Roth Conversion Timing
We will be doing our annual Roth Conversion this month, and I cannot figure out what time of the month is best.
Is it best to sell the mutual fund on, or before the ex-dividend date, or on, or after the pay date of the dividend of that fund?
Which makes most sense?
Thank you for any information you can provide for us.
Permalink Submitted by Alan - IRA critic on Wed, 2021-12-15 23:12
Fund record dates, ex div dates, and payable dates are usually within a week of each other. It does not matter whether the conversion is done before or after these series of dates, but if you want to control the converted amount, you should not request a conversion in the middle of these dates. Of course, since it is already mid December, there is a risk that any further delay in the conversion could result in the conversion not being processed before year end, giving the usual holidays, year end rush, and possible staffing issues. WIth commissions at or close to 0 for many securities, you may also want to redeem the funds to cash, convert the cash, and then reinvest in the Roth IRA.
Permalink Submitted by Peter Karakondis on Thu, 2021-12-16 01:41
Thank you for your response. I’m still confused. “if you want to control the converted amount, you should not request a conversion in the middle of these dates” What do you mean by “control the converted amount”? And, “since it is already mid December, there is a risk that any further delay in the conversion could result in the conversion not being processed before year end” Last year we did our conversion (with Vanguard) on 12/28, and that was both our trade and settlement date. 12/29 was the settlement date for buying back into those funds, inside the Roth IRA. Are you saying that there is a risk that the conversion may not happen that quickly, or maybe that it depends on the financial institution? “It does not matter whether the conversion is done before or after these series of dates” So it doesn’t make any difference if we sell, and then buy back the fund (inside the Roth) before the dividend is paid out, or if we sell (and then convert) after the dividend is paid out, and then buy into the fund inside the Roth? If it makes no difference, would you suggest doing the conversion now, before the record date? I am very grateful for your help in clarifying all of this.
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-16 02:07
Is this a conversion of the entire TIRA balance, or a partial conversion? If a partial, are you going to specify a certain number of shares for each investment you want converted, or if you just indicate a dollar amount how will VG determine which investments are converted to generate your dollar amount? Pending your response, I would favor requesting the conversion now when you are sure it will get done. I believe VG has posted the applicable dates of year end distributions on their site, so you can determine whether your request would be completed before the process starts or not.
While custodians differ in year end processing efficiency, and VG got it done at year end last year, the conditions may have changed at VG since last year. There is another Covid spike going on now. To be clear, if you complete the conversion before the record date when you have less shares and a higher NAV per share or after the fund has reinvested the dividend and/or cap gains, if the market price stays the same your conversion will be of the same value, just will involve more shares, but an offsetting lower NAV due to the fund distribution.
Permalink Submitted by Peter Karakondis on Thu, 2021-12-16 20:11
Thank you, I should have more fully explained our situation. This will be a partial conversion, and we want to convert the maximum amount possible within the 12% tax bracket. We planned on waiting until the Ex-Dividend date (12/23) for the funds in our taxable account, so that we would get a more accurate estimate for the total amount to convert. The Ex-Dividend date for the funds we wish to convert is 12/29. If, by 12/23, we knew the exact amount we wanted to convert, would it make sense to move that amount from those funds into the settlement fund (within the TIRA), and on the following day, do the conversion? Or would you recommend that, on 12/23, we calculate the number of shares to sell to reach that amount, which should give us a close enough figure, depending on price fluctuation? I did call Vanguard twice, and was told that, even if we waited until 12/29, if we requested conversion online before the 4PM (ET) deadline, it would be processed before the end of the year. Thanks again for your time and help. I hope I’ve been clear enough with my questions.
Permalink Submitted by David Mertz on Fri, 2021-12-17 01:49
With the TIRAs that I have, in-kind Roth conversions can only be done by specifying the number of shares to convert, precluding precise control of the dollar amount that is converted. Instead, I always sell a dollar amount of a particular mutual fund within the TIRA, convert this dollar amount to Roth and then make a fund purchase within the Roth IRA. That makes the timing of dividends irrelevant and gives me precise control over the dollar amount converted. That money is out of the market for a day or two, but I don’t really try to time the market so I don’t worry about that.
Permalink Submitted by Peter Karakondis on Fri, 2021-12-17 18:32
Thanks for your reply. One thing I forgot to mention was that I plan on selling all of the shares of one of the mutual funds involved, so I will not know the exact dollar amount until after the market close of that day. That’s why I was thinking of selling all of those shares, then putting that amount into the settlement fund, within that TIRA. That way, I will know the exact amount, and can then sell a dollar amount from the other fund, in order to reach the total that we want to convert. But to figure the maximium amount we can convert to stay within the 12% tax bracket, we have to wait until 12/23, so that we can see the dividend amounts from our taxable accounts. I hope that makes sense. I think I’ve given up on trying to understand if it is better to sell and buy before or after divdends are paid out (or if it even makes any difference). Thanks again for your reply.
Permalink Submitted by Alan - IRA critic on Fri, 2021-12-17 23:22
Other than market performance it does not make a difference whether you sell before the ex div date or after. If you sell prior, your higher NAV will be offset by fewer shares. After, your NAV drops by the same amount as the value of additional shares you acquired if you are reinvesting the dividend or cap gain.
It wasn’t initially clear that you had taxable brokerage accounts where the distributions would change your taxable income for 2021. The estimates released by the fund companies are just that, they tend not to be spot on, so if you want to convert just to the top of your 12% bracket, you would wait, but not at the risk of the custodian somehow failing to execute the conversion. That would be much worse than spilling into the 22% bracket by a couple hundred dollars.
Permalink Submitted by Peter Karakondis on Sat, 2021-12-18 17:31
Sorry I forgot to mention the taxable account in my original question. On Monday I will do a Roth conversion with a dollar amount that will bring us close to the 12% tax bracket limit. And on 12/23 we expect to have the dividend figures for our taxable account, and can then probably convert an extra few hundred dollars to bring us just under the 22% bracket. I will no longer wait until such a late date to do our year-end conversions and take the risk of it not being executed on time. Thanks for once again explaining the ex div date/Nav offset. It now makes sense to me.