FREE NEWSLETTER
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.
It seems like you’re trying to time the market on your conversion? My understanding is that you have to be right on both sides of that trade. Even if it’s a Roth conversion.
This is an issue for an optimizer but not a satisficer. I’m more concerned with the total amount I convert each year than the timing. But I do have optimizer tendencies: I tend to leave maybe half or more of my Roth conversions for December so I can guess better and make my income near the top of the tax bracket and keep my capital gains in the 0% bracket.
My suggestion is to look at the Roth and Traditional over a 20 year span. I remember making some calculations, and for my age and situation, conversions did not help a lot. I propose somebody like a CPA and Advisor from Fidelity get together and push the numbers. When I pushed my numbers, it just did not work at age 75. What I do, is take the maximum RMD to not increase my tax bracket. That is working for me at age now 80. I challenge our community to push the numbers, maybe Bogdan S could take a stab at it.
One thing I wish I had at least considered was taking SS early to reduce the amount of taxable income when RMDs kick in. It’s too for me to but it is something to consider especially if you do not think you will live into your 80’s.
Why not use the higher SS payout to fund Roth conversions. Roths hold down the growth of