1. It's a slight cost to go up into the next tax bracket if it's just a slight increase in the rate. For us, we were in the 22% tax bracket. I could have converted just enough of her 401K in the first year to keep us barely in the income range of the 22% tax bracket, then repeat again the next year, then the next, etc. (You don't have to do it all in one year.) But because the next tax bracket above us is 24%, I realized for a cost of just 2 more percent I could convert all of her 401K in the first year and treat the extra 2% cost of converting as a kind of insurance premium against future rising tax rates. But that works only if the next tax bracket above yours is a slightly higher rate (i.e. going from 12% to 22% is very costly, same for going from 24% to 32%, but not for going from 22% to 24% or maybe 35% to 37%).
2. The other thing I realized is that if you do convert in chunks (say $50K this year and $50K the next year, etc.) then migrate whatever mutual funds you have that are lowest at that time. Let's say you have a lot of money in a traditional IRA spread out across many mutual funds in different asset classes. Chances are some of your equity funds are doing poorly even if many of them are doing well. For example, some equity funds that are so low that I'm thinking about jumping back into soon are PRGTX (down 45.7% from its max), PRSCX (36.6%), PRLAX (36.1%), and PRNHX (28.3%). If I wasn't using an active investor strategy (I'm out of equities until they drop further) but instead using a pure buy and hold strategy and was invested in all the funds I like, those would be the funds I'd convert from traditional IRA to a Roth IRA right now. Why? Because if the conversion is done while they're low that means less dollars in the conversion to pay the tax on. Maybe next year the other equity funds will be low and I'll convert them.
Basically, converting shares that are low allows you to convert a larger portion of your portfolio from a share count perspective, while having a lower tax hit (because it's low from a dollar perspective). If the funds rise back up to their all time highs let it be done in the Roth account. If you have a million dollars you're converting and you're, therefore, converting in chunks instead of one large swoop, converting the chunks that are low each year might result in the dollar conversion calculation be something like $600K or so (after the overall process is done in many years) instead of $1 million.
Makes sense. I reflexively despise paying those big tax bills.
Are you a RIA ? You seem to be very knowledgeable.