Now Might Be the Time for a Roth IRA Conversion

If the Value of Your Traditional IRA has reduced significantly, You May Want to Consider a Roth IRA Conversion

The current market volatility may pose an ideal opportunity for IRA account holders to save money on a Roth IRA Conversion. How? Because the diminished portfolio valuation caused by a down market could result in less taxation over the long term.

The tax liability on a Roth Conversion is based on the IRA’s fair market value at the time of the conversion. For that reason, converting your traditional IRA account now, when the market value has significantly reduced, you can potentially avoid tax on income and gains that will accrue in your Roth IRA when the market recovers. In time, after age 59½, you can take tax-free withdrawals when your marginal tax rate may be higher than it is right now.

Advantages of a Roth IRA:

• Generally, contributions can be withdrawn tax free at any time, for any reason.
• Contributions and earnings grow tax free.
• There are no annual required distributions during the account owner’s lifetime. Therefore, funds can grow tax free in the account longer than in a traditional IRA.

Disadvantages of a Roth IRA:

• You pay tax on the conversion amount. However, if your traditional IRA balance is at a depressed level (or possibly your overall income level is lower this year), the tax hit might be minimal.
• The “five-year rule.” If you convert a traditional IRA to a Roth IRA, you must wait at least five years to get the converted amount out free of tax.
• You may not benefit if your tax rate is lower in the future.

Bottom Line

Taking advantage of the possible low tax liability in addition to the potential to avoid tax on income and gains that will accumulate in your Roth IRA when the stock market recovers may make a Roth IRA Conversion beneficial for you. However, keep in mind that there are many variables to consider based on your unique circumstances.

Questions?