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

[@cchat3491]

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.

[@davebing11]

EXACTLY!

[@habbadabbado5765]

Yeah, he’s not giving any credit for appreciation in the traditional pre-tax retirement account.

[@postrenter2720]

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

[@pensacola321]

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

[@adiposerex5150]

No, you need less stuff.

[@luiscolon921]

@@adiposerex5150this is profoundly deep!

[@chrisgraves1729]

False, he’s was right you don’t need more.

[@rayzerot]

Ummm. Y'all need to slow down on whatever your favorite chemical is. A quarter of new retirees have no funds in retirement savings at all and even the median new retiree only had 148k in retirement accounts. The vast majority of people need a lot more (the people watching this channel probably don't though)

[@bgintentional]

Everyone has their own financial journal. The most important thing is this, investing is the new savings! Start there. If you are able to work, you have the ability to save. The more stuff you own creates more expenses

[@drott150]

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.

[@edwardglatzmayer5466]

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.

[@i-postm4943]

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.

[@b3arwithm3]

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

[@DavidsonFootball1]

Yes, unless you're trying to time the market in the purchase and sales of your investments, it seems the only real effect of the timing of your Roth conversions is the distribution of funds between the taxable account and the Roth. And his first example of maybe a 30k difference in the distribution between the two after 4 years is immaterial.

[@b3arwithm3]

@@DavidsonFootball1 lesson, never take financial advice from a KZbinr with unknown credentials 😂

[@mikefochtman7164]

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.

[@rs-lq7nt]

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.

[@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!

[@briankelly1240]

Growth in Roth vs growth in pretax doesn't matter unless it changes tax bracket at time of conversion. Put in $100 in Roth beginning of year, pay $22 in taxes, $78 then grows 10% to $85.8 put $110 into Roth end of year with same 22% tax you have $85.8.

[@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.

[@gb3777]

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.

[@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.

[@YankeeBobCat]

Do you mention or consider "In-Kind" conversion of assets? Can be extremely powerful. Especially when you can pick which assets to convert and not disrupte your overall asset allocation.

[@miketracy9256]

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.

[@paulsackles1329]

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.

[@zrb9591]

Great! Informative. Looking forward to the next episode.

[@larryjones9773]

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).

[@SafeguardWealthManagement]

Larry, thanks for the comment. This is why we showed averages of each strategy over almost a 100 year time period. Nothing will be perfect during all periods. Counter examples I would offer would be 2008. An early year conversion would have been difficult to stomach. That being said, start of the year conversions certainly win in a number of periods. I don't think it's a bad strategy.

[@ronloftis9080]

Eric, have you guys really analyzed yet the Secure Act 2.0 and it's affects on Roth Conversion Strategies since RMDs have moved out until age 73 in 2023 and 75 in 2033. Can you do a video on Roth Conversion Strategies while collecting Social Security and it's ramifications. Thanks for another great video.

[@f430ferrari5]

RMD only applied to Roth 401k and any pre-tax prior to Secure act. RMD didn’t apply to Roth IRA. Most simply converted Roth 401k to Roth IRA. All the Secure act does now is allow a person to leave the monies in the Roth 401k The 401k has better protections also related to lawsuits.

[@keithmcphail1152]

You sort of raced by the "if you have the ability to wait for the market to recover" part. And it's corallary: that you can afford to let time go by while the Roth IRA builds up to the point where the 401K and Roth now equal the original 401K amount (pre-tax). It might take a decade.

[@larryjones9773]

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.

[@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.

[@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.

[@larryjones9773]

And if a drawdown event doesn't occur during the planned Roth conversion years, then we gain nothing, but still retain the negative consequences (more conversion years, higher conversion tax rates and/or too much money left in a tax deferred account). The risk isn't worth the reward.

[@drott150]

Overly simplistic. Each scenario assumes you follow the same strategy for multiple years in a row, when in fact you can mix and match as you go along based on what the market is doing. Today, we have transitioned - after 40 straight years - from declining interest rates to suddenly and dramatically rising interest rates. The Fed is actually deliberately trying to suppress employment, wages and economic growth. The Fed is deliberately trying to bring both the housing and stock market down, which are interlinked in many ways. But these larger macro effects have barely begun to be felt yet. But they will be given enough time. And the Fed has not capitulated on raising rates. So, in this specific and quite unique environment - not some hypothetically based broad statistical average of market performance over a select time period in the past - leads many informed investors to wait until year end before rolling over. It's called "don't fight the Fed."

[@tomj528]

I'm playing a different game. What this example does in a single year takes me 5 but not a penny of tax. I've been at this for 7 years with maybe another decade or so, perhaps a little more, depending on future returns, to go. Still about a decade before RMDs so I'll use the same mechanism to step up the cost basis on our taxable investments.

[@joeuser2360]

One thing I didn't see you mention is the 5 year rule. Your strategies make sense when deliberately planned. But sometimes situations allow for a first conversion late in the year that may not have been pre-planned. Even if it's at the end of the year, if it's done in that year, the entire year counts against the five year waiting period. So people shouldn't wait until the beginning of the new year. After that, the 5 year rule doesn't have as much of an impact on the planned periodic conversion strategies.

[@robertfield4103]

Timing of estimated tax payments? Is this included in your analysis? At what rate?(i.e, time value of the tax money at same rate as market. )

[@klfamily5873]

I appreciate your diligence on the concepts, but disagree slightly with the math. Because the concept illustrates a conversion to a Roth IRA, we can assume any initial dollars are pre-tax dollars in a retirement account (IRA, SEP, 401K, etc....). For math continuity, this original IRA should be illustrated to grow tax-deferred at the Roth IRA rate. On the COMMON MISTAKE ILLUSTRATION, both strategies convert $400,000 at $100,000 annually over 4 intervals. However, the unconverted IRA value is not calculated at the end for either strategy. For simplicity, I assumed each strategy began with $400,000 in an IRA, and calculated the ending IRA value in each strategy. For "Convert @ Beginning" Strategy, the IRA value is about $13,200 while the "Convert @ Year-End" Strategy is about $39,600. While this reduces the disparity, I do recognize that either IRA value will be taxed on distribution, including future conversions to Roth. My takeaway is that maintaining some flexibility to adjust conversion amounts throughout the tax year seems prudent.

[@M22Research]

Key Point I did not hear - While it appears to be true that with these alternative Roth conversion strategies, you do end up with more growth in your Roth, you are not foregoing the growth with an end of year conversion. That very same growth still happens in your tax deferred IRA or 401K. But it is true you have not made as much progress on conversions and you will ultimately pay income tax on the growth that remained inside your tax deferred account.

[@plantgains6307]

Your second paragraph…Yes! Yes! Yes! I generally feel that people make investing WAY too difficult and stressful.

[@robspencermd]

Here's a version of the Drawdown Strategy with an extra benefit! If the value of an asset held in your traditional IRA (stock, ETF, or mutual fund) drops by your target percentage, consider waiting till the next day before moving it to your Roth IRA. If it drops down even more, wait another day. Continue waiting until its value rises, then do the conversion early enough to be sure it will be processed before close of market that day. This works because (at least at the brokerage firm I use) the Roth conversion amount for tax purposes is calculated based on the asset's value as of the prior day's market close. If you are willing to spend the time and the asset value keeps dropping for a few days, this can save you even more than your original target percentage in taxes! 😊

[@robspencermd]

Note: Estimating the value of a mutual fund in real time requires selecting and following an ETF that closely matches the assets held in the mutual fund.

[@rapfreak7797]

I just started conversions last year and did end of year. With the down market I just converted the whole year target; good to hear my intuition matched statistical analysis. I’m still working so if the market draws down more I’ll likely convert more later this year.

[@turnertruckandtractor]

While the "A Common, But Wrong, Objection" chapter is true the example seems cherry picked with 1 down year first then three up years. Just previous to that you mentioned that 8 out of 10 years is an up year. That somewhat overhypes the start of year scenario success and the odds are still in your favor doing end of year conversions. You do have to start the reoccurring conversions at some point regardless of opportunity costs and in a way you are timing the market. Once you get the first year done then you can better select the strategy that works for you.

[@brianh6680]

Would have like to see how quarterly conversions faired.

[@jenniferciari204]

Bring on Part 2 !! This is great info

[@bernadettesandoval3990]

My suggestion is traxk the snowbird route: southern states in the winter and northern states in the summer....Every young retiree's dream

[@scottzeezee4343]

You made good points and I already use what you call the drawdown plan, but I think you totally miss the reason for some conversions. Don’t a lot of people convert in order to shrink their standard IRA and 401k balances in order to reduce their RMDs? Converting at the end of the year typically does the least to reduce RMDs. If you had $1M in standard accounts and converted $100k at the end of the year, and the market went up 8% that year you would hardly reduce your standard balances and your RMDs wouldn’t change much. Whereas the exact same scenario but beginning of the year conversions would get you zero RMDs after 10 years.

[@supersteve8305]

Seems completely dependent on what the market does if the money you are converting is already invested. If market goes up, you missed some conversion. If market goes down, you get to convert more shares. So I say, do it whenever, just do it every year.

[@ksgtokgo]

Doesn’t your comparison of a January vs December conversion ignore the growth of the non-converted fund for the first year?

[@hornbaker]

Yeah, the whole Dec vs Jan conversion argument only holds water for a one-time conversion. If you’re doing it regularly, only the first in the series takes the hit. And that hit is only the tax on one year of gains on the converted amount. Dec conversion enables you to manage a known tax impact instead of guessing about the coming year. And it starts the 5-year clock a year earlier for when the converted funds become available without penalty. It really only holds water if you know the market is going up next year… Because if you knew the market was going down, you’d want to convert late in the year and take the loss before paying tax on the gains.

[@jerrylabat550]

@@hornbaker You owe 25% of your taxes per quarter, so waiting until the end of the year to pay taxes will cost you more with penalties.

[@jerrylabat550]

Mathematically it doesn't matter, he was relying on the historical statistical pattern of the market going up more often than down therefore giving the appearance of being better. If you looked at the total assets they would be the same in both scenarios at end of 5 years. The only difference was the distribution based upon sequence of returns.

[@hornbaker]

@@jerrylabat550 You actually owe quarterly estimated taxes in the quarter that the income was earned. For people with salary withholding and smaller investment profits, this can often be trued up at tax time without penalty because of how the rules work. But as non-withholding income becomes a bigger percentage of income (e.g., especially after retirement), a lot closer attention to this is needed.

[@hornbaker]

@@jerrylabat550 The flaw in these comparisons tends to be that they compare results for Jan 2023 conversion vs Dec 2023 conversion, where one scenario gets a whole year of gain/loss in a different status. A proper comparison would start on 12/31/2022 vs 1/1/2023, where the valuations are nearly identical. The obvious answer is… the results will be virtually identical, with disadvantages of losing a whole tax year of conversion maturity. The magic in the flawed examples is not about doing the conversion in January. It’s about doing it nearly a whole year earlier.

[@krishnadevulapalli315]

Does it really matters when you do the Roth conversions as long as you have money in brokerage account to pay taxes. If you have cash sitting on the side lines, then the down markets are ideal time to do the conversions as opposed to brokerage accounts which will be down as well. I still think earlier in the year is better since you will have a year of compounding( alas, this did not work in 2022).

[@markbernhardt6281]

Pretty interesting. I wonder if the market tanks a certain amount, should you increase your conversions because even though you're in a higher tax bracket, the amount of the discount can't be passed up. Imagine if the covid crash of 2020, somewhere near the bottom, someone had done a 100% IRA conversion. That would have been amazing!

[@ericgold3840]

I think there is a market timing problem with the strategy. Example: Say the tIRA starts the year at $100k and you want to convert $10k in total. At the start of the year you convert $5k. Great Now the tIRA rises in value, so you wait. In a good year for the strategy, there is a dip of 1% below the start of year balance of $95k. Do you convert, or wait in hopes that the dip will deepen ? If the dip continues, do you keep waiting, or lock in your "gains" ? By the end of the year we will know that the biggest dip was say 10%, but that knowledge comes to us too late.

[@billmartin1663]

I love the basic assumption . . . the market always moves upward and always moves in a positive direction. If only.

[@geoffreyfaust3443]

Can one fine tune the strategy by doing 2 Roth conversions per year, the first one at year's start at 90-95% of goal, to capture the full year of tax free growth (in most years, anyway)? Then, could one do a second Roth conversion, sometime before year's end, optimally ASAP after one learns the complete income picture for the year? If so, then this would pick up the remainig 5-10% of the total conversion goal. Or is one prohibited from more than one conversion per year?

[@keithmachado-pp6fv]

Good video but I disagree with trying to time conversions for a market decline. It all has to do with the tax rate paid. If anything you could argue that after a market decline your RMDs are lower so future tax rates may be lower.

[@johnb1571]

i finished my last conversion in Jan 2022 and had been doing them for yrs in Jan for the full growth of the yr, if there was growth. i will retire this yr under rule of 55. live 2 yrs off 401k or until its depleted, then taxable account until SS kicks in. Lowest IRMAA bracket and only pull from Roth if we need too.

[@ryantsui2802]

Isn't this just effectively market timing and you'd get even better results with option #2 rather than #5 if you have no idea how things are going to turn out?

[@joemccarty2061]

Question...just so I'm clear, when you say "10% drawdown trigger", are you referring to the market being down 10% from the start of the year? In other words, do half of my conversion each January 1st and the 2nd half of my conversion if/when the market drops 10%? And complete my Roth Conversion in 5 years for optimal results? Thank you for your time and the video.

[@yossarianmnichols9641]

A lot of work but the the equal conversions 12 times a year seems to resemble dollar cost averaging investing, less bang for your buck when the market is up, more bang for your buck when the market is down.

[@charleskarpinski4441]

Great info. I’m trying to understand how the timing matters if you are invested in similar funds in the account the conversion is coming from and the account it is going to. You are making the same gain in the origin account, although it wouldn’t be tax free. I didn’t see in the video that it mentioned it was only counting the gain related to the tax difference

[@cchat3491]

Excellent point!

[@tjbonzo]

kzbin.info/www/bejne/epabiYiXotOdiNk does a good job of explaining your question. The "punch line" is that your (hopeful) growth happens in the Roth account.

[@SafeguardWealthManagement]

Correct. I left out the IRA balances because I don't believe it adds anything material. If the growth isn't happening in the Roth, it's happening in the IRA. Point here is not that growth is being missed out on. The point is that if we are implementing a strategy (like paying $X today to avoid taxes down the road), how can we get the most out of the strategy (and dollars we are allocating toward said strategy). Growth in the IRA simply means additional tax dollars down the road. If you're playing catch up with your Roth Conversion strategy, those taxes are compounding.

[@laurajohnson4446]

@@SafeguardWealthManagement "Growth in the IRA simply means additional tax dollars down the road" is true, but paying taxes up front means fewer dollars growing. In your example, you say you convert $100k in January and when the market goes down 5% you have $95k at the end of the year. But you don't. You have $95k minus whatever your tax bill was. So many Roth conversations ignore this. If you pay your taxes from some other account, you still have less money growing.

[@SafeguardWealthManagement]

@@laurajohnson4446, this is a common misconception when it comes to Roth Conversions. And unfortunately, this thought of 'less money growing after the conversion" prevents a lot from using this important strategy. Here are two videos to help explain this further: Roth Conversion Breakeven - kzbin.info/www/bejne/n5LVeWybis5kkLc (Sorry if the music is distracting here, we tried it out on a few videos and it didn't improve the viewer experience) Common Roth Conversion Miscalculation - kzbin.info/www/bejne/f4WZcoB_apmEoJY

[@matthewharrigan3568]

Excellent video. Is it fair to think that after the first year the strategies are the same but that the initial difference grows/compounds over time?

[@tacticaltruth8118]

Nice analysis. What impact will the end of the Trump Administration tax changes (ending 2025?) have on timing to covert? Specifically, would it be better to accelerate and convert as much as possible before those tax benefits end?

[@patrickd9576]

In your modeling of the different approaches, did you consider how the associated shifted timing of paying quarterly taxes impacts the comparisons? Or does that not make much of a difference versus the complexity it adds to the calculation?

[@Jechum]

If you are paying taxes immediately from the conversion, I think it might not be a major factor. But I would love to see advice if paying cash funded from savings or normal brokerage account.

[@Jechum]

@@_-Karl-_ Great point. Roth Conversions is mainly about the taxes. It would have been nice if the video let us know the assumptions on how taxes would be funded and paid.

[@mr88cet]

Another relevant question is how much longer will Tax Law continue to allow Roth Conversions? There have been efforts to disallow conversions. That sounds like a reason to convert a large amount now, as opposed to a comparative trickle over years.

[@moonmunster]

The tax law may be changed to tax Roth IRA distributions. I know, the money in a Roth has already been taxed. But maybe the earnings will get taxed. You never know what congress will do.

[@hilarymcvay9505]

Basically the earlier the better because you are comparing 3 years to 4 yrs of growth on the conversion. But end of the year is better planning for tax purposes.

[@coryhoang3736]

These are not apple to apple comparison. For the end of year strategy, only $400k was converted vs $500k for the beginning of year and split strategies. Of course, the end values for the latter 2 strategies are higher. The ROI for the end of year strategy is higher.

[@SafeguardWealthManagement]

I've answered this a number of times in other comments. The same total conversion was used in both scenarios. All of the added benefit came from growth from timing.

[@TheHouseofChameleons]

Is it better to convert when your portfolio is down or up?

[@gcburkett]

I don't see the difference in the traditional IRA balances between first of year and end of year. In the example giving with the same gains/losses in the traditional IRA, the roth has 26,000 more but the traditional IRA balance is 26,000 less. So while better, after accounting for the difference in gains on the traditional IRA is only the taxes paid on having to convert an additional 26000. I agree with a split approach with an opportunistic conversion if the market falls during the year but you need to apply to gains/losses on the traditional IRA balance to get what the final balance really means.

[@SafeguardWealthManagement]

With all due respect, the traditional IRA balance is irrelevant. None of these strategies will create money out of thin air. Yes, if the growth doesn't happen in the Roth it happens in the IRA all things being equal. But if you convert $100,000 for 5 years. Regardless of the time of the year you do a conversion, you have the same tax cost. So if one timing strategy ends up with you having more money in your Roth, then you end up getting more from the tax dollars you paid. You want a higher ROI on your the tax dollars you pay.

[@gcburkett]

@@SafeguardWealthManagement My point was that you will have more in the Roth IRA but less left in the traditional IRA so you don't have 26,000 of gain in total. Its still better to have 26,000 in Roth over 26,000 in Traditional for sure for the same amount of taxes paid. In theory, taxes should be paid earlier with start of year over end of year conversion if you also had the funds used to pay taxes invested the same way it becomes more of a wash.

[@SafeguardWealthManagement]

@@gcburkett the tax question is dependent on where you pay the taxes from. I'm not sure how you view it as a wash but if you don't see the validity in a strategy, don't use it. Best of luck!

[@gcburkett]

@@SafeguardWealthManagement The conversion after a market falls sounds great. I have not done any conversions yet but this year was maybe going to be my first year. For tax planning reasons the end of year is easier if you are not doing a fixed amount but converting to an AGI limit. Maybe its worth the effort to figure out a minimum amount and split the conversions. The video does present options I had not considered.

[@RalphRobertson-tn9ow]

What is the difference between Dec 2023 vs Jan 2024 ROTH Conversion?

[@aslancpa]

Yes but…. You have your biggest modeled percentage gain of 12% in the last year, when the beginning of year balance is biggest. If you switched the % gains around to where last year is a loss, results would be much different because that loss % applied to a large balance is a big dollar loss.

[@davidparker7156]

in a down market converting at then end of the year makes more sense

[@SafeguardWealthManagement]

I think you're saying that if the market fell from Jan 1st to Dec 31st we are better off with an end of year conversion. Of course. But we don't have a crystal ball

[@davidparker7156]

@@SafeguardWealthManagement that's correct just like we don't have one that says it will rise and therefore do it early in the year

[@SafeguardWealthManagement]

Right, so instead we need to look towards data as shown in this two part series. Or simply diversify and do a split conversion if you don't trust historical data/analysis.

[@billgates3229]

If I understand correctly there’s not much in this video about how to figure how much to convert in any single year. It’s an optimization problem: maximize account balances total at some point in the future, assuming a dollar in a non-Roth IRA is worth less than a dollar in a Roth IRA, accounting for potential income tax liabilities, potential IRMAA charges, RMDs, etc. etc.

[@SafeguardWealthManagement]

Correct Bill. This video is not about how much you should convert for your situation but rather about when to perform the conversion once you have the amounts determined.

[@sstewart_2001]

Can you discuss how converting in January would affect when estimated taxes are due?

[@jerrylabat550]

There really is no discussion, you owe 25% on the selected tax dates, if you come up short of your 25% you will owe penalties. You could pay when you do your conversion to avoid penalties, but that means you have to estimate pretty accurately, and also account for other income sources as well.

[@alan30189]

Good information, but wouldn’t an even better strategy be, if you expected a 10% draw down in the market each year, to just wait for that 10% drawdown and then put the full 100,000 in? In the case of 2023, that might be during the Feds’ next interest rate increase. It might cause a temporary 10% decrease in the stock market.

[@ryantsui2802]

Yes, if you believe you can predict the future with certainty you should all in at the bottom of the market.

[@rosemarypazhayattil4366]

I don’t have Roth IRA can you suggest for people who don’t have Roth IRA

[@BRunner12]

Don't get this, is the money not growing before it is converted, basically I think what you mean is you will have more in you after tax account if you convert at the start of the year vs more in you IRA if you delay conversion...

[@mexicomarty4764]

If using the drawdown method, is the trigger based on a % drop from the Jan 1st opening price? Or any intra-year % drop (even if it still not down the x% trigger from year open)?

[@butopiatoo]

convert based on where the market is. If you convert too much, you can recharacterize back to your traditional IRA and pay taxes on a portion of the earnings you made on the earlier in the year conversion. I contributed to a ROTH in May 2022 and suddenly in September I had made too much money to make ANY ROTH contribution for the year. I recharacterized my 7k contribution for 2022 and will have to pay tax on about $150 worth of income attributed to that $7k. No big deal. Early January, I contributed the max for ROTH in 2023 - 7.5k. Life goes on. You're just doing the same with a conversion. Did this in 2017 after the tax bill passed late in December. Had converted 175k to ROTH in Aug 2017. Trump Tax bill lowered rates in 2018 significantly, so recharacterized 170k BACK TO THE IRA from wince it came last week of DEC 2017. Kept 5k in the ROTH so I could convert in 2018 after the tax rate went down. Again, convert when you think the markets are going up or there is an investment you can make that can grow.

[@rickyaz8640]

You can no longer recharacterize a conversion. It’s been one way since 2017. You’d only be able to rechar the contribution

[@butopiatoo]

@@rickyaz8640 Interesting. I guess part of that 2017 tax law. We were able to do it in late '17

[@DP-ol5uv]

This all assumes you have a significant portions of your assets invested in equities and that future growth is based on some past return performance.

[@SafeguardWealthManagement]

You will arrive at a similar conclusion with a balanced portfolio or even an all bond portfolio. We have a video we did last year that includes the data.

[@larryjones9773]

@@SafeguardWealthManagement I think you may have your bar chart at 8:30 mislabeled. I think the Start of Year & Equal Conversions labels should be FLIPPED. With the market most often increasing, it seems impossible for Equal Conversions to beat Start of Year. 📊

[@jodtark]

Great video! I appreciate your content.

[@paulkempkes8292]

This whole thing ignores the fact that the money I'm converting into a ROTH IRA is already in the market in my SEP, regular IRA, or 401K..... The benefits of earlier conversion is still there, but not as great as proposed. Higher benefits if you're paying the tax from your taxable account and can leave that money in the market until you need to pay your quarterly tax estimates. (You do have to pay quarterly estimated taxes on SEP, IRA, and 401k withdrawals, yes? I'd bet so, but haven't gotten that far yet.)

[@LOLWHAT5]

I need advice on minimizing rmds I want to take s s at 65 I only have about $110000 in traditional ira should I do $40000 roth conversion each year with little income each year keep the last $ in traditional ira?

[@sstewart_2001]

Excellent information, as always.

[@hankstiffler]

Im still questioning the time of end of year vs start. Youre giving the start of year a 1 year head start. To be equal the end of year would be made at the end of December Before year 1. Its now July if I decided to start making conversions, theres no benefit to waiting till after Jan 1st. Also, Im not waiting till December 2024, Id make the conversion Dec 2023.

[@NAUM1]

So what if the drop never happens? Just an end of year one happens then?

[@garlandlewis1000]

If you have a RMD doesn't that have to be withdrawn before doing a ROTH conversion? How would that change your strategy?

[@larryjones9773]

Correct. RMDs can't be converted to a Roth.

[@Timothy003L]

Aren't all these strategies basically margin trading but worse? You're borrowing money from the IRS to buy stocks and then selling stocks to pay it back during tax season. If the price goes up, you get to keep some shares, but if it goes down, you have to sell other assets to cover the loss. Unlike margin trading, there are no margin calls, and you can't claim the loss on your tax return. You're not accounting for that added risk. If you're going to do this, why not use an actual margin account?

[@williamlong4953]

This is very compelling on the surface; however, it fails to include the earnings on the $100K used for each end-of-year conversions. These earnings appear to account for most of the difference.

[@SafeguardWealthManagement]

It does include the earnings on each 100k used in the end of year, start of year, and everything in between.

[@jerrylabat550]

Agreed, in the start of year scenario you have 4 years of interest, the end of year one you only have 3 years worth of interest in the Roth, that 4th year's interest is sitting in the IRA. In both the scenarios you have the same total assets. So in essence you started a year earlier from a growth standpoint on the beginning of the year scenario.

[@freedomrocks7821]

Great video.👍👍👍

[@KM-gf8oy]

Where is Part 2?

[@Random-yq1wu]

4:24 not a fair comparison: End of year has 3 conversion in 36 months Start of year has 4 conversion in 48 months

[@SafeguardWealthManagement]

No, they both have 4 years of $100k conversions.

[@jerrylabat550]

@@SafeguardWealthManagement But one of them has 4 years of interest applied the other has 3.

[@timtoolman9940]

I just did 100k conversion in Jan I transferred tax estimates to State and IRS now. I do not know if I had to pay the tax now. I don't know how the IRS even knows what the money I transferred to them is for. Is there a form I was supposed to send with the payment?

[@tewkewl]

you're kinda wrong about the timing. you need to ADD another year to the end of year conversion. they are simply shifting their retirement by a year. the endpoints are not the same.

[@SafeguardWealthManagement]

They endpoints are the same...

[@timb6985]

Would you speak about the new proposal that on National Tax on purchases of goods and services and doing away with Income taxes altogether? I assume you will say that it will never happen but even that remote possibility that something like a VAR could be imposed will totally negate the advantages of a Roth over an IRA and we will all be kicking ourselves for doing the conversation and needlessly paying an "income" tax.

[@larryjones9773]

True, if we go to a national sales tax and if tax on income ends, then all this work to convert to Roth will have been a big waste of paying taxes on Roth conversions.

[@jerrylabat550]

I don't see a path to doing an instant switch (which would be the only scenario where this deferred tax liability would be forgiven). Imposing a 30-50% inflation rate on the economy would absolutely destroy it. If it was done gradually you would have both systems probably for decades to ease into it to absorb the necessary 30+% inflation.

[@larryjones9773]

@@jerrylabat550 Good point. And we complain about our tax system now. The conversion to national sales tax would be quite complex (and scary).

[@SidinPhilly]

how is large is large?

[@NoelEldridge]

Doesn’t the best strategy just move your gains from the traditional to the Roth IRA? If you move $100k on Jan 1 and make 10% then you have $110k in Roth at the end of the year. But if you have $100k in Traditional on Jan 1 and make 10% and move $100k on Dec 31 then you will leave $10k in your Traditional IRA. It doesn’t seem to make a lot of difference to me. Am I missing something?

[@nancienordwick4169]

I don't get why you would convert just take out what you need as income exactly when you need it.

[@michaeleames8225]

There are pieces missing in this analysis. First of all, the results here are contingent on a market decline in the first year. You will not know this at the beginning of the year. If your goal is to maximize the Roth balance, then if you have growth in the first year you would be better off to convert at the beginning of year 1. My guess is that the market grows in most years. Then you are better off converting at the start of the year. Secondly, many people can outlive their retirement accounts. If a person in a lower tax bracket than you (e.g., your kid) inherits the account, then you might be better off to not convert at all, assuming that your goal is to minimize the tax burden on you and your estate.

[@calbob750]

Just remember in a conventional retirement account the gummint will require you make RMDs wether you want to or not.

[@mattlopez9351]

Little confused here, maybe someone can help. Even if you do an end-of-year conversion, wouldn't your money still be invested in the market and growing under your tax-deferred account?

[@cmdrfunk]

Yeah, which means you have to pay more tax to pull it out since the gains during the year made the number bigger. If you get it into your roth asap, all the gains during the year are untaxable.

[@mattlopez9351]

@@cmdrfunk Thanks for the clarity!

[@diytwoincollege7079]

How does tax work with a conversion? Are you on the hook for taxes on the amount that you convert?

[@martybuck]

Yes

[@Longjohnsilver58]

What if the Roth and Pre-Tax are equally invested, as in the same fund? Then the growth would be equal, so it would not matter, right? And if you’re paying taxes with a withdrawal and reducing the conversion, then would it not be better to do it at year end? I know people say don’t do that, but I have no choice because I have a pension and I have a lot of money in pretax. I have a provisional income problem when I start drawing social security. I need ALL that pretax money converted, and paying the taxes with some it makes sense.

[@patgreaney4730]

I am not convinced that you have looked at the whole picture. It seems that you are looking only at the money going into the Roth account. I believe that you also have to look at the traditional IRA out of which the Roth conversion money is coming from. For example, if you are going to convert $500k over 5 years at $100k per year, then you have to include the traditional IRA initially worth $500k in the complete analysis.

[@markohio4955]

Don’t you have to wait 5 years after the conversion to take the money out?

[@billauer5867]

My understanding is that you must wait five years before taking out the GAIN from the contribution or the conversion, because the Roth conversion took place after you already paid taxes, (if I'm not mistaken).

[@steves2074]

oh yeah all that suprise income i need to plan for... :)

[@bubpiper4028]

That was useful....

[@keithmcphail1152]

Ok, I have to admit, I do not understand the link that you are making between investing in a market decline and the benefit of the Roth. Whether in a pre-tax IRA or a Roth, you're still buying in a declining market, so there is no advantage to buying and the Roth. there is only the advantage that we would normally see in buying low and letting the value build up by end of year. And, the big point, that increase would be tax free. But those are market mechanics. The tool didn't offer any market advantage per se.

[@colleenconger5265]

But the rates are going up 2025 so I am just beginning to do a Roth and want to start before the end of the year so it will be at the end of the year but at least I’m getting in on this year because there’s only two more years before our rates go up Automatically. (tax cut and job acts reform is coming to an end! Plus our deductible is going to be going way down, especially if the Democrats come in! so I can’t lose starting at the end of this year!) then maybe I should start again at the beginning of next year I have no idea, but I’m just saying I want to get in on this year. Let me know if Im wrong

[@indrayee]

of course, it's bigger in the second scenario because you forgot to show you still earn money in an IRA before you move it to Roth.

[@SafeguardWealthManagement]

Not forgotten, just not a necessary data point. I'm not saying you magically have more money. For example, if you paid $20k to convert $100k per year for 5 years and one way of converting leaves you with $750k in Roth and the other leaves you with $900k there is obviously value in the second approach. You don't magically have $150k more in the second example, that money is in your IRA but $1 in IRA assets is not equal to $1 in Roth

[@stevevet3652]

If you slide equities (stocks) from an IRA to a Roth, you lose no growth.