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I have written that for the past few years I have been diligently performing Roth conversions spreading my conversions out on a monthly basis to sort of dollar cost average. In my reading I have learned that when the markets are down it is advantageous to do conversions as when the price goes down you can convert more shares per dollar. With the recent downturns I have been taking advantage of this phenomenon. However I think I may have found an error in my thinking. I have been moving future monthly conversions up from my original time frame due to the recent declines in the market. When there has been a significant drop in the market I have moved up a conversion. The prices of the fund at the time of conversions have been $44.27, $43.24, $43.75, $43.15, and $42.69.
Can you spot the problem?
I believe my error has been that I have been moving future monthly conversions based on what the market has done that day rather than a significant change in the costs of the shares in the fund. The fund’s price per share has not been dropping at the same rate as the overall market because the fund is a Target 2030 fund which contains a 40% bond position.
I have realized it would be better to move up conversions based on a decrease in the fund’s actual per share price. Going forward I now plan to convert only when the price has dropped at least $1/share. I used a similar mechanism, but based on the percentage decrease of the market to overweight stocks during the COVID crash.
I’m hoping Humble Dollar readers will think of these factors if they are considering Roth conversions in the future.
ROTH accounts started in 1998, that’s 28 years ago. What I can’t understand is why is there so much ROTH conversion going on. Why wasn’t ROTH the first choice for saving for the last 28 years? I must be missing something?
I suspect many younger people are saving in Roth 401(k) accounts now (that’s what my kids do) but they weren’t available to many of us boomers until more recently. Our main retirement savings vehicle was the traditional 401(k) so we find ourselves with a heavy allocation to pre-tax accounts. Particularly for funds to be passed to the next generation, the Roth is an attractive option. I feel the incentive is less strong for RMD reduction. That said, it seems like the current push in the financial press to convert, convert, convert has gone a bit far.
Good question. When Roths first came out, I would have been 53. I remember reading a financial article at the time saying that, at my age, I was better off with my 401k. Also, wasn’t there a $2,000 limit for Roths? Don’t know how it actually would have worked out, but I think I should have been putting the max $2,000 into a Roth Account on top of my 401K contribution. It never occurred to me that I would be in a higher income tax bracket in retirement than when I was working, but lucky me, here I am.
I did start a Roth for my wife and a spousal Roth for me as she continued teaching aerobics after I retired.
For years while we were working we were trying to minimize our taxable income. Now where we are financially and income wise we are better able to afford the additional taxation. Plus hopefully most of the converted funds will also result in a tax free inheritance for my children.
David, as an Irishman who once thought a Roth conversion was something to do with kicking a football, forgive me if this is a dumb question: by triggering conversions on drops as small as 2%, are you in danger of using up all your conversion capital before a really significant correction comes along — and then being left standing at the bar with empty pockets just when the good stuff goes on sale?
Hey Mark,
You wouldn’t want to convert everything and give up the 0% tax bracket available to you every year with the standard deduction?