Making Lemonade—Bear Market Roth Conversions

Making Lemonade—Bear Market Roth Conversions

June 27, 2022

This week’s reader question:  Is a bear market a good time to do a Roth conversion on my IRA?

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.

Manager of Financial Planning Andrew Busa and quote saying "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 market returns, you may wish you’d thought of this sooner.

 

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