Good time for Roth conversions?

[cypher1]

Been awhile for following up on forum but I've been meaning to ask for opinions on when to do Roth conversions, or if it makes sense for me to go down this path in the near future. I'm 44, single, in MN (not sure if state matters yet), with marginal tax rate 22% and effective tax rate 15%. I have a Vanguard Rollover IRA with 70K between three funds that I've been debating when to apply conversions. I'm not trying to market time given the recent current global economic events. But with that balance I have the money to pay the taxes to do so, which I'm not in a hurry to do all at once this year.

My plan was moving about 30K this year to my existing Roth IRA, and then the following four years convert another 10K each time. I figured since I plan to work another 11-16 years, which who knows if my tax brackets will be above or below where I'm at now, but I'd prefer to deal with the tax implications now or near future. If I end up working for another 16+ years and growth is tax-free I'd be very content do it now, along with one less IRA in my account for simplifying in the long run.

Let me know what I've missed for considerations and concerns.

[kork13]

I'm a big fan of tax-free growth, even if for no other reason than simplicity. But in general terms, doing a Roth conversion during a period with down markets (such as when the markets are down 14% YTD) is generally in your favor -- the absolute dollar amount of your conversion is lower, so you pay less taxes getting the conversion done.

Biggest consideration is your income & tax bracket. Is there any chance that your income (including the converted amount) will be low enough to be in the 12% bracket? Or high enough to bump you into the 24% bracket? If the answer to both is "no", then I'd err toward just taking advantage of the low market & covering as much of it as you can afford to pay taxes on next year.

Important Note: DO NOT use converted funds to pay the estimated taxes as a withholding!!! The brokerage will likely older that option, but doing so makes the conversion largely pointless. By paying the taxes with separate, external funds, you're able to make the money "more dense" by effectively packing those tax dollars into your new Roth IRA. It's gonna be worth more as $70k in tax free dollars because the taxes are already paid. But if you pay taxes as a withholding, your $70k becomes only $55k.

[cypher1]

Thanks kork for all that information! The answer is a "no" for both brackets (unless I get laid off and/or decide to change gears in career) in the near future. Great point about not allocating converted funds for paying any estimated taxes. That idea didn't cross my mind, but I could see how others would lean that direction for withholding.

I'm not saying this is a need or urgent, but given the timing of events I see this as an opportunity while budgeting for tax implications for the next year(s).

[srblanco7]

I'm a big fan of tax-free growth, even if for no other reason than simplicity. But in general terms, doing a Roth conversion during a period with down markets (such as when the markets are down 14% YTD) is generally in your favor -- the absolute dollar amount of your conversion is lower, so you pay less taxes getting the conversion done.

Biggest consideration is your income & tax bracket. Is there any chance that your income (including the converted amount) will be low enough to be in the 12% bracket? Or high enough to bump you into the 24% bracket? If the answer to both is "no", then I'd err toward just taking advantage of the low market & covering as much of it as you can afford to pay taxes on next year.

Important Note: DO NOT use converted funds to pay the estimated taxes as a withholding!!! The brokerage will likely older that option, but doing so makes the conversion largely pointless. By paying the taxes with separate, external funds, you're able to make the money "more dense" by effectively packing those tax dollars into your new Roth IRA. It's gonna be worth more as $70k in tax free dollars because the taxes are already paid. But if you pay taxes as a withholding, your $70k becomes only $55k.

Only other consideration that I could come up with was to verify that you don't have other (traditional) IRAs, in which case the pro rata rule may apply.

As Kork noted, Roth conversions are about marginal tax rates - comparing the conversion rate against a future taxable withdrawal rate if you left the investment in the IRA (recognizing that we don't know what future tax rates will be and that our current tax rates would likely be considered historically low).