Roth Conversion Question..."value" of holdings?

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duuuuuude
Posts: 26
Joined: Mon Dec 12, 2016 11:42 pm

Roth Conversion Question..."value" of holdings?

Post by duuuuuude » Tue Sep 12, 2017 10:29 am

Hi Folks,

I would like to convert about $10-15k from a traditional IRA to a Roth IRA (and stay within the 15% bracket, and minimizing the taxes paid).

My question is, how is the "value" converted calculated? I would like to convert shares in kind, to keep things easier.

If I have a holding currently valued at $10k, but was originally a $15k contribution/value (paper loss), would the conversion value be considered to be $10k (today's value), or $15k (the original investment)?

Hope that makes sense.

Thanks!

jebmke
Posts: 6527
Joined: Thu Apr 05, 2007 2:44 pm

Re: Roth Conversion Question..."value" of holdings?

Post by jebmke » Tue Sep 12, 2017 10:30 am

The conversion is the value as of the day you make the conversion.
When you discover that you are riding a dead horse, the best strategy is to dismount.

duuuuuude
Posts: 26
Joined: Mon Dec 12, 2016 11:42 pm

Re: Roth Conversion Question..."value" of holdings?

Post by duuuuuude » Wed Sep 13, 2017 8:58 pm

Thanks jebmke. That's what I was thinking.

Does that mean that if you had invested the annual $5500 in a traditional IRA and taken the whole tax deduction, and it dropped in value to $2750 (1/2), and you convert the $2750 to a Roth, you've effectively avoided paying $2750 income worth of taxes for that year you took the deduction? (because you're now paying the tax of only $2750 that you're converting?)

Is this what people mean by going back and forth and recharacterizing Roth to traditional IRAs as well?

Thanks in advance.

JBTX
Posts: 964
Joined: Wed Jul 26, 2017 12:46 pm

Re: Roth Conversion Question..."value" of holdings?

Post by JBTX » Thu Sep 14, 2017 1:33 pm

duuuuuude wrote:
Wed Sep 13, 2017 8:58 pm
Thanks jebmke. That's what I was thinking.

Does that mean that if you had invested the annual $5500 in a traditional IRA and taken the whole tax deduction, and it dropped in value to $2750 (1/2), and you convert the $2750 to a Roth, you've effectively avoided paying $2750 income worth of taxes for that year you took the deduction? (because you're now paying the tax of only $2750 that you're converting?)

Is this what people mean by going back and forth and recharacterizing Roth to traditional IRAs as well?

Thanks in advance.
Yes. The good news is you avoided some taxes. The worse news is your account declined in value!

While most here don't advocate market timing, doing a Roth conversion when the markets are way down can work out well in the long run.

ThrustVectoring
Posts: 169
Joined: Wed Jul 12, 2017 2:51 pm

Re: Roth Conversion Question..."value" of holdings?

Post by ThrustVectoring » Thu Sep 14, 2017 2:13 pm

Yeah, recharacterizing a Roth IRA contribution or conversion as traditional means that you have the ability to decide on tax treatment of past events. So if you wanted to optimize the daylights out of things, you'd construct your portfolio so that as much of your overall risk is born by an account that is within the recharacterization window. Which means understanding options, and then putting the long options of your strategy in the recharacterizable IRA.

So, for example, if your Roth IRA has $100k in equities, you could buy $5k worth of long-dated S&P 500 put options in a traditional account and convert it to Roth. If stock prices go down, the puts are worth a lot, but you only pay taxes on the $5k. If stocks go up, your options expire worthless (or get sold for very little), you recharacterize it as traditional, and don't pay taxes on the $5k.

You can build a similar strategy with buying call options and holding cash/bonds in your Roth IRA.

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