Advantages of Roth Conversions in a Down Market

“When one door of happiness closes, another opens; but often we look so long at the closed door that we do not see the one which has been opened for us.” - Helen Keller

During times of down markets or market volatility, investors often look for a “silver lining” as they navigate the storms of market uncertainty. One such silver lining could be to increase potentially tax-free retirement dollars at a temporarily reduced tax “price”. Converting some of a pre-tax retirement portfolio (Traditional IRA or 401(k)) to an after-tax Roth IRA portfolio while the value of the portfolio is temporarily discounted can be an advantageous way to maximize tax-free dollars to be used in retirement. In much the same way “buy low, sell high” can be an ideal investment philosophy, paying taxes while an investment’s value is low can add more to the taxfree portion of your overall plan as the converted investments recover and grow. There are important points to keep in mind when considering Roth conversions: • Income taxes are due for Roth conversions in the year of the conversion, so planning must be done every year a conversion is considered to determine if the overall tax rate for that year is likely to be lower than the future tax rate when funds could be distributed. No one knows what future tax rates will be, but paying too much in taxes now (for example, if too many Roth funds are converted) could be detrimental to one’s overall financial plan. • When a Roth conversion is made, the amount converted is treated as income in the year in which the conversion occurs. If you make a large Roth conversion, your taxable income will increase which not only would affect your tax bill, but also could affect your Medicare premiums. • Roth conversions don’t only make sense during times of down markets or market volatility. If you are in a lower-income year or have significant losses or deductions during the tax year, it might be an appropriate time to make a conversion and recognize that additional income. Bear in mind there are key differences between Traditional and Roth IRAs, which you can learn more about on pages 8-9. Proper tax and financial planning must be done to ensure any Roth conversions are in your best interest. We recommend that you work with your tax and financial advisors before implementing any significant financial decisions, including a Roth conversion.