Roth Conversions

Stocks have been all over the map the past few months. Many financial advisors suggest down markets can be a great time for Roth Conversions. Read below to see if a conversion is right for you…

Down markets can possibly be a great opportunity for those looking to convert Traditional IRA’s into Roth IRA’s. That’s because converting in a year when the market is down has you theoretically paying tax on a lower amount of assets, and then those assets can recover to higher amounts in the market meaning you’ll be paying less overall taxes, since the Roth distributions would be tax free when at higher account levels.

For example, let’s say you have a Traditional IRA with $100,000 that takes a bear market hit of 20%, putting the value at $80,000. Converting would have you paying taxes on $80,000 instead of the former $100,000 balance. Then let’s assume that same account grows strongly long-term, you’ve now given yourself reduced tax ramifications with those gains being tax-free.
 
A Roth Conversion does require taxes to be paid upon conversion (at tax filing time), so you’ll need to make sure you have the funds to pay the taxes. Although tax rates are near all-time lows, so it may be a good time to pay those taxes, pending your other income and effective marginal tax bracket.
 
Roth accounts don’t have Required Minimum Distribution (RMD) requirements, so it allows more flexibility in retirement as far as your distribution timing.
 
Reach out to us if you’d like to discuss your specific situation and whether a Roth Conversion makes sense for you.