Making Lemonade—Bear Market Roth Conversions

Andrew Busa, MSPFP, CFP^®, MPAS^®, CCFC

Manager of Financial Planning

This week’s reader question:  Is a bear marketA period in which stock prices decline significantly from recent highs and remain below previous high marks for weeks or months. Generally, a decline of at least 20% in stock prices is considered the threshold marking the start of a bear market. a good time to do a Roth conversion on my IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age.?

As Federal Reserve Chair Jerome Powell told Congress this week, a recession is a “possibility,” but it’s not the Fed’s “intended outcome.” Good, everyone feel reassured now? While the Fed tries to navigate these stormy economic waters, I think it’s more important to focus on smart portfolio moves and to remember that a down year in the market does have some advantages.

Take Roth IRAs, for example: Converting a traditional IRA to a Roth when your portfolio has lost value means your tax bill on the conversion will be lower. Even better, when the account recovers, all those gains will be tax-free.

In a sense, conversions are on sale while your IRA’s value is temporarily lower. Voilà. You just made lemonade out of a bear market.

But there’s a caveat: You still need to assess your financial plan to make sure a conversion is the right strategy for you. If you will need to cash your IRA out in less than 10 years or don’t have the cash available to pay the taxes due, it’s probably not the right time to be thinking about a conversion at all.

However, if a Roth conversion makes sense in the context of your overall financial plan (say, you are moving into a higher tax bracket in the near term), then this may be a great moment to take advantage of the opportunity.

To be clear, Roth conversions are not a silver bullet to avoid paying any taxes. Done under the wrong circumstances, a Roth conversion could unnecessarily accelerate tax payments.

Talk to us if you want to review your financial plan to determine if a conversion makes sense today. When the bull marketA period during which stock prices rise significantly from recent lows for weeks, months or years. returns, you may wish you’d thought of this sooner.

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Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.