Best time for ROTH Conversions

Submitted by Vaylu Maymon on Tue, 2018-03-06 17:31

Hello,

Thank you for the opportunity to present my questions.

I will be 67 in June 2018. Current income is from Social Security, dividends from IRA’S and contract work, which I estimate earnings of 5,000-6,000 for 2018. I will need to pay taxes on earnd income.

Investments-ROTH, 403b, IRA(I) and IRA(II), all with same brokeage firm. IRA(II) funded in 2014 from frozen pension plan. Investment’s in ROTH and IRA’S are dividend stocks.

I want to do a series of ROTH conversions, starting 2018, 2019 and 2020. RMD’s start in 2021. I plan to stay within the 12% tax bracket for 2018 taxes.

My question, is it better to start the ROTH conversions from the IRA’S now, since the value of some of the stocks is down or wait until the fourth quarter of 2018 and then do the conversions? Also, if I start the conversions now, will this result in paying quarterly taxes to IRS in the future?

Regards,
Vaylu



Submitted by Alan - IRA critic on Tue, 2018-03-06 18:42

  • It is not possible to know whether your IRA investments will be higher or lower 9 months from now. You can convert at different times the rest of the year to avoid converting on a single date. There is no limit to the number of conversions you do, and the 1099R you will receive next January will just add them up if done from the same TIRA account. As always, you should estimate what your marginal rate will be once RMDs begin and avoid converting if that marginal rate is expected to be lower than what you are paying for the conversions. Since each conversion will reduce the RMDs you will have, the first dollars converted are most likely to be done at a rate that is lower or equal to your expected rate in retirement. Do not overshoot because you can no longer recharacterize any conversions.
  • Since you will have some earned income, you can still make a regular Roth contribution up to 6500, but not more than your earned income. You can do this without increasing your taxable income as conversions will do. And do not overlook the savers credit, which can provide a credit, but only if you convert a modest amount.
  • If you do not have another source for withholding, you will need to pay quarterly estimates, but the safe harbor is 100% of your prior year tax liability. You should start with a 4/17 estimate unless you want to convert late in the year and deal with the complex 2210 annualized income installment method, under which you only have to pay in estimates based on the quarter your income is earned. 

Add new comment

Log in or register to post comments