Don't Fall into the Roth Conversion 'Catch-Up' Trap

Are your tax-deferred accounts outgrowing your Roth Conversion strategy? Are you finding it difficult to minimize required minimum distributions because of this?

You're falling into the Roth Conversion 'Catch-Up' Trap!

This trap is oftentimes created because retirees aren't getting the most out of their conversion strategy.

There are a few reasons for this. An important one is the timing of your conversions.

Many retirees and advisors will wait until the end of the year to perform conversions. This can be problematic.

For instance, if you perform a conversion at the end of the year, your tax deferred accounts have grown for the full year! Now at the end of the year, you are converting at a premium.

Instead, this growth could have taken place within your conversion if you shift the timing of your conversion.

In this video, we will discuss some important Roth Conversion strategies you can use to avoid this catch-up trap and gain control of your retirement tax situation.

- - - - - - - - - - - - - - - - -

Always remember, "You Don't Need More Money; You Need a Better Plan"

[michaelminarcik]

Thanks. I never thought about converting the money at the beginning of the year. It does make sense.

[ralphparker]

Yea, I converted 10% late Nov which was about half of the growth of the IRA over the preceding 12 Months. This is good thought material. Thanks,

[johnkelley]

Another brilliant video! Thanks for sharing. I admire the flexibility in Safeguard's approach, recognizing there are better answers, but often not one right answer - and certainly there are less tax efficient (worse) answers. I need a better plan.

[stevenobrien]

Another great video on this awesome topic! 👍

[krishnadevulapalli]

I did my Roth conversion at the beginning of this year when my tax deferred portfolio was high. Now the markets have been down this year, I probably lost on my discounts😕
Next year I am planning on quarterly conversions and hoping to be better given the probability of impending recession.
Doing Roth conversions & giving to DAF has been a great strategy to keep myself in 22-24% brackets.

[stevenbingham]

In a similar vein, I try to max out my retirement accounts as early in the year as possible. I save money up the previous year, that I use for retirement the following year. For instance, let's say I have $10, 000 in savings at year end. If my max contribution to a Roth is $6, 600 that year, as soon as I've earned the $6, 600, I make the full deposit into my Roth as soon as I can. That way my max contribution starts working as soon as possible in the year, rather than spreading contributions across the year slowly building up to the max in December. I usually make my contribution in January. Working well so far.

[rontina]

I'm not sure I would call this a "Trap" but with that being said, great video and good timing.

[cliffluxion]

Thank you for sharing this content!
Because I am still working and self-employed for four more years, I am still contributing to my 401k accounts to the maximum amount my earnings will permit. Retiring at FRA in four years and thinking about Roth conversions at that point. Not sure about the tax impact overall, however. Do have a pension and possibly a working spouse that might keep us in higher tax brackets at conversion time, so a bit uncertain about how much to plan to convert annually for five or more years. 🤔

[johnd]

I do my RMD late in the year, hopefully after some growth has happened. Roth conversion after RMD.

[johnnyfive]

I've been doing monthly conversions rather than lump sums. Its not perfect, but dollar cost averaging works in my taxable account, so I've applied the same approach in my conversion strategy.

[dmpase]

I know "experts" who have have predicted 17 of the last three stock market drops... :)

[Random-ldwg]

with these conversions, where is the money to be paid for taxes coming from? i get what is talked about regarding the timing of the conversion. the only thing that i am aware of and plan to utilize is the <$80, 000 income leads to 0 capital gains.

[straitjacketstudios]

Equally “baffling” is why this same logic does not apply in the argument of waiting until jan to do conversions. I get the point but at least if converting at the end of the year you safely (and accurately) maximize the current year tax strategy. Waiting until jan may solve for lowering your tax deferred account yet creating a predicament in the coming year due to the very unexpected gains in the year ahead that you describe. The same recommendation to not “predict” is exaclty why end of year is a safer option.

[rpguitar]

Definitely some good analysis and food for thought! The only nit I can pick is that converting routinely in December (End of Year 1) vs. January (Start of Year 2) is essentially the same point in time from a future growth perspective. The entire multi-year conversion sequence is shifted by just one month and is not a profound difference.

[ronloftis]

Well, I have about 7k left in an inherited Roth, and I just dont have the money to do my own personal Roth IRA....so in January I am going to cash out the inherited and contribute to my Roth and eliminate my RMDs.

[junshen]

Thank you for the useful Roth Conversion information 👍. Quick question, can I convert few times in a calendar year? Thanks.

[sirreptitious]

The only time it should make a difference is the first year you do it, and then only if the market goes up that year. After that, you are just doing the conversion at 12 month intervals, same as if you converted always in December. Nothing magical happens in January!

[DB-xppx]

this video kind of implies i shouldn't do my conversion for 2023 since i didn't get it done early in the year. if i waited until Jan 2024 then i've missed out on 1 year at what could be a lower tax rate given 2026+ tax rates are unknown.

[stevenobrien]

Hi quick question. Will regular plain old vanilla Traditional to Roth conversions continue indefinitely into 2022 and beyond? I know backdoor conversions are on the chopping block. Thoughts? Would like to continue conversions for the next several years! Thanks

[LadderA]

Can someone explain the benefit of a conversion in a market downturn. Unless you are converting your entire account balance at one shot, I don’t see the advantage in a down market. If I were to covert $50, 000 in an up market I would have to pay taxes on $50, 000, versus converting $50, 000 in a down market, I would still have to pay taxes on $50, 000. In an up market I would have to convert less shares to make $50, 000, in a down market I would have to convert more shares. Once moved to the Roth I would most likely invest in the same stock, ETF, or investment.
Thanks, Ray