Roth Conversions When The Market Is Down

A Roth conversion involves taking an amount of money from a tax-deferred account, such as a traditional IRA or 401(k), paying taxes on that amount, and moving it to a Roth IRA or Roth 401(k), where it grows tax-free.  

Example 

Jim has a $750,000 IRA. He converts $30,000 to his Roth IRA in 2020. This results in increasing his 2020 income by $30,000. Once the funds are in the Roth IRA, they grow tax-free for the rest of his life, and possibly his spouse’s life as well.  

Whether or not a Roth conversion makes sense for you depends on your personal situation. For one, what is your tax rate now, and what is your tax rate projected to be in retirement? I won’t dive into that here, but I will talk about the benefits of timing Roth conversions if it is part of your financial plan.  

When I evaluate Roth conversion plans, I typically wait until the end of the year to complete the conversions so I can ensure that income actually ended up being what was projected. However, if there is volatility in the stock market, it can be a great benefit to convert while the market is down.  

Last year the market (S&P 500) fell over 30% during the Covid-19 crisis. Taking the above example, if Jim converted $30,000 at the bottom of the market, he would have seen his Roth IRA grow back tax-free to $50,700 by the end of the year (if invested in S&P 500). 

A bear market is scary because you really can’t control what happens to your portfolio. However, there is tremendous opportunity in the few things you can control. If you are still working and your income is higher, continuing to save and invest at market lows will benefit you greatly in the long run. If income is lower and you don’t have the funds to save more, Roth conversions are a great way to capitalize on a market downturn.

Thank you for reading,

Alex

This blog post is not advice. Please read disclaimers.