The goal of this process is to lessen and draw out the tax burden of IRA to Roth conversions. If done all at once it can be a hefty tax bill, if done piecemeal it will be small amounts each time. Clearly, if I am doing something one way to avoid taxes there has to be a catch so I will highlight that now briefly (since other places do it much better).
IRA - This money can be pretax (as mine is - due to being 401k rollovers). Additional post tax funds can be added. Eventually these types of accounts, including 401ks, are subject to Required Monthly Distributions (RMDs). Money is not typically accessible before 59.5 years of age without penalty.
Conversion to a Roth - this would create a taxable event. The lesson here is if the amount lost by taxes now (compounded) is greater than the amount saved via future taxes thanks to the Roth the conversion should not take place.
Roth - the X factor here is that money in a Roth is 100% in the owner's control. It is subject to no future taxes or required distributions, assuming the law and tax code stay the same. Each dollar there is yours, theoretically. Money is also not typically accessible before 59.5 years of age without penalty, excepting for a few special circumstances where no taxes are leveled.
Strategy: to avoid unnecessary taxable events, I will move around 1 to 2 "positions" a year. At this rate I will be able to move the whole IRA to my Roth in about 25 years - perfect timing, to maximize growth and minimize taxes (pending changes in that and the law of course).
Process: Since my accounts are all at the same brokerage, I can for no fee transfer single positions after a few mouse clicks. Maybe its too simple, but works well for my needs. If I want I can transfer partial positions down to the share. This time I moved a whole position, but in the future I will likely be moving smaller pieces over to the Roth.
For my first / test conversion I moved my position in Matthews International (MATW), valued around $900 from my IRA to my Roth. This was a reduction in initial investment value. Taxes should be minimal.
Part 2 will happen next calendar year.
All changes will be reflected in my portfolio at the end of the month.
Are you planning on funding your Roth this way?
- Long MATW