Timing of Roth Conversion
I read inthe Feb. article about partial conversion and that you must wait year end to determine what the year end balance is in determining the denominator for the calculation and that you must use the year end value and NOT the balance on the date the IRA is converted.
Question: If I convert 100% of the IRA to a Roth can I use the value on the date of conversion?
To some degree I am playing a “market timing” game and trying to “roll over” when the market is low so that my basis represents a larger percentage of the account balance. This will result in less tax due for 2010.
Is this correct?
Thanks
Bill
Permalink Submitted by Anonymous (not verified) on Wed, 2010-06-23 16:25
Interesting concept, but I don’t see how you can really win here or even make it significant:
1. If you are lucky to convert at the lowest point of the market (and that is difficult as it is), the chance of recovery is higher at year’s end and will not achieve your goal. If you convert close to the same level at year’s end, you miss out on converting at the low end.
2. Have you calculated what an extreme swing will actually hurt you, if the market recovers dramatically at the end of the year (higher taxable percentage) verses the benefit of getting a low share price during the actual conversion? I have not looked at any numbers scenerio, but if you can illustrate one I would be interested to see it.
It does not seem you can really get an edge, either way. Just my initial opinion.
pko
Permalink Submitted by Anonymous (not verified) on Wed, 2010-06-23 18:08
I guess I did not answer your specific question:
If you convert all your TIRAs (all, not just one plan/acccount) you have no 12/31 balance and your conversion amount will be used to calculate the pro-rata percentage (see Tax Form 8606) – http://www.irs.gov/pub/irs-pdf/f8606.pdf
pko
Permalink Submitted by Edward Czapor on Wed, 2010-06-23 18:40
The goal should be to convert when the market is low so that subsequent gains are in the Roth tax free. The year end value must be used for the year of conversion. Although it is true that if the year end value is high the taxable amount will be higher for a partial conversion, but you also would be using up less of your basis. With a 100% conversion, the taxable amount will be the same no matter what the market value since 100% of the basis will be used. As PKO points out your year end balance will be zero and the taxable amount will be calculated on the converted amount added back. Perhaps you should be more concerned with the tax effect of a 100% conversion, although you can always recharacterize.
Ed C.
Permalink Submitted by Alan Spross on Wed, 2010-06-23 23:07
Ed is correct.
The original post indicated converting “100% of the IRA”. If this means 100% of ALL TIRA, SEP and SIMPLE IRAs and no new contributions are made, then the year end value on the 8606 will only be the value at the time of conversion.
But if 100% is only one IRA and there are other TIRAs not converted OR any new regular contributions or rollovers from 401k etc are done, then those amounts and the gains or losses they generate through year end will change the adjusted account value on the 8606. Gains would increase the taxable portion, losses would reduce it. QRP rollovers or deductible contributions would increase the taxable portion, non deductible TIRA contributions would reduce it.
Bill should also note that 2010 conversions are not taxable until 2011 and 2012 unless the taxpayer opts out of the deferral and reports all the income in 2010. Finally, the taxable AMOUNT of a 2010 conversion will NOT change due to IRA activity in 2011 and 2012, BUT separate 2011 and 2012 conversions or distributions will produce a separate taxable amount for those years added to the deferred 2010 amount.