Please respond to this statement:
It is better to roll over your traditional IRA during a bear market than a bull market (as we are in now) so you can get any recovery gains “tax free”.
Agree or disagree? Why or Why Not?
I did a large amount in the spring of 2020. Trad to Roth. Just as Covid was ramping up and there was a lot of fear. I paid a hefty tax bill that year. But it paid off.
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If you can manage to time the market, it’s best to do a conversion at a low in the market, to generate less in taxes. Of course, the problem is figuring out how exactly to time the market.
I would also point out that minimizing taxes may be accomplished by doing Roth conversions over multiple years. Additionally, if you don’t have other ordinary income sources, leaving enough in your Traditional IRA so that you can make withdrawals up to your standard deduction amount can also help minimize taxes over your lifetime.
AJ
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Just wait until the market drops 20%.
Until then, there is no need to interrupt compounding.
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Which works from a timing perspective unless the market is only halfway through a 40% drop. 
AJ
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Hi @darrellquock,
It is best to do a conversion when the prices of the securities you are transferring is lowest. Read that as “more shares converted for the same money.”
What if the “market” goes up 60% before that 20% drop or as AJ mentioned that the 20% drop is just the beginning.
Between 2010 and 2022, I did annual conversions every year. Other than 2010, I did them primarily on the first business day of the year. A few years I did some more during the year.
In 2020, I did some additional in April which might be the single best timing I ever fell into. Might have been nice to have that January pile converted in April also, but …
But I look at it like this:
On Feb 22, 2020, our portfolio was up 20.93% YTD.
By Mar 18 we had dropped 34.82% which included an 11.83% drop on Mar 16, our worst single day drop. It was at -19.83% YTD.
On May 12 our portfolio closed at +21.29% YTD, fully recovered.
On Dec 31 we were +102% YTD and 2 days later I did another conversion!
If you play with the numbers with fairly perfect hindsight, you can easily determine exactly when I could have saved around $25,000 in Fed taxes paid but then the Community Foundation might have lost an extra $100,000 of off-setting donations.
I look at it this way:
On January 1st I look at a bright and rosy future for the year. Sure there are problems but they will eventually work out.
A while back, I looked at our portfolio since retiring in 2005. We had 6 years with negative results. When I added back withdrawals for the year, it was just 2 years that were minus, 2008 and 2022.
What compounding gets interrupted? You move shares of stock, ETF’s, etc from one account to another. No selling and buying. Just moving existing assets.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
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The challenge is that you don’t know when the market will punish stocks — or particularly, the stocks you own. If the market goes on a long-term bull run, you will likely have wanted to convert before that bull run…
There are two key reasons why many people consider Roth conversions:
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To avoid or minimize RMDs. With a large traditional retirement account, you will be forced to take large distributions from your traditional plans, whether you need the money or not, once you reach RMD age. That will add income taxes, make more of your Social Security taxable, and raise your Medicare part B and D premiums.
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To “tax arbitrage” inheritance for those you leave behind once you pass away. Key such people include a surviving spouse who winds up single and/or high-income children who would be subject to RMDs / 10-year drawdowns on inherited retirement plan money.
Of course, Roth conversions aren’t free. You pay income taxes on the converted amount, and if you’re on Social Security and/or Medicare when converting, those same interplay issues apply. That also argues for making any conversions earlier, if possible, in a world where you can’t predict the market but where over time it generally is expected to rise.
Assuming Roth conversions make sense at all for a person, the following strategy seems fairly attractive to me. It’s based on combining what I’ve seen across a handful of financial YouTubers, so I can’t take full credit for it, but I don’t think I’ve seen the whole thing set out exactly like this…
The strategy targets 4-5 mini-conversions per year, with the flexibility to adjust based on the performance of the market.
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Remember that if you’re subject to RMDs, those RMDs must be taken before any Roth conversion. Note that if you are subject to RMDs, you can have up to 100% of the RMD amount withheld as taxes, which could be useful to cover the conversion taxes.
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At the beginning of the year, estimate the amount you want to convert, based on key factors like your traditional account balance, attained age during the year, anticipated other income, tax and cost implications, and marital status.
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Split that estimated conversion into 4 equal parts. The base plan is to convert 1/4 of that amount just after the beginning of each quarter, paying the applicable income tax estimate by the deadline for each of those quarters. If you need to pay the conversion tax estimate from the amount you are otherwise converting, you may want to have it withheld directly from the conversion.
(This raises a point: if you’re under age 59 1/2, any amount withheld from a conversion for taxes is generally considered an early distribution and subject to a 10% penalty. That needs to be included in the calculation as to whether a conversion really makes sense.)
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As the year nears its close and you have a clearer picture on your total income for the year, consider a 5th conversion to “top off” any available space you may have in a low tax bracket and/or buffer before you hit some important milestone like an anticipated IRMAA (Medicare premium) income cliff.
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If the market drops 20% or more at any time in the year before that potential 5th conversion, pull forward your next conversion to take advantage of the downturn.
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If the market drops 20% or more after a 5th conversion but when you still have time to complete another conversion, you can consider whether it makes sense to cross that milestone /cliff.
Note) If at any time during the year, your income unexpectedly skyrockets (example: surprise buyout of a major holding in your after-tax account), you reassess whether the remaining conversions you have planned still make sense.
What I like about this strategy is that it is fairly straightforward while still balancing both the unknowns of the market and the tax impacts associated with conversions. It also has a bias towards action, which is helpful if conversions make sense overall.
Regards,
-Chuck
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If the market goes up 60%, your traditional IRA is going up along with it. No harm, No foul. You should be smiling.
No one can time bear markets, but they will be coming. Just sit patiently for it to arrive.
Hi @darrellquock,
I do not understand your point. You want to make a conversion of some assets to Roth, right?
If a stock is $100 today and you decline doing a conversion of it because you want a 20% correction before you do a conversion, right?
It grows to $160 then corrects by 20% to $128 and then you are “happy” to do the conversion? You pay 28% more tax for the same share and that 28% growth was in the traditional IRA rather than the tax-free Roth and you are saying “No harm, No foul”?
If you are trying to do level conversions, by dollar amount, you move 80 shares instead of 100 by waiting in the above scenario.
Since the markets, in general, move up 2 out of 3 or 3 out of 4 years (depends on who you are reading), I go for get it done sooner than later.
Something I failed to mention earlier was I always tried to move my high-growth prospects first. So Netflix before Kimberly Clark. I wanted the growth in the Roth rather than leaving it in the trad IRA where it would just increase the eventual taxes to be paid.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
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Except you will have 60% more to pay taxes on when you convert.
AJ
I’ve never converted assets other than dollars, not shares of any holdings. And my annual conversion is whatever won’t take me past the 34% tax bracket. As such the market, bull or bear, makes no difference to me.
Perhaps I am just naive.
Hi @RHinCT,
Oh, I’m not believing that! 
But let me ask you this: If you had moved all your NVDA from your trad IRA to your Roth IRA 4 or 5 years ago, wouldn’t that be a nice kick?
For transferring cash from dividends/interest, it makes no difference what the market is doing. In fact, I always transferred all cash every year, then the securities to fill the amount needed.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
Sadly, no. I didn’t buy any NVDA until April 10, 2023. But I do own it now in both IRA and ROTH, overall up 222%.
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