Should You Consider A Roth Conversion in a Market Downturn

Should You Consider a Roth Conversion in a Market Downturn?

By Jonathan Harner, CFP® 

Lowering your tax liability is one of the most important things you can do to protect your wealth. A Roth IRA conversion can be an excellent way to minimize taxes by moving money from a traditional IRA to the Roth variety. Typically, we like to do Roth conversions toward the end of the year because that’s when we have the best information for taxes. We can most accurately predict what your income will be, which allows us to convert as much as possible to a Roth without putting you into a higher tax bracket or causing your Social Security benefits to be taxed more than they should.

But recently I have been asked the question, “If we are going to do Roth conversions, should we go ahead and do them while the market is down?” The short answer is yes. The long answer is sort of.

Some Nuances About IRAs

The decision for Roth versus traditional generally boils down to income tax rates. If income tax rates were uniform throughout one’s life, the decision would be moot as the funds available at a later date would be identical.

Another caveat has to do with one’s income. Generally speaking, anyone can contribute to a traditional IRA, though the deductibility of the contribution is based on income. There are different rules for single and married couples, and the IRA owner must consider if they are covered by a retirement plan, such as a 401k, from their employer—a serious consideration for anyone still working.  

Another consideration for IRAs deals with who can do conversions and how the conversions are taxed. This gets fairly complicated when the IRA owner has deductible and non-deductible account balances as the “pro rata” rules come into play, which are pretty complex and require some equations and spreadsheets (which I will save you from). Suffice it to say, it is worth getting a professional opinion when making such a decision.

Benefits of a Roth Conversion

There are numerous benefits to a Roth conversion. To name a few:

  1. You take advantage of today’s historically low tax rates.
  2. You insulate yourself from future tax increases.
  3. There are no requirements for mandatory distributions at age 72 as there are for traditional IRAs.
  4. Roth IRA distributions are not included in the calculations for the taxability of Social Security benefits.
  5. Heirs can maintain the tax-free status of Roth IRA funds for a period of 10 years with distributions also being income tax-free.

Roth conversions are not entirely a slam dunk. So, as I alluded to before, it is probably a very good idea to seek a professional opinion if you are pondering this strategy.

Getting to the good part, the big question is, when should you convert your IRA? Is there an ideal time to pay the taxes and make the change?

When Should I Convert My IRA?

If you convert $10,000 to a Roth from an IRA, the taxes will be the same regardless of whether your account is up 10% or down 10% for the year. The major advantage is you essentially get to buy the stock at a discount, then turn around and let it rebound and not pay any taxes on the growth! This means that if you are going to do Roth conversions, there is little downside to doing it during a market downturn!

However, there are several considerations when doing Roth conversions in the middle of the year, such as uncertainty around your taxable income for the year, any rule changes Congress may enact, and what the markets will do (if they drop further, you would rather wait to convert funds until then). For these reasons, the strategy we would recommend is to convert a small amount during the year—an amount low enough that we’re confident it won’t increase your tax bracket. Then at the end of the year, convert additional amounts based on your actual income.

Roth conversions during a down market also move a larger percentage of your further RMDs into a tax-free account, which will save you additional taxes in future RMDs that you won’t have to take!

Is a Roth Conversion Right for Now? 

A Roth conversion is an advantageous way for high-income earners and traditional IRA account holders to access the benefits of a Roth IRA and possibly lower their tax burden over the long haul. However, because of the many tax implications, it’s a decision that is not to be taken lightly. It’s important to work with an experienced financial professional to ensure you are making the most of your investments and not paying more taxes than necessary.

If you are a client, this is an opportunity that we are evaluating for you. If we have not already, we will reach out to you if our analysis shows you should take advantage of Roth conversions right now.

We love referrals! If you or anyone you know could benefit from our services, please forward our contact information to them. Even if we do not provide the service they need, we likely know the professional they need to talk to.

If you are considering working with us at Wichita Wealth Management, we can help you determine if a Roth conversion is the right fit for you and help you implement the process. Schedule a Strategy Meeting using the following link: or contact me at 316-722-1010 or to get started.

About Jonathan

Jonathan Harner is a CERTIFIED FINANCIAL PLANNER™ practitioner at Wichita Wealth Management, a fee-only, fiduciary financial advisory firm dedicated to helping their clients thoroughly prepare for retirement. Jonathan’s goal is to simplify the complex so his clients can experience confidence and peace of mind as they work toward and live out their retirement dreams. He specializes in developing and implementing tax strategies that maximize his clients’ money and builds a tax-efficient withdrawal plan for retirement. Jonathan loves finding opportunities for his clients to save money and is dedicated to continual learning and growing in his profession so he can provide solutions for his clients’ financial needs. When he’s not working, you can find Jonathan spending time with his wife, Annie, and their daughter, staying active in his church community, and participating in his two favorite (but vastly different) hobbies: CrossFit and Dungeons & Dragons. To learn more about Jonathan and how he can help you, connect with him on LinkedIn.

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