Does a ROTH Conversion Pay?

The closer I get to the age where the IRS requires a minimum distribution (RMD), the more I see a big income tax in my future. It is relatively easy to forecast our income from our brokerage account dividends, my Social Security income, and Cindie’s income from baking at Beehive. But that income doesn’t create any huge tax implications. However, the combination of those sources of income and the RMD will boost us into a higher tax bracket. Strategic thinking requires prudent tactics. One such tactic is to convert some assets each year from the IRA to the ROTH and pay the additional taxes. How much to move, and what to move requires some thoughtful math.

ROTH CONVERSIONS: A beneficial strategy

LyondellBasell Industries N.V.

On Friday I called Fidelity Investments and asked them to transfer my 200 shares of LYB from my traditional rollover IRA to my ROTH IRA. The last time I did something similar was in May 2021, and I wrote about it at that time. The value of the shares I moved was about $21,000, because the shares are worth about $105 per share. As a result, I owe federal and state income taxes on $21,000 of income. Why did I do this?

Doing the Math

The worst-case tax cost is about $5,000. This can be minimized if we continue to expand our charitable giving, which is also part of our plan. Because LYB pays a dividend, during the next five years I can reasonably, easily recoup the cost with the dividends. But this is a short-sighted perspective. The reality is that the five years of dividends will then be tax free and can either be reinvested in the ROTH or used for more charitable giving. The short-term tax pain is not all that great. This also ignores the strong probability of dividend increases.

Covered Call Options Trades

In addition, LYB is a potential source of income from selling covered calls. In May of this year I sold two different covered calls on my LYB shares, generating $98.62 in income in two weeks. I stopped trading covered calls on the shares, but I could easily restart this and add income that will be tax-free in my ROTH IRA.

LYB’s Dividend is Attractive for several Reasons

LYB operates in the materials sector, so there is risk. However, LYB offers a very attractive dividend payout ratio of about 37%. This provides plenty of room for dividend growth. The yield is better than 4% and the five-year dividend growth rate is about 6%. All of these factors make LYB a good candidate for my conversion strategy.