Waiting for 10% market pullback, to do conversion

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Lazareth
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Waiting for 10% market pullback, to do conversion

Post by Lazareth »

From my Investment Plan: "In 2021, do $80K Roth conversion when S&P pulls back 10%."

I figure I can convert that amount of Schwab equity index fund shares and keep within the 22% bracket. Still waiting for the pullback, while the market keeps moving away from that goal. But I am happy about the overall portfolio growth.
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carolinaman
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Re: Waiting for 10% market pullback, to do conversion

Post by carolinaman »

Good luck. What if the market goes up another 10% this year and does not have a pullback? Do you still do your conversion?

Does it matter that much where the market is at when you convert? If you do your conversion now, you will be out of market for a few days at most. You can invest in like funds in the Roth, so unless you get really unlucky and there is a major market change in that small window of time, the only change is the taxes you paid, and depending upon where you pulled funds to pay the taxes, that would not matter either.

Maybe I am missing something here.
Last edited by carolinaman on Sat Jul 24, 2021 9:02 am, edited 1 time in total.
delamer
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Re: Waiting for 10% market pullback, to do conversion

Post by delamer »

Did you have a question about your plan? Seems that you should substitute “if” for “when.”

And do a conversion to take advantage of the 22% bracket even if there isn’t a correction.

It’s nice if you can convert more shares due to a (presumably) temporary market drop. But why make that a condition for converting?
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khunron
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Re: Waiting for 10% market pullback, to do conversion

Post by khunron »

Okay.
tibbitts
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Re: Waiting for 10% market pullback, to do conversion

Post by tibbitts »

I have a minimum amount I need/want to convert in 2021 too, but I convert almost every day... roughly dividing the minimum amount over the number of trading days. Of course that generally hasn't worked out so far (as you would expect, on average) except for a few funds that I'm less inclined to convert first (of course.) If I do get a significant pullback I'll increase the amounts of my conversions; otherwise I'll just keep plodding along. But "significant" would be more measured against January 1 than from all-time-highs or some "10%" arbitrary value.
Robot Monster
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Re: Waiting for 10% market pullback, to do conversion

Post by Robot Monster »

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” -- old Klingon proverb
2pedals
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Re: Waiting for 10% market pullback, to do conversion

Post by 2pedals »

You might want to rethink your plan and rewrite your plan for this kind of scenario (the simple way is to delete). Sometimes plans are not practical to implement successfully. I avoid market timing.
Tamalak
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Re: Waiting for 10% market pullback, to do conversion

Post by Tamalak »

Not all years have a 10% pullback.. your plan needs instructions that are actually possible to follow.
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quantAndHold
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Re: Waiting for 10% market pullback, to do conversion

Post by quantAndHold »

I’m not sure what the question is, but I’ll ask one…

So if the market goes up 20% before it pulls back 10%, have you come out ahead of if you just did the conversion in January?
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Re: Waiting for 10% market pullback, to do conversion

Post by fposte »

I think it would make more sense to focus on the dollar amount you seek to convert in the year. If there's a dip, you're converting more of the account at $80k, which is a nice bonus, but you're not putting the actual decision to convert at the mercy of the markets. (I confess I did speed up a planned conversion when a market dip hit, but ultimately it didn't make a ton of difference.)
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Re: Waiting for 10% market pullback, to do conversion

Post by firebirdparts »

You should change your username to Lazarus. Cause you just need the market to die for about 4 days.
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David Jay
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Re: Waiting for 10% market pullback, to do conversion

Post by David Jay »

Robot Monster wrote: Sat Jul 24, 2021 9:46 am “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” -- old Klingon proverb
Sounds more like a Ferengi proverb.
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Re: Waiting for 10% market pullback, to do conversion

Post by tibbitts »

Tamalak wrote: Sat Jul 24, 2021 10:10 am Not all years have a 10% pullback.. your plan needs instructions that are actually possible to follow.
The most frustrating case is where you have a 9.9% pullback but never get to 10%, so you miss that opportunity entirely.
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Leif
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Re: Waiting for 10% market pullback, to do conversion

Post by Leif »

You might get your 10%. But it is possible it will go up 20% first.

I do my conversions quarterly. So I have a predetermined amount I will convert each year. If the market is down 20%+ at the time I convert I will convert more. My final conversion at the end of the year I will true up to my predetermined amount.
lazynovice
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Re: Waiting for 10% market pullback, to do conversion

Post by lazynovice »

VTI January 1 $192.75
July 23 $227.46

If it drops 10%, you will still not be as low as January 1. But I think you know that and why you posted this.
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arcticpineapplecorp.
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Re: Waiting for 10% market pullback, to do conversion

Post by arcticpineapplecorp. »

what if it goes down 7% like it did in 2019 and you wait and the market goes up (went up 29% that year, see pretty picture below):

Image

what if the market drops 10% and you convert, and then the market falls further like it did last year (down 34% according to pretty picture above).

market timing doesn't work. do the conversion if and when you want but don't wait for some opportune time.
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Re: Waiting for 10% market pullback, to do conversion

Post by BolderBoy »

Lazareth wrote: Sat Jul 24, 2021 8:49 am From my Investment Plan: "In 2021, do $80K Roth conversion when S&P pulls back 10%."

I figure I can convert that amount of Schwab equity index fund shares and keep within the 22% bracket. Still waiting for the pullback, while the market keeps moving away from that goal. But I am happy about the overall portfolio growth.
Change your IPS. Do Roth conversions to the top of whatever tax bracket you identify as the correct one. Don't do them based on market movements.
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Re: Waiting for 10% market pullback, to do conversion

Post by Dottie57 »

fposte wrote: Sat Jul 24, 2021 10:19 am I think it would make more sense to focus on the dollar amount you seek to convert in the year. If there's a dip, you're converting more of the account at $80k, which is a nice bonus, but you're not putting the actual decision to convert at the mercy of the markets. (I confess I did speed up a planned conversion when a market dip hit, but ultimately it didn't make a ton of difference.)
+1
stocknoob4111
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Re: Waiting for 10% market pullback, to do conversion

Post by stocknoob4111 »

it can go up 15% then go down 10%.. in that case you lose
Marseille07
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Re: Waiting for 10% market pullback, to do conversion

Post by Marseille07 »

Time in the market is more important than timing the market.
MrJedi
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Re: Waiting for 10% market pullback, to do conversion

Post by MrJedi »

Looks like a 10% pullback right now would send you back roughly to March 2021 levels.
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Lazareth
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Re: Waiting for 10% market pullback, to do conversion

Post by Lazareth »

arcticpineapplecorp. wrote: Sat Jul 24, 2021 1:10 pm what if the market drops 10% and you convert, and then the market falls further like it did last year…
market timing doesn't work. do the conversion if and when you want but don't wait for some opportune time.
That did happen. With market down 10% in early March 2020 I converted a similar dollar amount of discounted equity fund shares. The market proceeded to fall to -34% but I was still pleased with my conversion discount.

In prior years I would always convert near year-end when I knew my taxable income amount and could calculate the desired conversion amount. Now income is more predictable and so is my conversion target, so I will take advantage of a market dip (such as 10%) to convert more shares for the same tax expense.

carolinaman wrote: Sat Jul 24, 2021 8:57 am Does it matter that much where the market is at when you convert? If you do your conversion now, you will be out of market for a few days at most....
Maybe I am missing something here.
Yes I believe does make a difference. When the market drops, the fund share price drops. You will convert more shares for the same dollar amount of taxable income.

At Schwab you won’t be out of the market. The calculated number of fund shares are "journalled" out of the traditional IRA and into the Roth using the current (yesterday's closing) mutual fund price. The phone rep had me refresh my summary screen while we were on the call, to view that the conversion was immediately reflected in both accounts.
Last edited by Lazareth on Mon Jul 26, 2021 8:45 am, edited 2 times in total.
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Actin
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Re: Waiting for 10% market pullback, to do conversion

Post by Actin »

If you're that sure of a pullback, why don't you just do a 100x leveraged short on the S&P with that money?
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retireIn2020
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Re: Waiting for 10% market pullback, to do conversion

Post by retireIn2020 »

At Schwab you won’t be out of the market. Schwab converts the fund shares "instantly".
Pretty sure it's the same at Vanguard or Fidelity, why would there be a delay if your keeping it in the same brokerage?
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Re: Waiting for 10% market pullback, to do conversion

Post by Dave55 »

I do the Roth conversion's in December of each year and keep the taxes in the 12% bracket.

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Lazareth
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Re: Waiting for 10% market pullback, to do conversion

Post by Lazareth »

Dottie57 wrote: Sat Jul 24, 2021 4:26 pm
fposte wrote: Sat Jul 24, 2021 10:19 am I think it would make more sense to focus on the dollar amount you seek to convert in the year. If there's a dip, you're converting more of the account at $80k, which is a nice bonus, but you're not putting the actual decision to convert at the mercy of the markets. (I confess I did speed up a planned conversion when a market dip hit, but ultimately it didn't make a ton of difference.)
+1
The dollar amount of 2021 conversion will be $80K. I typically convert at year-end.
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MrCheapo
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Re: Waiting for 10% market pullback, to do conversion

Post by MrCheapo »

Lazareth wrote: Sat Jul 24, 2021 8:49 am From my Investment Plan: "In 2021, do $80K Roth conversion when S&P pulls back 10%."

I figure I can convert that amount of Schwab equity index fund shares and keep within the 22% bracket. Still waiting for the pullback, while the market keeps moving away from that goal. But I am happy about the overall portfolio growth.
I'll go the contrarian way and suggest the OP has a good chance of a 10% correction occurring in the next month or two IF the delta variant really takes hold and infections spike up north of 100,000 new cases a day.

Why? Because then the threat of further shutdowns, travel industry shutting down again etc kick back in.

Now if there is an epsilon variant which can evade the vaccines (because the more people unvaccinated the greater the chance) then we are all screwed and expect a 20+% correction. I hope not.
Carol88888
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Re: Waiting for 10% market pullback, to do conversion

Post by Carol88888 »

Why can't you convert 1/2 now and 1/2 later like it is sometimes suggested for someone with a lump sum to invest half right away and then dollar cost the other half.

(For what it is worth, I am in the correction camp since I still think tapering will cause a hiccup and that the taper will come by the end of this year. Listen to me at your own peril - I never get these calls right.)
Tom_T
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Re: Waiting for 10% market pullback, to do conversion

Post by Tom_T »

I have learned the hard way that it is better to just invest it today. The number of sleepless nights you will have waiting for "the right time" to buy is simply not worth it. If the market drops enough, I will re-balance. If it doesn't drop enough for that, then I don't care.
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Re: Waiting for 10% market pullback, to do conversion

Post by Toons »

If this is long term money (IRA)
Years from now the "dip"
You are waiting for
will be a long forgotten
Memory,
The compounding machine never stops working
Put the dollars to work,
Time In
Not Timing

:wink:
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climbingFool
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Re: Waiting for 10% market pullback, to do conversion

Post by climbingFool »

You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price. You already own the stocks or funds- just moving to already taxed account and suffering the resulting taxable income.
Similarly stocks tend to go up more than down so waiting until end of year to do conversion makes no sense either as a general policy - in my opinion.

I have been doing large 401k or IRA to ROTH conversions for a few years now and I just jump on the first good down market opportunity.
This year my aggressive growth stocks in my "play money" IRA accounts were down a lot in March so I did a large conversion of individual stocks (picking the stocks down the most) in one IRA to ROTH on 3/12/2021 and a smaller conversion of individual stocks that were way down in a different IRA on 3/16/2021. Most of those stocks are already back up considerably. By transferring when stocks are down it's more tax efficient.

Last year when the whole market was down I did a small 401k conversion to Roth401k on March 12, 2020 and a large conversion on March 19 on a very low market day. Those were index fund conversions.

I don't feel like looking up the years before that but I have always tried to time the conversion when the market was down.
rockstar
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Re: Waiting for 10% market pullback, to do conversion

Post by rockstar »

What if the market first goes up 20% before going down 10%? Are you better off?

Good luck.
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Re: Waiting for 10% market pullback, to do conversion

Post by Lee_WSP »

You are highly highly likely to be neither better nor worse off if you mistime the market or time it perfectly.

You will be paying a 22% tax on the conversion and if you pay 22% tax on the tax deferred amount (note that is the marginal rate on the converted amount), it's a wash. Likewise, you will be better or worse off if you would have been in a higher or lower tax bracket if you didn't convert that specific sum.

The only way you "win" is if the amount converted reduces the need for further conversions you otherwise would have had to or wanted to make and but for this conversion, you would not have been able to make the conversion at the same marginal rate.
delamer
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Re: Waiting for 10% market pullback, to do conversion

Post by delamer »

climbingFool wrote: Tue Jul 27, 2021 1:07 am You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price. You already own the stocks or funds- just moving to already taxed account and suffering the resulting taxable income.
Similarly stocks tend to go up more than down so waiting until end of year to do conversion makes no sense either as a general policy - in my opinion.

I have been doing large 401k or IRA to ROTH conversions for a few years now and I just jump on the first good down market opportunity.
This year my aggressive growth stocks in my "play money" IRA accounts were down a lot in March so I did a large conversion of individual stocks (picking the stocks down the most) in one IRA to ROTH on 3/12/2021 and a smaller conversion of individual stocks that were way down in a different IRA on 3/16/2021. Most of those stocks are already back up considerably. By transferring when stocks are down it's more tax efficient.

Last year when the whole market was down I did a small 401k conversion to Roth401k on March 12, 2020 and a large conversion on March 19 on a very low market day. Those were index fund conversions.

I don't feel like looking up the years before that but I have always tried to time the conversion when the market was down.
The OP’s statement was to do conversions “when” the market drops 10%. So the initial implication was that no conversion would happen unless there was a market drop.

But there is no “when” about it. It’s an “if.” And buying on a 10% drop after a 20% rise doesn’t achieve the objective of converting more shares or tax efficiency. The OP would have been better buying before the rise.

Ultimately, no one knows what the market is going to do. If your plan includes conversions of accounts that hold stocks and you plan on converting a fixed dollar amount, odds are high that today is the best day to convert because your stocks are going to be worth more tomorrow.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Waiting for 10% market pullback, to do conversion

Post by climbingFool »

Lee_WSP wrote: Tue Jul 27, 2021 5:03 am You are highly highly likely to be neither better nor worse off if you mistime the market or time it perfectly.

You will be paying a 22% tax on the conversion and if you pay 22% tax on the tax deferred amount (note that is the marginal rate on the converted amount), it's a wash. Likewise, you will be better or worse off if you would have been in a higher or lower tax bracket if you didn't convert that specific sum.

The only way you "win" is if the amount converted reduces the need for further conversions you otherwise would have had to or wanted to make and but for this conversion, you would not have been able to make the conversion at the same marginal rate.
Previous threads have argued this post before. I am 99.999 % sure of this one. The goal is to transfer to ROTH to allow tax free compounding. If I transfer when the stocks are way down for the same tax dollars I transfer a higher % of the portfolio. This is a no brainer. Imagine if there were a flash sale on stocks and one day my stocks dropped 99.99 % and I then did the conversion. It would cost much much less. Doesn't matter whether I transfer the whole portfolio or not it is still more efficient.
Please don't argue I don't know if the stocks will go back up (Japan). With that attitude you might as well not be an investor.
Agreed if stocks go up 20 % then down 10 % not a great deal. I want to do big conversions every year - especially if the market drops a lot earlier in the year it is a no brainer to do all of my conversions then. I prefer to take advantage of any big drops early in the year.
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Re: Waiting for 10% market pullback, to do conversion

Post by fposte »

climbingFool wrote: Tue Jul 27, 2021 10:06 am

Previous threads have argued this post before. I am 99.999 % sure of this one. The goal is to transfer to ROTH to allow tax free compounding. If I transfer when the stocks are way down for the same tax dollars I transfer a higher % of the portfolio. This is a no brainer. Imagine if there were a flash sale on stocks and one day my stocks dropped 99.99 % and I then did the conversion. It would cost much much less. Doesn't matter whether I transfer the whole portfolio or not it is still more efficient.
Please don't argue I don't know if the stocks will go back up (Japan). With that attitude you might as well not be an investor.
Agreed if stocks go up 20 % then down 10 % not a great deal. I want to do big conversions every year - especially if the market drops a lot earlier in the year it is a no brainer to do all of my conversions then. I prefer to take advantage of any big drops early in the year.
I think it's fine to convert on a dip; I did it. What's a bad idea is to plan that you will only convert on a dip and to do so in terms that won't necessarily favor you, which is what the OP is doing and what people are advising them against.

If the OP just changed the plan to "convert $80k in [month] or any time prior to that the market dips 10%" that would be fine. It wouldn't guarantee an advantageous approach, because you'd need a crystal ball to make sure of those, but at least it would get the money converted for sure rather than relying on market timing that may never happen.
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Re: Waiting for 10% market pullback, to do conversion

Post by Lee_WSP »

climbingFool wrote: Tue Jul 27, 2021 10:06 am
Lee_WSP wrote: Tue Jul 27, 2021 5:03 am You are highly highly likely to be neither better nor worse off if you mistime the market or time it perfectly.

You will be paying a 22% tax on the conversion and if you pay 22% tax on the tax deferred amount (note that is the marginal rate on the converted amount), it's a wash. Likewise, you will be better or worse off if you would have been in a higher or lower tax bracket if you didn't convert that specific sum.

The only way you "win" is if the amount converted reduces the need for further conversions you otherwise would have had to or wanted to make and but for this conversion, you would not have been able to make the conversion at the same marginal rate.
Previous threads have argued this post before. I am 99.999 % sure of this one. The goal is to transfer to ROTH to allow tax free compounding. If I transfer when the stocks are way down for the same tax dollars I transfer a higher % of the portfolio. This is a no brainer. Imagine if there were a flash sale on stocks and one day my stocks dropped 99.99 % and I then did the conversion. It would cost much much less. Doesn't matter whether I transfer the whole portfolio or not it is still more efficient.
Please don't argue I don't know if the stocks will go back up (Japan). With that attitude you might as well not be an investor.
Agreed if stocks go up 20 % then down 10 % not a great deal. I want to do big conversions every year - especially if the market drops a lot earlier in the year it is a no brainer to do all of my conversions then. I prefer to take advantage of any big drops early in the year.
The law of multiplication equivalency makes it so.

You are confusing super charging the Roth with after tax dollars with equivalent conversions. Try it, do the math.

After tax conversion x CAGR = (pre tax x CAGR) x (1-tax rate)
Ramjet
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Re: Waiting for 10% market pullback, to do conversion

Post by Ramjet »

You are writing market timing into your investment plan :oops:
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Re: Waiting for 10% market pullback, to do conversion

Post by iamlucky13 »

Robot Monster wrote: Sat Jul 24, 2021 9:46 am “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” -- old Klingon proverb
No, that's wrong.

It's a Ferengi proverb. It does not seem to be written in the rules of acquisition, however.
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Re: Waiting for 10% market pullback, to do conversion

Post by Charon »

Lazareth wrote: Sun Jul 25, 2021 12:03 pm The dollar amount of 2021 conversion will be $80K. I typically convert at year-end.
So not only did you write market timing into your investment plan (as Ramjet said), but absent a drop you typically convert at the end of a year - and thus on average after an entire year of growth.

This seems incoherent.

Are you waiting for a 10% drop from Jan. 1? From the peak? Do you realize that there are plenty of years where the drop you're waiting for never happens (2017, 2019...) - or if it does happen, it comes after, say, 20% growth and is thus more expensive than having converted earlier?

I guess I have a lot of questions, which is ironic since your original post doesn't have any. Not sure why you were posting...
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Re: Waiting for 10% market pullback, to do conversion

Post by KingRiggs »

MrCheapo wrote: Mon Jul 26, 2021 9:51 am
Lazareth wrote: Sat Jul 24, 2021 8:49 am From my Investment Plan: "In 2021, do $80K Roth conversion when S&P pulls back 10%."

I figure I can convert that amount of Schwab equity index fund shares and keep within the 22% bracket. Still waiting for the pullback, while the market keeps moving away from that goal. But I am happy about the overall portfolio growth.
I'll go the contrarian way and suggest the OP has a good chance of a 10% correction occurring in the next month or two IF the delta variant really takes hold and infections spike up north of 100,000 new cases a day.

Why? Because then the threat of further shutdowns, travel industry shutting down again etc kick back in.

Now if there is an epsilon variant which can evade the vaccines (because the more people unvaccinated the greater the chance) then we are all screwed and expect a 20+% correction. I hope not.
We're already up to the Lambda variant, last time I checked... :sharebeer
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Re: Waiting for 10% market pullback, to do conversion

Post by JoeQ »

climbingFool wrote: Tue Jul 27, 2021 1:07 am You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price. You already own the stocks or funds- just moving to already taxed account and suffering the resulting taxable income.


I have been doing large 401k or IRA to ROTH conversions for a few years now and I just jump on the first good down market opportunity.
This year my aggressive growth stocks in my "play money" IRA accounts were down a lot in March so I did a large conversion of individual stocks (picking the stocks down the most) in one IRA to ROTH on 3/12/2021 and a smaller conversion of individual stocks that were way down in a different IRA on 3/16/2021. Most of those stocks are already back up considerably. By transferring when stocks are down it's more tax efficient.

Last year when the whole market was down I did a small 401k conversion to Roth401k on March 12, 2020 and a large conversion on March 19 on a very low market day. Those were index fund conversions.

I don't feel like looking up the years before that but I have always tried to time the conversion when the market was down.
If you agree that performing a conversion at a lower portfolio value is superior to performing a conversion at a higher portfolio, and your policy is to wait for a market dip, then you are market timing; it is no different than delaying a purchase.
climbingFool wrote: Tue Jul 27, 2021 1:07 am Similarly stocks tend to go up more than down so waiting until end of year to do conversion makes no sense either as a general policy - in my opinion.
This is exactly what would happen if you spend all year waiting for a correction that never comes.
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Re: Waiting for 10% market pullback, to do conversion

Post by Lee_WSP »

JoeQ wrote: Wed Jul 28, 2021 2:55 pm
climbingFool wrote: Tue Jul 27, 2021 1:07 am You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price. You already own the stocks or funds- just moving to already taxed account and suffering the resulting taxable income.


I have been doing large 401k or IRA to ROTH conversions for a few years now and I just jump on the first good down market opportunity.
This year my aggressive growth stocks in my "play money" IRA accounts were down a lot in March so I did a large conversion of individual stocks (picking the stocks down the most) in one IRA to ROTH on 3/12/2021 and a smaller conversion of individual stocks that were way down in a different IRA on 3/16/2021. Most of those stocks are already back up considerably. By transferring when stocks are down it's more tax efficient.

Last year when the whole market was down I did a small 401k conversion to Roth401k on March 12, 2020 and a large conversion on March 19 on a very low market day. Those were index fund conversions.

I don't feel like looking up the years before that but I have always tried to time the conversion when the market was down.
If you agree that performing a conversion at a lower portfolio value is superior to performing a conversion at a higher portfolio, and your policy is to wait for a market dip, then you are market timing; it is no different than delaying a purchase.
climbingFool wrote: Tue Jul 27, 2021 1:07 am Similarly stocks tend to go up more than down so waiting until end of year to do conversion makes no sense either as a general policy - in my opinion.
This is exactly what would happen if you spend all year waiting for a correction that never comes.
It just doesn't change anything either way since a Roth conversion is a tax arbitrage decision and has absolutely nothing to do with timing the market.

Although super charging a conversion during a slump is a good opportunistic play similar to a tax loss harvest.
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Re: Waiting for 10% market pullback, to do conversion

Post by Lazareth »

climbingFool wrote: Tue Jul 27, 2021 1:07 am You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price. You already own the stocks or funds- just moving to already taxed account and suffering the resulting taxable income.
Thank you!

It is in my plan that I will exploit a tax-efficient conversion opportunity when the market pulls back 10%. I shared that with the group.

It's not complicated. But I do appreciate the conversation about when to convert. My preference typically year-end when I am confident of my taxable income.
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Re: Waiting for 10% market pullback, to do conversion

Post by Statistical »

VTI (proxy for the whole market) is up ~15% YTD. So even if the market tanked 10% tomorrow it was still 5% worse to wait compared to just doing the conversion on Jan 1.

Timing the market is a fools errand. How or why you are timing the market doesn't change the nature of the errand.

Markets go up more than they go down. Markets have more up days than they have down days. If you want to do a $50K conversion each year might as get it over in January.
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Re: Waiting for 10% market pullback, to do conversion

Post by Statistical »

climbingFool wrote: Tue Jul 27, 2021 1:07 am You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price.
Which doesn't change anything. The market is up more than 10% this year. Waiting for the efficient time (aka trying to time the market) results in worse efficiency. Even if the market does go down 10% it will still be worse than just doing it at the start of the year.

No matter the reason for timing the market it is still a fools errand.
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Re: Waiting for 10% market pullback, to do conversion

Post by grabiner »

climbingFool wrote: Tue Jul 27, 2021 1:07 am You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price. You already own the stocks or funds- just moving to already taxed account and suffering the resulting taxable income. Similarly stocks tend to go up more than down so waiting until end of year to do conversion makes no sense either as a general policy - in my opinion.
If you convert and pay taxes from the converted amount, it doesn't matter when you convert. If you pay taxes from a taxable account, it is slightly better to convert at a lower price, and thus to convert earlier since the market is more likely to go up than down.

Suppose that you have $10,000 in a traditional IRA, and you convert to a Roth IRA, paying 22% tax from the IRA balance. You have $7800 in the Roth, and if the market doubles, you have $15,600 in the Roth. If you wait to convert, you will convert $20,000 and pay $4400 tax, also leaving $15,600 in the Roth.

Now suppose that you have $10,000 in a traditional IRA and pay tax from a taxable account, so that you can convert, pay $2200 tax, and have $10,000 in the Roth, which becomes $20,000 after the market doubles. If you wait to convert, you will have $20,000 in the Roth, but the taxable account will not grow from $2200 to $4400 to cover the doubling of the tax, as you will pay some tax on the gain.
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Re: Waiting for 10% market pullback, to do conversion

Post by mffl »

Lazareth wrote: Sat Jul 24, 2021 8:49 am Still waiting for the pullback
See, that's the problem. As an example, 11/15/1996 the S&P crossed 740 for the first time. It would never have a 10% pullback ever again. Not 9/11, not the 2002 recession, not the GFC, not Covid. It's now almost 600% of that level. This is despite the prior year 1995 being up 35%. You'd still be waiting for the pullback. This is a major reason why market timing sucks -- I'll get in when there's a pullback. Decent chance there never is one. (I picked this date because it's the first time the S&P hit 10% more than the 666 low in March 2009.)

I'm not saying the S&P will never have a 10% pullback from 4,400, but I'm saying it's possible. It would be interesting to see what percentage of new S&P daily all time highs actually never suffered a 10% pullback ever. I don't know, but I wouldn't be surprised if it was more than half of them.
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Re: Waiting for 10% market pullback, to do conversion

Post by JoeQ »

Lee_WSP wrote: Wed Jul 28, 2021 3:32 pm
JoeQ wrote: Wed Jul 28, 2021 2:55 pm
climbingFool wrote: Tue Jul 27, 2021 1:07 am You guys posting it's time in the market don't understand the question. Original poster already in the market - by converting 401k to Roth when the market is down you convert a bigger percentage of your funds for the same tax dollars. Nothing to do with time in the market to wait for this dip. the dip is waiting for tax efficiency - not buying stocks at a good price. You already own the stocks or funds- just moving to already taxed account and suffering the resulting taxable income.


I have been doing large 401k or IRA to ROTH conversions for a few years now and I just jump on the first good down market opportunity.
This year my aggressive growth stocks in my "play money" IRA accounts were down a lot in March so I did a large conversion of individual stocks (picking the stocks down the most) in one IRA to ROTH on 3/12/2021 and a smaller conversion of individual stocks that were way down in a different IRA on 3/16/2021. Most of those stocks are already back up considerably. By transferring when stocks are down it's more tax efficient.

Last year when the whole market was down I did a small 401k conversion to Roth401k on March 12, 2020 and a large conversion on March 19 on a very low market day. Those were index fund conversions.

I don't feel like looking up the years before that but I have always tried to time the conversion when the market was down.
If you agree that performing a conversion at a lower portfolio value is superior to performing a conversion at a higher portfolio, and your policy is to wait for a market dip, then you are market timing; it is no different than delaying a purchase.
climbingFool wrote: Tue Jul 27, 2021 1:07 am Similarly stocks tend to go up more than down so waiting until end of year to do conversion makes no sense either as a general policy - in my opinion.
This is exactly what would happen if you spend all year waiting for a correction that never comes.
It just doesn't change anything either way since a Roth conversion is a tax arbitrage decision and has absolutely nothing to do with timing the market.

Although super charging a conversion during a slump is a good opportunistic play similar to a tax loss harvest.
If it is not "timing the market", why not do it today?
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Re: Waiting for 10% market pullback, to do conversion

Post by Lee_WSP »

JoeQ wrote: Thu Jul 29, 2021 8:51 am [

If it is not "timing the market", why not do it today?
That's my point.... If it isn't tax advantageous, there's no reason to convert in the first place.
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