Just curious to see how many of us out here are doing big roth conversions to take advantage of the current market?
Any money you make, above and beyond the normal benefits of Roth Conversions, is just from market timing. It certainly could happen that the market has overreacted and will bounce right back and you make extra money by doing a conversion, but it could also be an extended period of bad times and you lose money. I'd love to believe I can outsmart everyone else in the market, but I have no history of being able to do it. So when markets fluctuate, my analysis is done using current market values and right now, the driving force for doing Roth Conversions has gone down because my accounts have gone down.
I do not consider the present Tarff situation market timing. It's a type of major event (there are several kinds) that only happens once every 3-5 years or so and presents golden opportunities. If you were say, thinking about doing a $100,000 Roth conversion but haven't gotten around to it, now that $100,000 has dropped to $80,000, you do the conversion now for $80,000. This means instead of paying taxes on $100,000, you are paying on $80,000, so smaller tax bite. And your $80,000 will grow back as the stock market recovers, as it ALWAYS has. And now it will be tax free forever - Win win
Whether Roth conversions are rational or not entirely depends on one's context. At the moment, as newly retired, I personally am more interested in managing risk of catastrophe.
If you're planning on a Roth conversion this year anyway, why not do it now? It seems like just getting a discount on your tax liability.
So nobody feels is doing any conversions right now to take advantage of the market?
I am not doing a conversion because I did a big one in March 2020 and now about 55-60% of our retirement funds are now in Roths, and our future RMDs will be less than our living expenses, so I don't really need to do anymore. I did take out about $100,000 out of the market in Jan/Feb (at records highs) of this year with the idea of using a near future significant stock market drop opportunity (because of the new administration) to get back in. Just didn't thing it would happen this fast.
re your April 7, 1:15pm post.
You know the system has had a shock, but what you can't know is how it all works out. The sum of the wisdom of a world of market participants says there is some risk of a bad outcome. I'm glad you know that things will be fine, I'm happy to root for that outcome.
As for it always being the case that you should ignore market shocks and convert as if nothing had happened, the historical record shows there have been times where that doesn't work. Use the historical sequence feature to test your Roth Conversion plan starting in 1965 or 1929 and you will see that there have been times that Roth Conversions do not work out and will lose you money.
Time
Time is a powerful ally. I plan on living for at least 25 or more years. The US stock market has NEVER lost money over any 20 year time period over the last 150 years.
https://themeasureofaplan.com/us-stock-market-returns-1870s-to-present/
So, conducting a Roth conversion now as the stock market drops 20% from it's February 2025 high will result in a worst case scenario of gaining 0.5% over 20 years. and that's not taking into account the tax saving from having that money in the Roth. I will take those odds any day.
Taxes
As I pointed out in the Roth Conversions and Future Tax Rates thread, taxes will be going up. Exactly when I don't know, but certainly within 8-10 years. Factor that in to your Roth conversion decision, and it becomes a no brainer, even in PRC.
Roth money gives you a lot of flexibility, the more money in your Roth, the more flexibility you will have. It allows you to play around with your AGI to get tax breaks such as for health care coverage and energy efficiency upgrades to your house. If you have enough in your Roth, you can basically can get away with only two money buckets, bonds in a regular IRA and everything else in your Roth. By this I mean you can put your 1-2 years of emergency money in your Roth (in a money market) and the rest in stock index funds. If an opportunity presents itself for more Roth conversions, like today, you can use the cash in your Roth to pay the taxes on the conversion. If an emergency does pops up, sell some stocks in your Roth and take out the money tax free. When the stock market comes back, you put money back into your money market. Rince and repeat.
I'm with Pizza Man but am not rushing to do it right away. I was planning on doing some Roth conversions this year but it is tough to calculate what I can convert safely & cost-effectively due to some income from our part-time work. I would like to take advantage of the downturn to optimize it but not a fan of "jumping" to do something based on external triggers - tend to believe in preparation first, then acting. I believe we haven't hit the bottom yet so we will see. I'm hoping to do a small amount that will definitely be below my conversion tax thresholds.
Don't forget when you are doing Roth conversions, you can use in-kind transfers from your regular IRA to a Roth IRA:
When you request a conversion of shares from your Traditional IRA to your Roth IRA, the conversion value will be based on that day's closing price. It is not possible to receive a prior day's closing price. If a conversion request is submitted after the close of the market or over a weekend/holiday, it will be processed on the next business day and receive that day's closing prices to determine the conversion value.
Keep in mind, the value of the conversion will be subject to earned income tax for the year in which the conversion takes place. Fidelity will report the value of the conversion on a 1099-R tax form, which we issue after the end of the year.
https://www.reddit.com/r/fidelityinvestments/comments/1041ob5/in_kind_roth_conversion/?rdt=61815
How about this, you decide to convert $50,000 regular IRA to a Roth IRA because the S&P is down 20% from it's high on Feb 19, 2025. For a married couple filing jointly, say you are $25,000 below the 22% tax bracket. So $25,000 of the conversion is at 12% tax bracket and $25,000 conversion is at 22% tax bracket. That's $8,500 owned in taxes. Say it takes the stock market one year to return to it's high on Feb 19, 2025. The 20% gain on $50,000 is $10,000 (Tax free and more then the tax cost). Say instead of converting that $50,000, you put it in a one year US Treasury. The going rate on that is 3.86% or $1,930 gain (Federal taxable). Or two year Treasury at 3.69% or $3,690 gain if you think it will take the stock market two years to get back what it lost. What's the down side to converting today??? Sure the stock market could go down even more but so what, lets not get greedy 🤑.
Time is a powerful ally. I plan on living for at least 25 or more years. The US stock market has NEVER lost money over any 20 year time period over the last 150 years.
1. True in the US thus far, though 1929 through 1948 (20 year) average of the Sp500 was only 0.6% per year annualized real $ before Expense ratio and other fees. 20y period ending 1920 was 0.49% annualized
2. This is not true in international markets. So you have to make a bet that the US is different.
Yep, but my point is that you do not have to worry about the financial world ending if you invest for the long term 🙂. While there were a few 20 year periods will small returns, there are far more periods with double digit returns that more then make up for poor performing years 🥂. During the Nixon administration the DOW was at 1,000, it is now around 40,000. That only happens if the stock market goes up and up over time.
As far as the US, it is very different. There is a whole thread intitled "US vs Global Stock Market Returns" under "Sharing of Inflation Rates, Rates of Return" that goes into great detail 🤓. Not to regurgitate info, but the US accounts for about 65% of the worlds wealth, we are in the drivers seat. We have US stock market history going back some 150 years while developed nations sans US has reliable history only going back to the early 1970's (due to World War 2). Plus the US stock market is more diversified then all of the foreign developed world combined. Just saying 😇.
As far as the US, it is very different. There is a whole thread intitled "US vs Global Stock Market Returns" under "Sharing of Inflation Rates, Rates of Return" that goes into great detail 🤓. Not to regurgitate info, but the US accounts for about 65% of the worlds wealth, we are in the drivers seat. We have US stock market history going back some 150 years while developed nations sans US has reliable history only going back to the early 1970's (due to World War 2). Plus the US stock market is more diversified then all of the foreign developed world combined. Just saying 😇.
There is disagreement about this. I'm not saying you're wrong, just posting that not all economists share the view of US exceptionalism. Those of us who try to diversify across as many risks as possible, also count "country risk" of the USA. Without getting political, we're seeing some of that right now.
Pizzaman, you might enjoy this recent study that found that the optimal ratio was 33% domestic 66% international. This roughly held true even excluding the US from domestic.
