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I thought I would see what suggestions or improvements might be possible for how to time my Roth Conversions. Generally, I establish a target conversion amount in early January using a variety of factors including (IRA Size, Marginal Tax Rates, Effective Taxes, AGI, Taxable Income, IRMAA and NIIT). My question is focused on how to time the conversions once a target number has been established. I am currently 61 and plan significant conversions into the 24% Marginal Bracket till I start taking RMDs at 72.
Currently I have nothing left in Taxable, 88% in IRA, 12% in Roth. Always convert in-kind from my IRA to my Roth. I file Estimated Taxes to cover this and other income -- no taxes are withheld from the conversion itself. Given my portfolio, I have been focusing on converting my holdings in Vanguard Total Stock Market ETF (VTI) for now. Conversions are all done with Fidelity and I have until 2PM Eastern Time to enter the request and take advantage of the current closing values for the day.
I am trying to document this process for my Retirement Policy Statement (RPS) and want to make sure its clear and reasonable approach.
Currently:
1. DCA average conversions on a monthly basis. Target the 3rd Wednesday of each month. Effectively this means I convert 1/12th of the Target every month.
2. If a new Market Low is hit for the year, I will double up my conversion and do an extra conversion (essentially 1/12th regular + 1/12th for a new low). If a new Market Low is hit again after 1 week, I will convert an additional 1/12th. (This was my approach during March 2020 this year.)
3. In December I have a much better idea of my tax situation and I may revise the Target Conversion amount and complete the conversions by the 3rd Wednesday of the month.
Insights:
- I chose the 3rd Wednesday since its typically a trading day and isn't subject to some of the volatility that occurs on a Monday or Friday. No real science behind it, just wanted to have a defined target time for the DCA.
- Focused on a DCA approach since it provides a higher likelihood I will convert when stock prices are lower (inverse logic from the concept of Lump Sum investing). Given a choice, I would like to convert when ETF prices are lower so I convert more shares.
- I can do some Market Timing for new lows since I know what the closing price of the ETF is when I enter the conversion request.
Questions:
1. Anyone have a better approach?
2. Any suggestions for streamlining and clarifications?
Thanks in advance
WoodSpinner
Do you run the risk of doing so much in conversions that you now land in the 24% bracket but at age 72 you've diminished your IRA by so much that you land in the 12% bracket? in that case, your plan was not optimal.
Based on my modeling, I will have about 50% still remaining in the IRA assuming a 4% Nominal Growth rate.
Projecting my taxes forward it seems like I will always be in the 24%/28% Marginal bracket unless there are major changes to the tax rates or a large correction that doesn’t recover in a 10 year timeframe.
One strategy that I like as a hedge against bad market returns is to try to stay under a certain tax bracket that you're on the border on, say 22 or 24% and if you're "wrong" and you get good market returns this next decade or two, you'll end up with a big portfolio with slightly more taxes dipping into the next bracket after 72. On the other hand if we have another "lost decade" with poor returns, you'll be less likely to dip into higher bracket 11+ years from now. You either get great returns with less optimal taxes or poor returns but pay less in taxes compared to some kind of DCA strategy.
Anyone have an idea how we could backtest a DCA approach for conversions against a Lump Sum approach?
Which gives us the best probability of converting more shares?
My approach would be to go grab Shiller's data here and make a model. Would be interesting to what happens over various 20 year windows...real question is maybe impact on SWR vice trying to avoid taxes.
I decided to do so,e Backtesting and wrote up my findings in this post on Bogleheads.
https://www.bogleheads.org/forum/viewtopic.php?p=5577471#p5577471
