Watch This Before Roth Converting in 2023… | Roth Conversion Timing (Part 1)

When you perform a Roth Conversion, you are deciding to pay taxes today to get out of future taxes. Are you getting the most out of the taxes you are currently paying?

How do you know?

Timestamps:
0:00 - The Best Roth Conversion Timing Strategy in 2023
0:11 The Normal Roth Conversion Process
1:22 Timing Strategy #1 - The Most Common Strategy
2:38 Timing Strategy #2
3:22 A Common, But Wrong, Objection
5:13 Timing Strategy #3 + #4
5:58 Timing Strategy #5 - The Safeguard Method
7:06 A Drawdown Method Example
8:22 The Historical Results

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

[cchat]

IMO the Historical results should include the performance of the funds in the regular IRA which would be the source of these conversions. Yes it's better to have gains in tax free accounts but the overall difference is just the tax saved on the gains, not the extra gains made from the extra time in Roths which ignores the gains you would have had in the regular IRA.

[postrenter]

Ok I've pondered this for some time. For the audience here's another way to think about this. When you withdraw for a conversion the withdraw hits you as taxable income so 1) How much additional taxable income are you willing to take on in a given year? 2) You will be taxed the same if you withdraw for the conversion in month 1 or month 12 - same tax. 3) We have to assume that your Roth is going to be invested in nearly an identical portfolio as Traditional/401 was, so that converted (now Roth) money in going to grow tax free, so its better to grow tax free in a Roth for 12 months than grow all year as taxable (albeit deferred) for 12 months in Traditional or 401k.. The sooner you get it under tax free growth conditions, the better - in theory. Safeguard ran the numbers and found that in order to catch as many bottoms in the year as possible you should 1) dollar cost average your money out from Trad to Roth unless 2)you hit a real good -10 percent or greater market slump in which case you should pull out about as much as you're willing to be taxed on once that condition is met

[pensacola]

I do love your videos, but for the record I must say. Sometimes you just need more money. ☺️

[i-postm]

Great video as always!

If converting, I do it in chunks, say, 4 times a year. A lot can happen in a year in personal life and stock market. So, I prefer flexibility as you said in the video. And, I want to be sure I have the $ to pay the estimated taxes and am willing to let that $ go. Even though my future self will be happy, the taxes paid now can be a hefty sum.

[edwardglatzmayer]

I think the best strategy depends on what is going on during each year. I like to look for market downturns and due conversions during that time. Preferably 15% or more. The larger the market downturn the better as long as you're confident in your selections in your portfolio.

[drott]

Did you factor in the lost annual earnings/opportunity cost from the money taken from your cash account in order to pay for the rollover taxes? I don't see that accounted for.

[barwithm]

Agreed with your numbers, but to complete the picture, you need to add the performance of the 401k you draw money from. Together, they show the gain/loss

[mikefochtman]

I'd just add that what time of the year you do the conversion(s) may trigger an 'underpayment penalty'. Even if you make an estimated payment in January of the following year for the amounts you've converted. If you make estimated payments the same day you do the conversion even, you may have to look at form 2110 and see if you can use 'annualized income' strategy for what can be considered varying rate of income for the year. May also apply to state income taxes if your state has such.

[MILGEO]

I think that always starting the year with a partial conversion sounds like the best idea as it covers all the best strategies even if you're not sure what to choose of the other options at the time. I did a draw down last year starting with about 60% pf what I intended for the year then the rest after a market drop. I've been adding and converting to my Roth for years and don't feel the need to put a large amount in each year. No where near 100K!

[rs-lqnt]

Great information in this video. This year I'll be using a hybrid version of #4 equal conversions and #5 drawdown conversions. I'm planning equal monthly conversions because dollar cost averaging fits my risk tolerance/comfort zone, but I will use my November conversion earlier in the year if the market hits a 5% drawdown point. If it hits the 10% drawdown point I'll use my October conversion. If 15% I'll use the September conversion, and so on. I'll be protecting the December conversion to adjust for income variance, IRMAA, and tax brackets.

[paulsackles]

Fantastic work Eric your analysis is so complete and definitively show the worst approach. Keep up the great work and I look forward to the 2 future episodes on this topic.

[larryjones]

As I said last year, I still disagree that the Drawdown is the best option. The best option is Beginning of Year (90% at the beginning of the year & 10% at the end of the year), in most situations.

My 10 year plan for Roth conversions ends on 12/31/25, when tax rates will probably increase. And, most importantly my plan is to get my 401K down to $0, by age 95. The examples provided don't include these two important (real life) components.

Not performing a (90%) Roth conversion in early January, is going to cause the tax infested accounts to further grow (usually). That's a BAD thing.

Real life example: I performed 90% of my planned 2023 Roth conversion on 1/4/23. The market is up 4% since then (more tax infestation!). Any delay runs the high risk of adding a year or two more to a Roth conversion plan. Most people don't have an infinite number of years to perform Roth conversions. I was lucky to have 10 years available, as I'm not working.

As with stock investing, any type of market timing is risky behavior (including Roth conversions).

The Drawdown strategy is going to successfully convert the planned dollar amount, but it is going end up converting a lower PERCENTAGE of the tax deferred balance. Not getting the tax deferred down to the desired goal ($0 by age 95, in my case), is a serious risk, that could result in having to pay a high tax rate (41% in my case), in order to withdraw the remaining tax deferred money.

Love this channel and the debate!

If I had used the Drawdown option, I would have been in big trouble due to the recent double digit stock returns. I would have had to convert more in the 22% tax bracket (which I hate doing), in order to meet my 12/31/25 deadline & $0 tax deferred balance by age 95. I plan to move to CA (high state tax) from TX (no state tax), in early 2026.

[miketracy]

Some of us have income that changes every year, so for us, doing the conversions in December when we know the best amount, seems to make the most sense.
Because we still have earned income, we also like to be sure that our income qualifies us to do the 15 K
2023 contribution.
IRMAA is no fun, but when tax rates go way up in 2026, having more money in Roth and less in taxable retirement accounts may be a wise change.

[Jechum]

First I love your statement… “You don’t need more money, you need a better plan.” Since I’m paying for my Roth Conversion from a normal brokerage account and markets tend to rise in Nov & Dec. I’ve been doing my conversation in October and then sell stocks in Dec, thus it’s all a 4th quarter 1040ES due in January. I thought Roth conversion is all about the taxes and best way to leave money to heirs. Anyway love your advice, just sad not to see my method and makes me wonder if I’m doing it wrong.

[gb]

This was great, my plans have changed. I need to learn best way to pay conversion taxes- 401k dollars, or my cash on hand. I’m thinking the later.

[zrb]

Great! Informative. Looking forward to the next episode.

[ScottHess]

In your chart comparing end of year to start of year conversions, the Roth IRA ends up with an additional $26k with start of year conversions. But with end of year conversions, the tIRA ends up with an additional $26k. You don’t gain that amount, you gain the tax costs on that amount, which is much less.

[dobiesj]

Compliance is more important than picking the ideal strategy. For the majority of people the start of year strategy is ideal even though it doesn't have the best results. The drawdown based strategy is compelling. But that forces one to frequently monitor their investments for a drawdown event. I don't think its worth the extra attention it requires over many years vs. the simpler start of the year strategy from a peace of mind perspective.

[larryjones]

Albert Einstein once said “Compound interest is the eighth wonder of the world".

Stock returns for 2017, 2019, 2020, 2021 were 22%, 31%, 18% & 29%, respectively. This type of explosive growth is great, EXCEPT when trying to get a tax infested account balance down, to avoid high tax brackets.

Safeguard's preferred method (Drawdown) means 50% of the planned Roth conversions would be done at the end of the year. Delaying 50% of a planned Roth conversion to the end of the year in 2017, 2019, 2020 & 2021 would have been a costly delay (higher conversion tax rates and/or more years of needed Roth conversions), if one is trying to get their tax deferred balance to a certain dollar amount, by the end of life.

For me personally, this would have caused my 10 year Roth conversion plan to end up being a 12 year plan. If I chose not to do the additional 2 years of conversions, then my end of life tax deferred balance would have been $1, 000, 000, rather than my goal of $0.

Closely monitor your end of life tax deferred balance goal, while planning your Roth conversions. I plan with a 10.4% stock return, knowing however, that stock returns are highly volatile. Delaying Roth conversions in years like 2017, 2019, 2020 & 2021 can throw a wrench in your plan.

I realize doing Roth conversions when stock prices are down can be lucrative, but the negative consequences are usually higher (in my humble opinion).

[furyofbongos]

Another reason to wait till the end of the year for a conversion is to keep your ACA premiums low. Estimate your income for ACA without counting the conversion (after all at this point you have no plans to do a conversion for the year). You pay lower premiums while that money that would have gone to premiums is earning 5.3% right now. Just plan to have an ACA bill based on your 1095-A later after you have accumulated all that nice interest.