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Down Market Roth Conversions

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  • #16
    Originally posted by BryanMD View Post
    When when you say “significant Roth conversion” what sort of amounts are we talking. What constitutes a big Roth Conversion?
    This depends on your personal situation; for ex, size of Roth, tax bracket, goals, how much the market has dropped, etc. For example, a 40% - 50% drop in the market would persuade me to convert everything possible, as long as I was confident in the ability to pay the taxes on the transaction. That is quite an opportunity. 20% -25% drop, I would be a little more judicious, knowing that drops in this area happen more frequently than big ole bears. Fwiw, a bear is, technically, a sustained drop of 20% plus and occurs, on average over the long term, q5.5 yrs.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #17
      Originally posted by jfoxcpacfp View Post

      This depends on your personal situation; for ex, size of Roth, tax bracket, goals, how much the market has dropped, etc. For example, a 40% - 50% drop in the market would persuade me to convert everything possible, as long as I was confident in the ability to pay the taxes on the transaction. That is quite an opportunity. 20% -25% drop, I would be a little more judicious, knowing that drops in this area happen more frequently than big ole bears. Fwiw, a bear is, technically, a sustained drop of 20% plus and occurs, on average over the long term, q5.5 yrs.
      Just to clarify, is this for everyone regardless of tax bracket? Does the math work out as well for somebody MFJ that makes $1M a year as it does for someone MFJ making $300k a year? I’m sure the lower earning couple would tax benefit more by filling up the brackets but at what income does it not make sense to do a conversion?

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      • #18
        but at what income does it not make sense to do a conversion?
        conversions make sense when they are done in a tax bracket lower than your retirement tax brackets.
        Projecting those future brackets is the hard part. What will the legislated brackets be in decades from now?
        Last edited by jz-; 02-06-2022, 08:06 AM.

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        • #19
          Originally posted by jz- View Post

          conversions make sense when they are done in a tax bracket lower than your retirement tax brackets.
          Projecting those future brackets is the hard part. What will the legislated brackets be in decades from now?
          It also depends on the current and desired balances. RMD and planned windows for conversions. Many individual variables.

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          • #20
            Originally posted by BryanMD View Post

            Just to clarify, is this for everyone regardless of tax bracket? Does the math work out as well for somebody MFJ that makes $1M a year as it does for someone MFJ making $300k a year? I’m sure the lower earning couple would tax benefit more by filling up the brackets but at what income does it not make sense to do a conversion?
            For me, the tax bracket is a factor, but not the only factor. If you read the blog post I linked above, the % decline in the market also is impactful. I have no way to predict what marginal tax bracket a 35-y.o,new attending will at in retirement, but I’m willing to guess it won’t be lower than today. However, I prob won’t be around to find out if I’m right and doubt I’ll care if I am. But I do know that a Roth has a huge tax-free advantage and I personally want as much money in mine as possible. For those of you saner folks, try to develop a plan that will help you determine the amount of tax-free income you would like to have available in retirement and work toward that goal.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #21
              I hear what you are saying about conversions in big bear markets. That has to test your intestinal fortitude to watch your nest egg get halved and then decide to take a big tax hit at the same time. I read your post and I know it makes numbers sense but I bet that’s got to be some psychological torture. Market drops 50% and now my plan says to convert $250k and pay half that in taxes. I don’t know if I have the stomach for it.

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              • #22
                Originally posted by BryanMD View Post
                I hear what you are saying about conversions in big bear markets. That has to test your intestinal fortitude to watch your nest egg get halved and then decide to take a big tax hit at the same time. I read your post and I know it makes numbers sense but I bet that’s got to be some psychological torture. Market drops 50% and now my plan says to convert $250k and pay half that in taxes. I don’t know if I have the stomach for it.
                consider testing how you'd feel by doing smaller conversions then. You've got a long runway until retirement and there's a correction on average once a year and a bear market I think on average once every 3-5 years. Just convert anywhere from $10-$25k the first time and see how you feel. If it was too gut wrenching, don't do it again, or do a lesser amount.

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                • #23
                  As Lange says, fill up to the top of the 24% bracket with partial roth conversions
                  If you have teenagers make them work and fund their ROTHS!!!

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