QCD, RMD, Roth Conversion, in a down year

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GeoMetry
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Joined: Mon Jan 31, 2011 8:26 pm

QCD, RMD, Roth Conversion, in a down year

Post by GeoMetry »

This person is single 85 years old and has not yet taken their RMD for 2022. He has pension and SS that along with RMD puts him close to the top of the 32% bracket. He is already in the 3rd tier of IRMAA at $442 per month. Has been doing QCDs and Roth conversions up to the top of the current bracket for several years. He has an large stake in an investment that is down 32% for the year (FDGRX) it is held in his traditional IRA. He doesn't need the RMD he puts it all into his brokerage account each year. He lives off the pension and SS. Projections show he will be in the 32% bracket until TCJA expires then probably fall into the 28% bracket. Is there an opportunity here because the investment is down so much at the moment? What if the investment is still down substantially at the beginning of next year? In that case would there be an advantage to a larger Roth conversion in 2023? I tried to get him to do his RMD early in 2022 but obviously that didn't happen. Late in the year RMDs have been working well for him for a long time. At this point I suspect he will wait till mid December as usual.
secondcor521
Posts: 852
Joined: Wed Sep 10, 2014 4:11 pm

Re: QCD, RMD, Roth Conversion, in a down year

Post by secondcor521 »

I would separate the decisions out and consider them individually:

1. "buy/hold/sell FDGRX decision"
2. "when to take his RMD this year decision"
3. "whether to do QCD and how large"
4. "which assets to convert/QCD/Roth convert"
5. "whether to Roth convert on top of QCD/RMD"

My opinions on the above:

1. Decide this based on your IPS and overall AA and expectations of future returns. How the asset has performed this year has little to nothing to do with anything. You may be suffering from either the sunk cost fallacy or the gambler's fallacy or both.

2. Sounds like he's already made the decision to do it at the end of the year. On average that's probably smarter, this year it didn't happen to work (unless the market recovers a bunch between now and mid-December).

3. This will depend on his charitable inclinations/goals/plans, and to some extent his marginal tax rate.

4. Since he's just transferring the assets to taxable, he could do that in kind. Which assets to choose is a function of what he wants his AA to be overall in his IRA and in his taxable.

5. Usually not a bad idea to convert to the top of the current bracket, although since he's 85 it depends on who will be the beneficiaries on his IRA and what their distribution requirements are and thus what their marginal rates would be when they are required to distribute.

Also, if it's true that he will drop to the 28% bracket, then doing conversions now and unnecessarily paying an extra 4% is something I'd make sure made sense in context overall. I'm having a hard time imagining such a scenario, unless you know about TCJA bracket expiration but believe something else (i.e., higher brackets) will happen instead.
niagara_guy
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Joined: Tue Feb 11, 2020 8:32 am

Re: QCD, RMD, Roth Conversion, in a down year

Post by niagara_guy »

Has been doing QCDs and Roth conversions up to the top of the current bracket for several years. 

QCDs are not part of taxable income (if done right) and can be up to 100k per person per year from their pre tax ira, so the above statement in your post does not make sense for the QCD part. And, QCDs count as part of the RMD for the year if he follows the rules.

Here is a wiki for QCDs:

https://www.bogleheads.org/wiki/Qualifi ... tributions

I would not wait until the last minute (or even mid-December) to start the RMD process since it might not get finished by the end of the year.
RetiredCSProf
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Joined: Tue Feb 28, 2017 4:59 pm

Re: QCD, RMD, Roth Conversion, in a down year

Post by RetiredCSProf »

I am 74 and take QCDs, RMDs, and Roth conversions each year.

Taking QCDs/RMDs early or late in the year:
In March 2020 (when the market tanked and RMDs were subsequently waived), I decided that my best approach going forward was to take QCDs and RMDs early in the year (Jan-Feb) to give me a longer timeframe to take Roth conversions. This amounts to sort-of timing the market in the hopes of Roth converting at the lowest NAV or, alternatively, DCA'ing Roth conversions throughout the year -- the goal is to move the most shares out of tIRA for a given tax hit.

FWIW, so far in 2022, the market may have hit bottom in mid-June, it may dip lower before the year is finished, or it may slowly rise.

At what age to stop Roth converting:
Based on the current RMD tables, I expect that when I reach age 86 or 87, there will be little value for me to continue Roth conversions. At that point, the RMD will be about 6% of the tIRA balance and will overtake the average expected growth of my tIRA (assuming 60/40 AA). That is, the balance in my tIRA will start to shrink due to increasingly larger RMDs.
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FiveK
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Re: QCD, RMD, Roth Conversion, in a down year

Post by FiveK »

GeoMetry wrote: Thu Sep 22, 2022 2:07 pm Is there an opportunity here because the investment is down so much at the moment?
Only that he can convert a larger fraction of his traditional account at a given marginal rate. The current and expected marginal rates are what matter, not whether the market is up or down. See Whether to convert.
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