Legacy Design Strategies
Omaha, NE, Minot, ND and Iowa Fall, IA Estate Planning and Elder Law Firm

Estate Planning and Elder Law Blog

Is a Roth Conversion a Good Idea when the Market Is Down?

June 7, 2022
MK Epperson
Soaring inflation, interest rate hikes and the war in Ukraine have sparked ongoing stock market volatility. However, there may be a bright spot: the chance to save money on a Roth conversion.

A stock market downturn may be a prime time for a Roth IRA conversion, reports CNBC’s recent article titled “Here’s why a Roth individual retirement account conversion may pay off in a down market.” This is especially true if you were considering a Roth conversion and never got around to it.

A Roth conversion allows higher earners to sidestep earnings limits for Roth IRA contributions, which are capped at $144,000 MAGI (Modified Adjusted Gross Income) for singles and $214,000 for married couples filing jointly in 2022.

Investors make non-deductible contributions to a pre-tax IRA, before converting funds to a Roth IRA. The tradeoff is the upfront tax bill created by contributions and earnings. The bigger the pre-tax balance, the more taxes you’ll pay on the conversion. However, the current market may make this a perfect time for a Roth conversion.

Let’s say you own a traditional IRA worth $100,000, and its value drops to $65,000. Ouch! However, you can save money by converting $65,000 to a Roth instead of $100,000. You’ll pay taxes on the $65,000, not $100,000.

According to Fidelity Investments, the first quarter of 2022 saw Roth conversions increase by 18%, compared to the first quarter of 2021. That was before the second quarter’s market volatility, which has been more dramatic.

The decision to do a Roth conversion can’t take place in a vacuum. Consider how many years of tax savings it will take to break even on the upfront tax bill. Weigh combined balances across any other IRA accounts, because of the “pro-rata rule,” which factors in your total pre-tax and after-tax funds to determine your tax costs.

Attractive features of the Roth IRA are the freedom to take—or not take—distributions when you want, and there are no taxes on the withdrawals. However, there is an exception, and it pertains to conversions—the five year rule.

If you do a conversion from a traditional IRA to a Roth IRA, you have to wait five years before making any withdrawals of the converted balance, regardless of your age. It’s an expensive mistake, with a 10% penalty. The clock begins running on January 1 of the year of the conversion. If you are close to retirement and will need funds within that timeframe, you’ll need other assets to live on.

However, there’s more. If the conversion increases your Adjusted Gross Income (AGI), it may create other issues. Medicare Part B calculates monthly premiums using Modified Adjusted Gross Income (MAGI) from two years prior, which means a higher income in 2022 will lead to higher Medicare bills in 2024.

Before doing a Roth conversion, evaluate your entire financial and retirement situation.

Reference: CNBC (May 10, 2022) “Here’s why a Roth individual retirement account conversion may pay off in a down market”

Share This Post
Meeting with a client

Get Started Today

Book your Free Estate Planning Consultation Now

  • You have people you care about.
  • You want to maintain control of your life and your assets.
  • You'd like to leave a legacy.
  • You'd enjoy some peace of mind.
  • We can help.
Book a Discovery Call

Stay Up-To Date

Subscribe to Our eNewsletter

Office Locations

Omaha, NE Office

9859 South 168th Avenue,
Omaha, NE 68136

Directions

Minot, ND Office

7 Third Street SE, Suite 202,
Minot, ND 58701

Directions

Iowa Falls, IA Office

320 North Oak Street, PO Box 295,
Iowa Falls, IA 50126

Directions

Some Of The Areas We Serve

LDStrategies
Omaha, NE Office

9859 South 168th Avenue,
Omaha, NE 68136

Minot, ND Office

7 Third Street SE, Suite 202,
Minot, ND 58701

Iowa Falls, IA Office

320 North Oak Street, PO Box 295,
Iowa Falls, IA 50126

IMS - Estate Planning and Elder Law Practice Growth Advisors
Powered by
cross