Should You Convert to a Roth During a Down Market? 

Photo: Drew Angerer/Getty Images

If you’re a high earner or invest in a traditional IRA, you might be planning to convert your account to a Roth for some tax savings and easy access to your contributions, depending on your circumstances. When to convert, though, is a question with a million different considerations. There’s no perfect time, of course, but financial experts agree that a down market can be appealing.

That’s because when you convert to a Roth, you’re moving money from a pre-tax account to a post-tax account, creating a taxable event. You have to pay taxes on that money that you’re converting now (as opposed to later in life, if you left it in the traditional IRA), based on your ordinary income tax bracket. The “cost” of converting when the market is down, then, is less.

“If your traditional IRA account was worth $100,000 in September and then the markets went down and now your same investments are only worth $80,000, then less taxes would be due on a Roth conversion,” says David Day, a Colorado-based Certified Financial Planner. “Naturally, this makes sense because there is $20,000 less of ‘income’ to be taxed.”

Beth Agnello, a North Carolina-based financial planner, says to think about it like this: Let’s say that you deferred paying income taxes on $1,000 because you invested it in a 401(k) or traditional IRA. But then the market dips and your investment is now “worth” $750. If you decide that a Roth conversion makes sense for you (more on that below), and you can afford to pay ordinary income taxes (aka your tax bracket) on that $750, you can convert to a Roth, which will have these benefits:

  • You’re paying income taxes on $750 instead of $1,000, “forever avoiding taxation on $250.”
  • And you’ll never be taxed on those funds again now that they’re invested in a Roth (assuming you follow the withdrawal rules). “So, when the market comes back, as it will, and [your] equity continues to grow in value, there’s no bill associated with draws from the Roth,” says Agnello.

When to Convert to a Roth

There are a number of other factors you’ll want to take into account.

“You need to be careful about converting too much money in any given year because doing so can push you into higher tax brackets,” says Day, as the money you convert would count as income. One way to do this is to split the conversion into two or more years, particularly if you are on the edge of a higher tax bracket.

In fact, Andrew Marshall, a San Diego-based financial planner, says a dip in the market shouldn’t be your main consideration, though it is helpful. “Conversions should be done in years when you have a lower income,” says Marshall. “This is usually the first few years after retirement, but could occur before then if you were unemployed or unable to work much that year. It you are in one of these situations and the market is down, then it may be a good time to convert to a Roth IRA.”

Gordan Achtermann, a Virginia-based CFP, says the most important question is, “Can you afford to pay the tax that will be due?”

“One of the foundational assumptions of the traditional IRA is that your tax rate will be lower in retirement than while working,” says Achtermann. “If you suspect that your tax rate will be the same or even higher when you are retired, then a Roth is a better choice because you are getting tax-free appreciation as long as you keep the account.”

When you’ve decided a Roth is the superior product, you can consider timing. “The sooner the conversion is done the more time it has to appreciate tax-free, but that cannot be the only consideration,” he says.

Glenda Moehlenpah, a California-based CFP, says to remember that what you are converting also plays a role in whether or not this is a good deal. You’re only really getting a bargain if the asset you’re converting has dropped in value (for example, it wouldn’t really make converting cash any more appealing).

“This is more of a psychological ‘win’ because you are taking advantage of the drop,” she says.

And remember: This isn’t something you would do just because the market was down for a day. It needs proper planning.

“It is difficult to time the market and thus difficult to time the low point of the market for tax minimization,” says Steve Martin, a Florida-based wealth advisor. Additionally, “the Roth conversion strategy is really a long-term strategy, so the long-term factors are generally more relevant than short-term characteristics.”

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