I do my Roth conversions at the beginning of the year on the assumption I get an extra years gains and I can't time the market. Sometimes I win sometimes I loose. This year I lost, but the money won't be needed for another 15 or more years. Can't look back.
I'm 61 and still working. I'm trying to make a decision whether I should start doing conversions now when my income is high or wait until I retire and put off SS and other pensions, making my income much smaller for a few years so I will pay less taxes.
Why is the tax amount listed at $18K in the video? A $100K conversion for us in California at this point would be about 45% including state tax. So $45k!
My question is do I have to liquidate my equities to do a conversion? Can the stocks be transferred into a Roth ? If they can it would probably be smart to do it before a dividend pay out or on a dip in value of that particular stock.
We do ROTH conversions filling our tax bracket so if in the future we need to make a major purchase we have money to pull from without bumping up our tax bracket. If we end up not spending it great, but unlike most it is not penciled in as "long term"
I've tried to time my Roth conversion chunks to market downdrafts as recommended here by SWM, always paying the conversion tax out of my taxable acc't. But, I have a lingering question that is skimmed over in this otherwise authoritative analysis. In the two comparison cases presented above, the tax cost for the $100K conversion is given as the same $18K. But, in the downdraft case, wouldn't whatever asset is liquidated then to pay the $18K tax have suffered the same hypothetical 20% market downdraft as well? And, assuming this, is the case still preferential? Or, does it become a wash? (Due to SWM's "commutation of multiplication" tongue-in-cheek observation in another of his videos.)
The dollar amount you convert is fixed so, if you convert $25k during a downturn it will still be $25k and you will owe the same tax. The advantage is that you now converted more shares because the share price was low so it is a bigger percentage of your total IRA. The principle is that you are converting something that will hopefully recover, like a sp500 ETF (I would not use a random individual stock), which ideally you transfer in-kind if you can, or you sell it, transfer the cash, and re-buy it in the Roth. In-kind is better as the shares transfer fast without selling. Then the recovery occurs in the Roth tax-free.
@@J-2024-v8i Thanks for the reply, J. I get that aspect. But, what if I'm already 100% invested in equities over on the taxable side of my investment portfolio? The crux of my question, excerpted from above, is "wouldn't whatever asset is liquidated then to pay the $18K tax have suffered the same hypothetical 20% market downdraft as well?" In this (perhaps rather unique) circumstance, wouldn't the choice then turn out to be a wash? I'd appreciate your further thoughts, now that I've clarified my question. Thanks!
@@larryrobx I see what you mean. Yes, paying the tax on the conversion from your taxable account is essentially like transferring those funds to your Roth, to make the conversion whole. The decrease in value in your taxable account will then hopefully recover inside the Roth. This works as long as you will not need those taxable funds for expenses now, and results in two benefits: potentially realizing a loss in taxable to offset other gains (if the price falls below your basis), and the tax-free growth inside the Roth that you can tap into in the future. Of course, the ideal scenario is to pay the tax from your taxable account by selling an investment that has gone up or at least remained stable (cash or bonds) during the downdraft.
@@J-2024-v8i Ah, just what I suspected / feared, J. Thx for your further analysis: "Of course, the ideal scenario is to pay the tax from your taxable account by selling an investment that has gone up or at least remained stable (cash or bonds) during the downdraft." How successfully one is able to "buy low / sell high" to generate funds for paying the conversion tax is, of course, completely independent of the Roth conversion decision itself. So, in such a specific instance, it ends up being a wash. Thx for clarifying!
Is it true that when you convert money via a Roth conversion that while considered income from a tax bracket perspective, it does not affect your AGI relative to Roth contributions?
@@everetteborr if you make too much money you cannot contribute to a ROTH IRA. When converting to Roth it does not effect your ability to contribute, even though it is counted as income for tax purposes.
@safeguardwealthmanagement - I understand that once you open a Roth IRA, once your first Roth IRA is over 5 years old, you can use that money and money in any other Roth IRA without any penalties (provided you are over 59.5 years old). But, is it true that when you do a Roth conversion, do you have to wait 5 years to cash that money? Do you have to start over and wait another 5 years after every Roth conversion (say you convert 100k in 2022, you wait 5 years and you convert another 100k in 2023, do you have to wait another 5 years for that conversion)?
If you are over 59.5, you do not need to wait 5 years. Over 59.5 is an exemption to the rule. Here is a video that walks through this a bit more - th-cam.com/video/iqcvj6_QDzA/w-d-xo.html
You need to be 59.5 *and* have had a Roth IRA for 5 tax years. On top of that, every conversion has a separate 5-year aging period for the funds that were converted. As a practical matter, converted funds are the last bucket withdrawn, so you’d need to burn through all of your direct contributions before this becomes an issue.
The RMD can not be used for the Roth. So if you have an RMD of $50,000 and wish convert $50,000 to a Roth the timing does not matter (to the IRS) but both withdrawals from the 401K (or IRA) need to occur.
@@LuckyOne3749 Yes, but you want to avoid that, if possible, because it reduces your Roth funds, and therefore the amount of your portfolio that can grow tax free.
I do my Roth conversions at the beginning of the year on the assumption I get an extra years gains and I can't time the market. Sometimes I win sometimes I loose. This year I lost, but the money won't be needed for another 15 or more years. Can't look back.
Anything about Roth conversions on your channel always catches my interest! Excellent. Fyi waiting for your future book! Steve n.y.
I think your content is marvelous. Straight forward and logical.
Thank you so much Andy!
Thanks Eric. Excellent analysis & explanation. Waiting for the "perfect" is a fallacy in life. Better is the enemy of good enough.
Thanks John! Agreed!
I'm 61 and still working. I'm trying to make a decision whether I should start doing conversions now when my income is high or wait until I retire and put off SS and other pensions, making my income much smaller for a few years so I will pay less taxes.
How do we balance conversion at 32% married rate now in down market vs a lower bracket conversion later in early retirement?
Why is the tax amount listed at $18K in the video? A $100K conversion for us in California at this point would be about 45% including state tax. So $45k!
Feed the democratic hand out machine that not only nurture incompetence it supplements it, via the self sufficient and prosperous.
My question is do I have to liquidate my equities to do a conversion? Can the stocks be transferred into a Roth ? If they can it would probably be smart to do it before a dividend pay out or on a dip in value of that particular stock.
We do ROTH conversions filling our tax bracket so if in the future we need to make a major purchase we have money to pull from without bumping up our tax bracket. If we end up not spending it great, but unlike most it is not penciled in as "long term"
Thank you very informative
Thank you Pat!
I've tried to time my Roth conversion chunks to market downdrafts as recommended here by SWM, always paying the conversion tax out of my taxable acc't. But, I have a lingering question that is skimmed over in this otherwise authoritative analysis. In the two comparison cases presented above, the tax cost for the $100K conversion is given as the same $18K. But, in the downdraft case, wouldn't whatever asset is liquidated then to pay the $18K tax have suffered the same hypothetical 20% market downdraft as well? And, assuming this, is the case still preferential? Or, does it become a wash? (Due to SWM's "commutation of multiplication" tongue-in-cheek observation in another of his videos.)
The dollar amount you convert is fixed so, if you convert $25k during a downturn it will still be $25k and you will owe the same tax. The advantage is that you now converted more shares because the share price was low so it is a bigger percentage of your total IRA. The principle is that you are converting something that will hopefully recover, like a sp500 ETF (I would not use a random individual stock), which ideally you transfer in-kind if you can, or you sell it, transfer the cash, and re-buy it in the Roth. In-kind is better as the shares transfer fast without selling. Then the recovery occurs in the Roth tax-free.
@@J-2024-v8i Thanks for the reply, J. I get that aspect. But, what if I'm already 100% invested in equities over on the taxable side of my investment portfolio? The crux of my question, excerpted from above, is "wouldn't whatever asset is liquidated then to pay the $18K tax have suffered the same hypothetical 20% market downdraft as well?" In this (perhaps rather unique) circumstance, wouldn't the choice then turn out to be a wash? I'd appreciate your further thoughts, now that I've clarified my question. Thanks!
@@larryrobx I see what you mean. Yes, paying the tax on the conversion from your taxable account is essentially like transferring those funds to your Roth, to make the conversion whole. The decrease in value in your taxable account will then hopefully recover inside the Roth. This works as long as you will not need those taxable funds for expenses now, and results in two benefits: potentially realizing a loss in taxable to offset other gains (if the price falls below your basis), and the tax-free growth inside the Roth that you can tap into in the future. Of course, the ideal scenario is to pay the tax from your taxable account by selling an investment that has gone up or at least remained stable (cash or bonds) during the downdraft.
@@J-2024-v8i Ah, just what I suspected / feared, J. Thx for your further analysis: "Of course, the ideal scenario is to pay the tax from your taxable account by selling an investment that has gone up or at least remained stable (cash or bonds) during the downdraft." How successfully one is able to "buy low / sell high" to generate funds for paying the conversion tax is, of course, completely independent of the Roth conversion decision itself. So, in such a specific instance, it ends up being a wash. Thx for clarifying!
Is it true that when you convert money via a Roth conversion that while considered income from a tax bracket perspective, it does not affect your AGI relative to Roth contributions?
This is correct!
What does this even mean?
@@everetteborr if you make too much money you cannot contribute to a ROTH IRA. When converting to Roth it does not effect your ability to contribute, even though it is counted as income for tax purposes.
@@ericjuli6576 Thanks, nice explanation!
@@everetteborr where is this written on the IRS site or other official site (morningstar / forbes / etc)? I can't find this written anywhere
@safeguardwealthmanagement - I understand that once you open a Roth IRA, once your first Roth IRA is over 5 years old, you can use that money and money in any other Roth IRA without any penalties (provided you are over 59.5 years old). But, is it true that when you do a Roth conversion, do you have to wait 5 years to cash that money? Do you have to start over and wait another 5 years after every Roth conversion (say you convert 100k in 2022, you wait 5 years and you convert another 100k in 2023, do you have to wait another 5 years for that conversion)?
If you are over 59.5, you do not need to wait 5 years. Over 59.5 is an exemption to the rule. Here is a video that walks through this a bit more - th-cam.com/video/iqcvj6_QDzA/w-d-xo.html
You need to be 59.5 *and* have had a Roth IRA for 5 tax years. On top of that, every conversion has a separate 5-year aging period for the funds that were converted.
As a practical matter, converted funds are the last bucket withdrawn, so you’d need to burn through all of your direct contributions before this becomes an issue.
@@SafeguardWealthManagement - Thank you so much for your expertise!!!
Is it necessary to complete RMD withdrawals before making ROTH conversions?
The RMD can not be used for the Roth. So if you have an RMD of $50,000 and wish convert $50,000 to a Roth the timing does not matter (to the IRS) but both withdrawals from the 401K (or IRA) need to occur.
No, but you need to take the RMD withdrawal in addition to the conversion. View these as separate events.
i thought you could only do 1 conversion a year? am i missing something here?
Negative. You can do an unlimited number of conversions
Thinking of a Rollover probably.
@@SafeguardWealthManagement Doing a Roth conversion from an IRA, can we use some of the conversion money for taxes?
@@LuckyOne3749 Yes, but you want to avoid that, if possible, because it reduces your Roth funds, and therefore the amount of your portfolio that can grow tax free.