Roth Conversion on Market Correction
I am married and 58 years old and trying to strategically do Roth conversions till I am age 70 when I will take social security. We have about 200k in Roths and 1.2 million in IRA / 401k eligible to convert. My wife has been a stay at home mom and I currently work at a non-profit. Annually we have been converting 10 – 15k to fill up the 12% tax bracket. That 10% jump to a 22% bracket seems a bit painful.
I have thought though that if we have a market correction of 10 % or more, I’d try to do a large conversion while stocks are cheaper to fill up the 22% bracket and possibly the 24% bracket. I do have money outside or retirement accounts to pay the associated taxes. Does this make sense?
Permalink Submitted by Alan - IRA critic on Wed, 2020-02-26 00:26
You are already doing the “no brainer” conversions up to the top of the 12% bracket, but for additional amounts you should compare the cost (24% plus state, if any) with your estimated marginal rate in retirement each year. A long term conversion plan should ignore market timing issues that could throw you off target. Perhaps you convert half your target in March and the other half 6 months later or use another method that is consistent from year to year without regard to the market levels at the time. There will be many corrections in the next 12 years and probably a couple bear markets, so I would not put any significance in a current correction which might be just one day away. The tough part is how much into the 24% bracket you wish to go. You might consider such things as whether you have good LTC coverage, if the mortality expectations between you and spouse differ considerably, and if you want to factor in the expected tax bracket of your remainder beneficiaries. Each of those factors might produce a clear indicator for being more or less aggressive with your conversions. Another factor is how much your bracket changes in 2026 with the sunset of the TCJA. No easy answers. Finally, note that most conversion analysis assumes that you invest your Roth in the same manner as your TIRA.