Should You Consider a Roth Conversion While the Market is Down?


While few people like the stock market declines we are experiencing.  There are some bright spots and opportunities.  Should you consider converting a traditional IRA to a Roth during a down market?

Traditional IRAs are pre-tax dollars.  While the money grows in the Traditional IRA tax-free; at distribution, you are taxed at your ordinary income tax rates.  A Roth IRA invests post-tax dollars.  Assuming you meet certain criteria, all Roth IRA distributions are income tax free.

Since a Roth IRA is the most efficient retirement vehicle available to most individuals, should you convert this year?

Conversion to a Roth will require you pay income tax on the amount you convert at ordinary income rates.  This strategy makes sense if:

  • You believe your underlying investments will appreciate
  • You believe tax rates will go up in the future (remember the current tax structure that lowered individual income tax rates will expire in 2024)
  • You have cash to pay the tax on the conversion.

If you had a traditional IRA with $100,000 at the start of the year, and due to the market, it is now down to $85,000, you could choose to convert that entire IRA to a Roth and only pay tax on the $85,000 instead of the $100,000 that it was months ago. Assuming that these dollars will rebound in the market in the future, you’ve picked a good opportunity to convert.

The benefits of a Roth IRA are:

  • Income tax free growth
  • No income tax at distribution (assuming you meet certain age and time requirements)
  • No Required Minimum Distribution (since you have already paid tax on the money)

Triggering a Roth conversion will increase your adjusted gross income (AGI), which could compound other issues, such as Medicare premiums.  However, reducing future RMDs could lower future Medicare premiums. 

The best way to determine if a Roth conversion is the right move for you during the down market is to work with a tax professional so you can get feedback on your specific financial situation – including any expected tax liability.