Any further thoughts about Roth tactics? Maybe we are passing a deadline for re-characterizing a Roth conversion?
Is it not a good bet to put your most high potential return investments in it, since gains are tax free (assuming you are willing to lose all as well)? We seem to be in a temporary period where some risk assets are exploding upward, and witness this Roth portfolio that is on a trajectory to double every few months (if exited before endgame of a crash) based on sugar and silver futures:
There has been some discussion in the past regarding splitting your IRA up into several accounts and converting them separately over to Roths - and then recharacterizing (un-converting) whichever ones go down between now and the deadline. Of course, you need the individual accounts to all be invested differently, with uncorelated assets so that while some go down others may go up -- and of course, leave the ones which went up alone.
I'm not sure it's worth all the hassle, though I suppose for very large IRA portfolios it may be.
Here's a webpage with a list of several potential conversion and recharacterization strategies:
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For the most part, though, the way to go is probably simply what they call "option 1" - convert as much as you're comfortable converting and if the investment goes down substantially before you hit the deadline, unconvert, wait 30 days, then convert again - resulting in a conversion of the same assets but a lower tax liability.
Bear in mind that the reconversion may be in a different tax year, so if the reconversion is for 2011, you (a) don't get to spread the taxes across two years like you can for a 2010 conversion; or (b) may pay higher marginal income taxes unless Congress gets themselves into gear and fixes the impending tax cut expirations.
While that's a generally good idea - it has two potential complications. The obvious one is that when it comes time to rebalance (and you are rebalancing on a regular basis to keep closer to your target allocation, right?) - you may end up with a need to buy an asset which is not exactly the one you'd have preferred to keep in the Roth. Of course, if you have both Roth and non-Roth IRAs, as well as a taxable account, you can juggle appropriately to keep only the riskiest (and highest risk-premium) assets in the Roth, but it may take a bit of additional transactions to keep it that way.
The other not-so-obvious reason to put less risky assets into the Roth (and again, this one may also be mitigated if you don't mind juggling assets in more than one account) is that if you were shoving money into the Roth, say, in lieu of making 529 contributions or other shorter-term savings because you know that you can always pull your contributions back out -- you may want the Roth to be more conservatively invested.
(I'm not a big fan of treating Roth contributions this way - keep the money in that Roth as long as you can! Heck, that's the account you should let your kids inherit! But still, especially for someone who has no retirement savings at all yet and is only just getting started, there's no downside to putting your emergency money into the Roth. If you were going to sit on $5000 and not do any saving for retirement this year for whatever reason, put the money in the Roth anyway. If you don't need it for emergencies, great - and later on, you can allocate it more aggressively. Every year that goes by that you don't make a Roth contribution is a lost opportunity. And if you do, sadly, need the cash, you're still no worse off than if you'd not shoved it into the Roth in the first place.)
"if exited before the endgame" is some big, serous "if".
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