in my IRA account and found all had gains. My brother-in-law said to pick a fund which throws off the most dividends and convert that fund. Does this makes sense? For instance, I have Schwab’s SCHD (Schwab US Dividend Equity ETF). I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over. That makes more sense to me. Please explain the benefits of moving funds with substantial unrealized gains and/ or point me any guidance. Thank you in advance.
there are a couple things going on here. I think we need more info or at least some clarification because I can't tell if you're talking about a trad IRA or a taxable acct.
It is a TIRA not a taxable account
1. Is the SCHD you're referring to that you bought at $55/share that is now worth $74 a share inside your IRA or a taxable acct?

It is in my TIRA

2. losses are irrelevant within a traditional IRA from a tax perspective because you can't tax loss harvest in a trad IRA.
I was aware this. I previously was converting based on your #3 example

3. losses can be relevant in a trad IRA if you convert a fund that has decreased in value to a Roth IRA because you're paying less tax than you otherwise would have.

ex: If you originally invested $10,000 in your trad IRA and now it's worth $5000 because the investment fell and you convert now to Roth IRA, you'd pay tax on $5000 rather than $10,000 even though it's the same number of shares (just the value has changed). When the investment recovers to $10,000 in the Roth, it's all tax free when withdrawn. So you avoided paying tax on $5000 of the original $10,000 (plus future gains on that as well).

4. Gains are relevant in a taxable acct because you will pay cap gains taxes.

I am aware of this.

5. Gains are only relevant in a trad IRA to the extent that you will pay tax on the gains (as ordinary income) when withdrawn from the trad IRA (or when converted to Roth IRA).

6. I understand SCHD was worth MORE than $74 until today, but that doesn't mean it's worth converting. It might (based on other circumstances, like if your income is in 0% tax bracket even with the conversion, that could make sense), or it might not. You have to be willing to pay the tax on money converted. Do you understand what the tax implication will be if you sell?

Yes. I am aware of this. I know I have to pay taxes. I am trying to covert up to the 22% tax bracket.

7. But if you want to change funds, you don't have to convert to Roth to do that. You can simply switch funds within the trad IRA with no tax implications (if your goal is simply to switch funds).

I am aware of this.
8. what does converting a fund (SHCD) with the most dividends have to do with anything? Whether that's in a trad IRA or Roth IRA it would be irrelevant. What was your brother's rationale/explanation? Is this in a taxable account??

I think his rationale is that fund would grow faster in the Roth account. I believe it would be more efficient in the Roth.

9. if you switch funds in a taxable acct there can be a taxable event even if the price fell recently (like it went from $79 to $74) because if you bought it at $55 and sell it at $74, that's a gain, not a loss and you will owe cap gains taxes (if taxable acct).

This is good to know. [

does that help? Yes. Thank you.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

aristotelian wrote: Mon Sep 20, 2021 8:03 pm You don't convert funds, you convert dollars. You can always rebalance your retirement accounts at any time. Cost basis is irrelevant since the entire conversion is taxable.
Thank you. I was looking at the fund and more importantly the cost basis and not the dollars. I have to really shift my thinking.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

tibbitts wrote: Mon Sep 20, 2021 8:19 pm It's important to differentiate cost basis from tax basis. Cost basis doesn't matter if the funds are in a tIRA now. Tax basis definitely does matter when converting, but it applies to your entire tIRA, not more or less to any individual fund.

I wouldn't get too excited about the dip today unless you were equally excited the last time your tIRA position was at the same price it closed at today. I will confess that I did twice my usual daily conversion, but only because I missed one day previously and promised myself the next time the fund dropped below it had been on the day I missed (if ever, of course), I'd catch up.

In general the idea is to leave lower-returning assets in a tIRA vs. a Roth, although there are exceptions. For example if you want a chunk of money you can access without paying taxes some year in the future, sort of a not-really-emergency fund, you might want that in a fairly stable investment in a Roth. But that depends on what funds you have in taxable and other resources.
Thank you. My funds are in a TIRA. I didn’t realize cost basis was irrelevant in a TIRA. I plan to focus on the dollars I was to convert regardless of the cost basis. I can move lots with gains which will make my conversion decisions easier.
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FiveK
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Re: Can you educate me on Roth conversions please

Post by FiveK »

ColoRetiredGirl wrote: Mon Sep 20, 2021 11:26 pm I plan to focus on the dollars I was to convert regardless of the cost basis.
Good plan.

See also Roth IRA conversion - Bogleheads.
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arcticpineapplecorp.
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Re: Can you educate me on Roth conversions please

Post by arcticpineapplecorp. »

ColoRetiredGirl wrote: Mon Sep 20, 2021 11:15 pm
arcticpineapplecorp. wrote: Mon Sep 20, 2021 8:33 pm 8. what does converting a fund (SHCD) with the most dividends have to do with anything? Whether that's in a trad IRA or Roth IRA it would be irrelevant. What was your brother's rationale/explanation? Is this in a taxable account??

I think his rationale is that fund would grow faster in the Roth account. I believe it would be more efficient in the Roth.
it's only more efficient in the sense that there will be less taxes than if in the trad IRA but that would be true of any stock fund whether it's a dividend aristocrat or a total stock market index fund. The dividend part is what I'm asking you to focus on. Do you think this fund is superior than a total stockmarket index fund because it has "dividend" in the name? If so how do you account for the fact that since the beginning of this fund it's done worse than the total stock market index fund:

Image

source: https://www.portfoliovisualizer.com/bac ... ion2_2=100

total return is what matters.

Also, schd only has 100 stocks.
total market has over 3000 stocks.

schd is 0.06% per year
total market is 0.04% per year
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jeffyscott
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Re: Can you educate me on Roth conversions please

Post by jeffyscott »

ColoRetiredGirl wrote: Mon Sep 20, 2021 11:15 pm
arcticpineapplecorp. wrote: Mon Sep 20, 2021 8:33 pm
ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm Please forgive me for asking this stupid question but I need help in understanding converting funds with substantial gains when the market dips or has a correction. In the past, I have converted funds with unrealized losses but never with unrealized gains. Today, when I saw the market was down I looked over my equities in my IRA account and found all had gains. My brother-in-law said to pick a fund which throws off the most dividends and convert that fund. Does this makes sense? For instance, I have Schwab’s SCHD (Schwab US Dividend Equity ETF). I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over. That makes more sense to me. Please explain the benefits of moving funds with substantial unrealized gains and/ or point me any guidance. Thank you in advance.
1. Is the SCHD you're referring to that you bought at $55/share that is now worth $74 a share inside your IRA or a taxable acct?

It is in my TIRA

2. losses are irrelevant within a traditional IRA from a tax perspective because you can't tax loss harvest in a trad IRA.
I was aware this. I previously was converting based on your #3 example

3. losses can be relevant in a trad IRA if you convert a fund that has decreased in value to a Roth IRA because you're paying less tax than you otherwise would have.

ex: If you originally invested $10,000 in your trad IRA and now it's worth $5000 because the investment fell and you convert now to Roth IRA, you'd pay tax on $5000 rather than $10,000 even though it's the same number of shares (just the value has changed). When the investment recovers to $10,000 in the Roth, it's all tax free when withdrawn. So you avoided paying tax on $5000 of the original $10,000 (plus future gains on that as well).
With regard to item 3, it is not the really about losses but only about the current value. Converting specific lots based on the cost basis of those shares is pointless. You seemed to imply that was what you were doing here:

I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over.

and still seemed to think you need to identify specific lots to convert here:
I can move lots with gains which will make my conversion decisions easier.

Let's say you had $100,000 in SCHD on Jan 1 and plan to convert $50,000 sometime during the year. If you do it while the value is $100K, you will have converted 50% of it. If you wait and the value falls to $50,000 and you then convert, you have converted 100% of it. If the value increases to $150K and you then convert, you will have converted only 1/3. In each case, future taxes on your SCHD depend only on the total balance in the TIRA and that is the benefit of converting when the value is lower rather than higher.

Share prices, dividends, cost basis, and lots make no difference. The full value of whatever is in your TIRA is taxable upon withdrawal (or conversion), whatever is moved to the Roth will be subject to no further tax.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Can you educate me on Roth conversions please

Post by retiredjg »

ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm While I want to move as much of my IRA to a Roth....
Is there a reason you think that converting tIRA to Roth IRA at this time is a good idea?

It is possible you should not be converting anything. For example, if your current tax bracket is high then converting later might be the better plan.

Also, do you have any non-deductible contributions in this IRA or any other IRA? That will be handled differently from having all pre-tax money in your IRA(s).
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Re: Can you educate me on Roth conversions please

Post by tibbitts »

retiredjg wrote: Tue Sep 21, 2021 9:09 am
ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm While I want to move as much of my IRA to a Roth....
Is there a reason you think that converting tIRA to Roth IRA at this time is a good idea?

It is possible you should not be converting anything. For example, if your current tax bracket is high then converting later might be the better plan.

Also, do you have any non-deductible contributions in this IRA or any other IRA? That will be handled differently from having all pre-tax money in your IRA(s).
This is a good point and you want to view it in context of your total tax-deferred balance and your other retirement income (annuities, pension, etc.) For me I definitely don't plan on getting to even nearly a zero deferred balance before RMDs start. I'd like to get to a zero tIRA balance (vs. deferred overall) just so as to get rid of the annoying tax basis, but that would still leave other deferred investments that would be subject to RMDs. Of course if the equity market drops 90% I'm converting every deferred dollar I have in equities - as if I could actually get logged in to do that if that happened. But as time goes on you start ending up with more deferred in fixed income, so converting becomes less of a priority as you lose that "risk" of a high growth rate.
an_asker
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Re: Can you educate me on Roth conversions please

Post by an_asker »

aristotelian wrote: Mon Sep 20, 2021 8:03 pm [...]
Cost basis is irrelevant since the entire conversion is taxable.
Doesn't it depend? I mean, one could have a non-deductible traditional IRA, no?
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Re: Can you educate me on Roth conversions please

Post by aristotelian »

an_asker wrote: Tue Sep 21, 2021 11:14 am
aristotelian wrote: Mon Sep 20, 2021 8:03 pm [...]
Cost basis is irrelevant since the entire conversion is taxable.
Doesn't it depend? I mean, one could have a non-deductible traditional IRA, no?
As another person suggested, the contribution basis could be important but the cost basis of whatever shares currently held in the account is irrelevant. Since non-deductible contributions weren't mentioned I assumed it is an ordinary pretax traditional IRA.
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Re: Can you educate me on Roth conversions please

Post by an_asker »

aristotelian wrote: Tue Sep 21, 2021 11:16 am
an_asker wrote: Tue Sep 21, 2021 11:14 am
aristotelian wrote: Mon Sep 20, 2021 8:03 pm [...]
Cost basis is irrelevant since the entire conversion is taxable.
Doesn't it depend? I mean, one could have a non-deductible traditional IRA, no?
As another person suggested, the contribution basis could be important but the cost basis of whatever shares currently held in the account is irrelevant. Since non-deductible contributions weren't mentioned I assumed it is an ordinary pretax traditional IRA.
Ahaa! Got it :-)

:sharebeer
LeeMKE
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Re: Can you educate me on Roth conversions please

Post by LeeMKE »

May I suggest that the point of the advice was to load the Roth with the highest performing funds, NOT to do tax harvesting, which everyone has correctly suggested does not apply to tIRA to Roth conversions.

Since Roth accounts will be tax free, you want the strongest performers in Roth. And Since IRA will be taxed when withdrawn, your slower performing assets should be in tIRA (i.e. bonds).

For example:
$100,000 portfolio 50/50 AA

IRA
$50,000

Roth
$50,000

You can hold your AA in both accounts equally, and after one year of 10% returns in stocks and 0% in bonds, you will have:

IRA:
$52,500 --- taxable
Roth:
$52,500 --- tax free

OR You can tilt the Roth to equities and IRA to bonds:

IRA:
$50,000 --- taxable
Roth:
$55,000 --- tax free

Which would you rather have?

This effect compounds over time, so it can get pretty helpful, growing the Roth bigger, and tamping down the taxable IRA account.
The mightiest Oak is just a nut who stayed the course.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

arcticpineapplecorp. wrote: Tue Sep 21, 2021 7:09 am
ColoRetiredGirl wrote: Mon Sep 20, 2021 11:15 pm
arcticpineapplecorp. wrote: Mon Sep 20, 2021 8:33 pm 8. what does converting a fund (SHCD) with the most dividends have to do with anything? Whether that's in a trad IRA or Roth IRA it would be irrelevant. What was your brother's rationale/explanation? Is this in a taxable account??

I think his rationale is that fund would grow faster in the Roth account. I believe it would be more efficient in the Roth.
it's only more efficient in the sense that there will be less taxes than if in the trad IRA but that would be true of any stock fund whether it's a dividend aristocrat or a total stock market index fund. The dividend part is what I'm asking you to focus on. Do you think this fund is superior than a total stockmarket index fund because it has "dividend" in the name? If so how do you account for the fact that since the beginning of this fund it's done worse than the total stock market index fund:

Image

source: https://www.portfoliovisualizer.com/bac ... ion2_2=100

total return is what matters.

Also, schd only has 100 stocks.
total market has over 3000 stocks.

schd is 0.06% per year
total market is 0.04% per year
WOW! I didn’t know this. However, I am glad I have more VTI and IVV than SCHD in both my Roth and tIRA :happy.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

retiredjg wrote: Tue Sep 21, 2021 9:09 am
ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm While I want to move as much of my IRA to a Roth....
Is there a reason you think that converting tIRA to Roth IRA at this time is a good idea?

It is possible you should not be converting anything. For example, if your current tax bracket is high then converting later might be the better plan.

Also, do you have any non-deductible contributions in this IRA or any other IRA? That will be handled differently from having all pre-tax money in your IRA(s).
I am retired and squarely in the 22% tax bracket due to my pension. I have been converting up to the 22% ceiling. When I take social security I will be almost at the top of the 22% tax bracket. I believe taxes will increase in 2025 so I want to move as much over before then.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

LeeMKE wrote: Tue Sep 21, 2021 1:03 pm May I suggest that the point of the advice was to load the Roth with the highest performing funds, NOT to do tax harvesting, which everyone has correctly suggested does not apply to tIRA to Roth conversions.

Since Roth accounts will be tax free, you want the strongest performers in Roth. And Since IRA will be taxed when withdrawn, your slower performing assets should be in tIRA (i.e. bonds).

For example:
$100,000 portfolio 50/50 AA

IRA
$50,000

Roth
$50,000

You can hold your AA in both accounts equally, and after one year of 10% returns in stocks and 0% in bonds, you will have:

IRA:
$52,500 --- taxable
Roth:
$52,500 --- tax free

OR You can tilt the Roth to equities and IRA to bonds:

IRA:
$50,000 --- taxable
Roth:
$55,000 --- tax free

Which would you rather have?

This effect compounds over time, so it can get pretty helpful, growing the Roth bigger, and tamping down the taxable IRA account.
Thank you for the advice to move over the strongest performers to the Roth. I really had not thought about that.
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FiveK
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Re: Can you educate me on Roth conversions please

Post by FiveK »

ColoRetiredGirl wrote: Tue Sep 21, 2021 10:33 pm I am retired and squarely in the 22% tax bracket due to my pension. I have been converting up to the 22% ceiling. When I take social security I will be almost at the top of the 22% tax bracket. I believe taxes will increase in 2025 so I want to move as much over before then.
Given that belief, you might logically then consider converting to the top of the 24% bracket.

Whether that would be a good strategy depends on more regarding your specific situation. Whether it would be good in hindsight might depend on how well your assumptions match reality. But it seems worth considering at the least, whether you choose to share details here or keep them to yourself.

The wiki article linked previously discusses some considerations, and you will likely find no shortage of opinions here should you provide more of your details and plans. :)
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

LeeMKE wrote: Tue Sep 21, 2021 1:03 pm May I suggest that the point of the advice was to load the Roth with the highest performing funds, NOT to do tax harvesting, which everyone has correctly suggested does not apply to tIRA to Roth conversions.

Since Roth accounts will be tax free, you want the strongest performers in Roth. And Since IRA will be taxed when withdrawn, your slower performing assets should be in tIRA (i.e. bonds).

For example:
$100,000 portfolio 50/50 AA

IRA
$50,000

Roth
$50,000

You can hold your AA in both accounts equally, and after one year of 10% returns in stocks and 0% in bonds, you will have:

IRA:
$52,500 --- taxable
Roth:
$52,500 --- tax free

OR You can tilt the Roth to equities and IRA to bonds:

IRA:
$50,000 --- taxable
Roth:
$55,000 --- tax free

Which would you rather have?

This effect compounds over time, so it can get pretty helpful, growing the Roth bigger, and tamping down the taxable IRA account.
Currently, my Roth is all equity funds. I plan to keep all bonds in the TIRA. I like your aforementioned example. It gives clarity. Thank you.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

jeffyscott wrote: Tue Sep 21, 2021 8:45 am
ColoRetiredGirl wrote: Mon Sep 20, 2021 11:15 pm
arcticpineapplecorp. wrote: Mon Sep 20, 2021 8:33 pm
ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm Please forgive me for asking this stupid question but I need help in understanding converting funds with substantial gains when the market dips or has a correction. In the past, I have converted funds with unrealized losses but never with unrealized gains. Today, when I saw the market was down I looked over my equities in my IRA account and found all had gains. My brother-in-law said to pick a fund which throws off the most dividends and convert that fund. Does this makes sense? For instance, I have Schwab’s SCHD (Schwab US Dividend Equity ETF). I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over. That makes more sense to me. Please explain the benefits of moving funds with substantial unrealized gains and/ or point me any guidance. Thank you in advance.
1. Is the SCHD you're referring to that you bought at $55/share that is now worth $74 a share inside your IRA or a taxable acct?

It is in my TIRA

2. losses are irrelevant within a traditional IRA from a tax perspective because you can't tax loss harvest in a trad IRA.
I was aware this. I previously was converting based on your #3 example

3. losses can be relevant in a trad IRA if you convert a fund that has decreased in value to a Roth IRA because you're paying less tax than you otherwise would have.

ex: If you originally invested $10,000 in your trad IRA and now it's worth $5000 because the investment fell and you convert now to Roth IRA, you'd pay tax on $5000 rather than $10,000 even though it's the same number of shares (just the value has changed). When the investment recovers to $10,000 in the Roth, it's all tax free when withdrawn. So you avoided paying tax on $5000 of the original $10,000 (plus future gains on that as well).
With regard to item 3, it is not the really about losses but only about the current value. Converting specific lots based on the cost basis of those shares is pointless. You seemed to imply that was what you were doing here:

I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over.

and still seemed to think you need to identify specific lots to convert here:
I can move lots with gains which will make my conversion decisions easier.

Let's say you had $100,000 in SCHD on Jan 1 and plan to convert $50,000 sometime during the year. If you do it while the value is $100K, you will have converted 50% of it. If you wait and the value falls to $50,000 and you then convert, you have converted 100% of it. If the value increases to $150K and you then convert, you will have converted only 1/3. In each case, future taxes on your SCHD depend only on the total balance in the TIRA and that is the benefit of converting when the value is lower rather than higher.

Share prices, dividends, cost basis, and lots make no difference. The full value of whatever is in your TIRA is taxable upon withdrawal (or conversion), whatever is moved to the Roth will be subject to no further tax.
I get it now. Back to looking at the dollars. Between looking at the dollars and converting when the value is lower rather than higher makes sense. My plan was to convert all my VTI, IVV and SCHD first and hope to be able to covert other funds later if it makes sense. Thank you.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

FiveK wrote: Tue Sep 21, 2021 10:42 pm
ColoRetiredGirl wrote: Tue Sep 21, 2021 10:33 pm I am retired and squarely in the 22% tax bracket due to my pension. I have been converting up to the 22% ceiling. When I take social security I will be almost at the top of the 22% tax bracket. I believe taxes will increase in 2025 so I want to move as much over before then.
Given that belief, you might logically then consider converting to the top of the 24% bracket.

Whether that would be a good strategy depends on more regarding your specific situation. Whether it would be good in hindsight might depend on how well your assumptions match reality. But it seems worth considering at the least, whether you choose to share details here or keep them to yourself.

The wiki article linked previously discusses some considerations, and you will likely find no shortage of opinions here should you provide more of your details and plans. :)
I plan to review the wiki article tomorrow and complete the spreadsheet. I am sure I will be back with more questions. I agree with you that I am making the assumption taxes will increase. I hope I am wrong.
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jeffyscott
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Re: Can you educate me on Roth conversions please

Post by jeffyscott »

ColoRetiredGirl wrote: Tue Sep 21, 2021 11:05 pm
jeffyscott wrote: Tue Sep 21, 2021 8:45 am
ColoRetiredGirl wrote: Mon Sep 20, 2021 11:15 pm
arcticpineapplecorp. wrote: Mon Sep 20, 2021 8:33 pm
ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm Please forgive me for asking this stupid question but I need help in understanding converting funds with substantial gains when the market dips or has a correction. In the past, I have converted funds with unrealized losses but never with unrealized gains. Today, when I saw the market was down I looked over my equities in my IRA account and found all had gains. My brother-in-law said to pick a fund which throws off the most dividends and convert that fund. Does this makes sense? For instance, I have Schwab’s SCHD (Schwab US Dividend Equity ETF). I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over. That makes more sense to me. Please explain the benefits of moving funds with substantial unrealized gains and/ or point me any guidance. Thank you in advance.
1. Is the SCHD you're referring to that you bought at $55/share that is now worth $74 a share inside your IRA or a taxable acct?

It is in my TIRA

2. losses are irrelevant within a traditional IRA from a tax perspective because you can't tax loss harvest in a trad IRA.
I was aware this. I previously was converting based on your #3 example

3. losses can be relevant in a trad IRA if you convert a fund that has decreased in value to a Roth IRA because you're paying less tax than you otherwise would have.

ex: If you originally invested $10,000 in your trad IRA and now it's worth $5000 because the investment fell and you convert now to Roth IRA, you'd pay tax on $5000 rather than $10,000 even though it's the same number of shares (just the value has changed). When the investment recovers to $10,000 in the Roth, it's all tax free when withdrawn. So you avoided paying tax on $5000 of the original $10,000 (plus future gains on that as well).
With regard to item 3, it is not the really about losses but only about the current value. Converting specific lots based on the cost basis of those shares is pointless. You seemed to imply that was what you were doing here:

I have a cost basis of about $55/share. Today’s price was about $74/share on a dip. While I want to move as much of my IRA to a Roth, what is the benefit in moving such a low cost basis to a market price? I looked around for any lots with unrealized losses to move over.

and still seemed to think you need to identify specific lots to convert here:
I can move lots with gains which will make my conversion decisions easier.

Let's say you had $100,000 in SCHD on Jan 1 and plan to convert $50,000 sometime during the year. If you do it while the value is $100K, you will have converted 50% of it. If you wait and the value falls to $50,000 and you then convert, you have converted 100% of it. If the value increases to $150K and you then convert, you will have converted only 1/3. In each case, future taxes on your SCHD depend only on the total balance in the TIRA and that is the benefit of converting when the value is lower rather than higher.

Share prices, dividends, cost basis, and lots make no difference. The full value of whatever is in your TIRA is taxable upon withdrawal (or conversion), whatever is moved to the Roth will be subject to no further tax.
I get it now. Back to looking at the dollars. Between looking at the dollars and converting when the value is lower rather than higher makes sense. My plan was to convert all my VTI, IVV and SCHD first and hope to be able to covert other funds later if it makes sense. Thank you.
We're doing something similar and did international first, thinking the lower valuations might mean higher returns. Of course, that has not been the case. Now we are working on asset allocation and balanced funds.

A few more years of filling the 12% bracket and we'll have no stocks left in TIRA.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
retiredjg
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Re: Can you educate me on Roth conversions please

Post by retiredjg »

ColoRetiredGirl wrote: Tue Sep 21, 2021 10:33 pm I am retired and squarely in the 22% tax bracket due to my pension. I have been converting up to the 22% ceiling. When I take social security I will be almost at the top of the 22% tax bracket. I believe taxes will increase in 2025 so I want to move as much over before then.
This is a good reason to do conversions with the caveat that you might want to use the first IRMAA limit (somewhat lower) if you are 63 years old or older, to avoid pushing your Medicare premiums up each year.

And if you are under 63, I would agree with FiveK about converting more - into the 24% bracket for the next few years while tax rates are lower. In 2026, your 22% bracket will revert to the 25% bracket so paying 24% now is not that bad a deal if you need to reduce your tax-deferred account.

There is no need, however, to completely eliminate the tax-deferred account if that is your goal.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

tibbitts wrote: Tue Sep 21, 2021 11:03 am
retiredjg wrote: Tue Sep 21, 2021 9:09 am
ColoRetiredGirl wrote: Mon Sep 20, 2021 7:55 pm While I want to move as much of my IRA to a Roth....
Is there a reason you think that converting tIRA to Roth IRA at this time is a good idea?

It is possible you should not be converting anything. For example, if your current tax bracket is high then converting later might be the better plan.

Also, do you have any non-deductible contributions in this IRA or any other IRA? That will be handled differently from having all pre-tax money in your IRA(s).
This is a good point and you want to view it in context of your total tax-deferred balance and your other retirement income (annuities, pension, etc.) For me I definitely don't plan on getting to even nearly a zero deferred balance before RMDs start. I'd like to get to a zero tIRA balance (vs. deferred overall) just so as to get rid of the annoying tax basis, but that would still leave other deferred investments that would be subject to RMDs. Of course if the equity market drops 90% I'm converting every deferred dollar I have in equities - as if I could actually get logged in to do that if that happened. But as time goes on you start ending up with more deferred in fixed income, so converting becomes less of a priority as you lose that "risk" of a high growth rate.
I am unable to convert all my pre-tax money before RMDs kick in due to the size of my account. My plan is to do larger conversions now before taking SS in the next 2 1/2 years (age 70) and smaller conversions before age 72. I still need to look at the wiki article and run the spreadsheet to see the results.
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ColoRetiredGirl
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Re: Can you educate me on Roth conversions please

Post by ColoRetiredGirl »

retiredjg wrote: Wed Sep 22, 2021 7:05 am
ColoRetiredGirl wrote: Tue Sep 21, 2021 10:33 pm I am retired and squarely in the 22% tax bracket due to my pension. I have been converting up to the 22% ceiling. When I take social security I will be almost at the top of the 22% tax bracket. I believe taxes will increase in 2025 so I want to move as much over before then.
This is a good reason to do conversions with the caveat that you might want to use the first IRMAA limit (somewhat lower) if you are 63 years old or older, to avoid pushing your Medicare premiums up each year.

And if you are under 63, I would agree with FiveK about converting more - into the 24% bracket for the next few years while tax rates are lower. In 2026, your 22% bracket will revert to the 25% bracket so paying 24% now is not that bad a deal if you need to reduce your tax-deferred account.

There is no need, however, to completely eliminate the tax-deferred account if that is your goal.
I do not need to worry about IRMAA as a retired government worker. I like the idea of converting into the 24% tax bracket. Thank you.
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