I'm currently in the process of this myself on one of my trading accounts that has taken a beating from trading GDXJ and JNUG. Make sure you don't pay taxes with the funds you are converting, and you don't have to do it all at once, but that's what I did on this account.
https://www.scottrade.com/documents/formscenter/Bysis_SF2350_DirConverReq.pdf
This is update #1988 for Tuesday early morning, April 1, 2014.
Today's second main topic is Roth conversions.
When making financial decisions, trying to figure out whether a particular asset will go up or down may be an educated guess--but it is still a guess. However, with tax planning, there are clear winning and losing strategies. A few rare strategies allow you to change your mind if you were wrong, so you really can't lose. Therefore, even if you sometimes make inferior trading moves, you can more than compensate for these shortcomings by making especially intelligent tax planning decisions. I will give a specific useful example in this update.
I could easily write an entire book about this topic, so I'll try to focus on the most important points. Most tax "planning" is anything but intelligent, with investors mostly adopting ridiculous losing methods such as tax-loss selling. Those who sell assets during the final weeks of the calendar year may reduce their tax bill for that year, but will usually end up increasing it in future years and causing other problems by converting potential long-term capital gains into short-term gains, by selling the most oversold assets which are likeliest to rebound strongly during the next few years, and by making unnecessarily frequent transactions when they should be most patient. Incompetent tax professionals also tend to recommend strategies such as making charitable donations or otherwise increasing expenses in December without regard to whether the next year will involve a significantly higher or lower income. As a rule, you should accelerate income into years when your overall income is lowest, and lump together deductions during years when your income is highest. If you sometimes claim the standard deduction, you should lump itemized deductions together once every two or even three years, since otherwise they may be useless. It is understandable that accountants will promote their services as saving clients money in the short run, since that is a much easier selling point than the more involved task of making a long-term plan over a period of years or decades.
One strategy which is underrated is the one which I have been doing most consistently since June 2013, which is converting depressed assets from non-Roth retirement accounts into Roth retirement accounts. Let's suppose that you took a tax write-off in 2013 or earlier for contributing money to a 401(k), 403(b), 457, Keogh, SEP-IRA, traditional IRA, or some other non-Roth retirement account. If you did this with ten thousand dollars, then you were able to reduce your income by ten thousand dollars. Let's assume that you put the money into GDXJ which is now worth six thousand dollars. How can you benefit from this decline? You can convert your GDXJ holding into a Roth IRA, which locks in the six-thousand-dollar valuation for purposes of paying federal and state income tax next April 15, 2015. In other words, a year from now you'll have to pay taxes on the amount which you converted into a Roth based upon the value when you converted it. Assume that GDXJ does nothing more exciting than simply returning to its original valuation of ten thousand dollars. You were able to deduct ten thousand on a previous year's tax return; then you paid tax at the six-thousand-dollar level; and now it's worth ten thousand again. You therefore got a free gift from the U.S. government and your state government, since you paid taxes on your holding at 6K instead of 10K. In addition, all future gains in your Roth account will be tax free no matter how high it goes before you sell it. If you never spend the money in your Roth and it is inherited by a young person who will be able to withdraw the money gradually over a period of several decades, some of the gains might continue to be tax free for an entire century.
I have therefore been converting as much of my retirement accounts as possible into Roth retirement accounts in 2013-2014. I would do so even more aggressively, but if I convert too much in any given year then it will cause my tax bracket to be too high, so I am acting gradually. I plan to keep some of the money in non-Roth retirement accounts to donate to charities, where there is no advantage to having a Roth account. For all non-charitable purposes, the only good retirement account is a Roth account, because that is the only one where the eventual recipients won't have to pay taxes. This is especially true if your heirs are in high tax brackets. Because I used to have several employers and later began my own business, most of my non-Roth money is in traditional IRAs which were converted from 401(k) and 403(b) accounts of former employers, along with SEP-IRAs which represented a percentage of my Schedule C profits.
If your net worth is high enough to cause you to have to pay estate taxes, then it is especially important not to have money in non-Roth retirement accounts except for those which are earmarked for charities. The reason is that there will be double taxation on the amounts which are subject to estate tax: once when the estate is evaluated for estate tax purposes by the federal government and your state, and a second time when the beneficiaries of non-Roth accounts are required to take out money each year and pay taxes each year based upon ordinary income rates. For each dollar which is in a non-Roth retirement account which helps you to exceed your estate tax exemption, you will be taxed at roughly 35% by the federal government, various amounts by the state (15% for New Jersey, for example), and then the remaining 50% will be taxed as much as 50% by the federal and state governments who will assess the withdrawals by your heirs. This will result in an approximate 75% total tax which will apply to non-Roth retirement accounts. It is also possible that Congress will enact future limitations on the combined total of all non-Roth retirement accounts, so if you don't make this conversion sooner rather than later, you may have to do so eventually in larger annual amounts which will cause your current tax bracket to be notably increased. I continue to be surprised that those who have the highest net worth--including Mitt Romney himself, according to the data which was released when he was running for President--don't seem to be taking action to deal with this important issue.
I have been attempting to convert whichever shares are the most depressed at any given time. Last June and July, I converted mostly mining shares; then I switched to emerging markets in August and September; didn't do much in October or November; shifted back into mining shares in December; and then during the first quarter I have shifted back and forth between whatever seemed to be most compelling. In general, whatever I would be most eager to buy if I had unlimited cash reserves has been whatever I have been transferring in the largest quantities. I haven't completed my transfers, and in fact did some today for gold and silver mining shares. I have temporarily stopped transferring emerging-market equity funds because of their recent strong rebounds. In the end, I'm sure that some funds will remain untransferred, so eventually I'll sell them in a year or so and hope that there will be a future opportunity to shift HDGE or TLT or some future investments into Roth accounts. I'll probably leave one or two non-Roth accounts alone with the intention of using them for future charitable inheritances.
Usually, if you buy something and it goes down in price, then that's too bad. However, with these transfers, it's a win-win situation. Suppose that I transfer an asset--let's say KOL--and it goes down further instead of rebounding for the next year. You're probably thinking that I'll wish I hadn't converted it in the first place. However, I don't have to worry, because the IRS will allow me to retroactively change my mind as late as October 15 following the year in which I did the conversion. So if I decide by October 15, 2015 that it was a bad idea to transfer my KOL shares from a SEP-IRA into a Roth IRA in 2014, I can reverse the process. I fill out a form stating essentially that I changed my mind, and I'm going to put KOL back into my SEP-IRA. I have to make some calculations as to how KOL performed during this period, which most tax software can handle competently. I can then decide at a later date to try again with KOL whenever I think it's ready to rebound. If I'm right and it recovers, then I do nothing further; if I'm wrong again, then I recharacterize the transfer again and move it back into my SEP-IRA. I can keep trying over and over until I finally get it right. This is like being able to undo a purchase if a stock goes down, and therefore I am astonished how few people utilize this method in order to save money at zero risk. Probably I should have dozens or hundreds of accounts where I am constantly transferring back and forth, and in fact most brokerages now charge modest fees for recharacterizations (although not for rollovers themselves) because some people were abusing this process to achieve a risk-free heads I win, tails you lose scenario involving thousands of small back-and-forth transfers. As a former devotee of numerous board games as a kid, I can appreciate why some "nerdy" person would get great pleasure out of doing this. The number of total transfers I have done already exceeds one hundred, though in theory I probably should have done closer to ten thousand to maximize my gains (and drive my brokers crazy).
http://truecontrarian-sjk.blogspot.com/
