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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.
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 later RMDs and are a true gift to your heirs.
Interesting. We are delaying social security to reduce future RMDs! We are drawing down our IRAs for living expenses while we wait for social security, thus reducing our IRA balance. Ken
R, this is an interesting question. I wonder if anyone has done the math on this.
This is a job for Rick Connor!
Although none of this impacts me directly, I found the thread intriguing because the number of variables involved is just mind-blowing. I actually ran R. Mancuso’s comment through Claude AI to see what it could do. I asked it to analyze the text and design a spreadsheet for comparison scenarios—and it delivered a comprehensive, downloadable sheet complete with multiple tabs and usage notes. I had a quick play with it in Google Sheets, but I’ll admit the RMD and Roth columns were “Double Dutch” to me. Still, I thought you might find the observation interesting!
You mean you would prefer a lower SS payment so your taxable income (hence actual income) is lower?
I did a bunch of Roth conversions to provide income for LTC as the cost of these policies for most nowadays is prohibitive. I read that 95% of the LTC business is gone as most cannot afford the policies and those that have them are getting hit with big increases. With tax rates this low roth conversions just be part of the game plan
I pondered over a few years obtaining a LTC policy, but finally came to the conclusion it was too expensive.
This is a typical conundrum for the middle class as the rich can self insure, and the poor have Medicaid to fall back on. The middle class has nothing to fall back on.
For all of us who have most of their retirement income in TIRAs, why all the fear about taking an RMD? Remember when they were drilling into us that the taxcuts were going to expire? What happened? seniors got more deductions. Sean Mullaney has some interest takes on this. We’re saturated with Youtube videos by 30yr old “financial experts” telling us to do Roth conversions now and they know nothing about us and what the future holds for senior tax reduction benefits. As for me, I have been doing small conversions just to benefit my heirs. But my TIRA balance continues to grow each year and I am happy with that.
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 may be wrong, but I seem to recall that SEPs offered me as a self-employed professional a much better option for sheltering more of my earnings each year. I’m now long retired, but I note that this year, one can shelter $72,000! That adds up fast, though you eventually have to pay the piper.
Right, there was no Roth option for SEPs, until the Secure 2.0 Act.
My theory is that, since the 401(k) is the primary vehicle for most workers to save, the timeline of the Roth 401(k) could answer your question. 2006 was the first year that companies could offer the option, and 2023 was the first year that employers were allowed to make matching contributions directly into the Roth. I bet the youngsters will have lots more money in Roths than we boomers have.
We funded Roths until they imposed restrictions based upon income.
The door closed shut for two income couples like us.
Like Kenneth DeLuca below, my wife and I have a significant percentage of money in traditional accounts because that was initially the only type available to us through our employer. As soon as a Roth option was available, we chose that. I continued to collect tax-deferred money through the company match and bonuses, however. We also contributed to Roth IRAs, starting in 1999, so we have some balance of account types. We have started conversions and will continue to do so.
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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,
Since Roth conversions can cause Social Security (SS) benefits to become taxable, it’s smart for you to do them before claiming SS.
Yup!
You wouldn’t want to convert everything and give up the 0% tax bracket available to you every year with the standard deduction?
Mark,
I am converting all of just my wife’s traditional to a Roth. My traditional which is 2/3 of our retirement accounts’ value is still in traditional and won’t be converted. My traditional will be available for taking advantage of the 0% bracket, and also I have read it is important to have some in traditional for possible high medical expenses. The other reason for converting just her’s is that way I will only have to deal with RMDs for one account.