We can’t control when markets drop like we are seeing this year, but it does
happen in every economic cycle at some point. This makes it a good time to plan for a Roth Conversion as markets recover in future years.
A conversion involves transferring funds from a retirement account, such as a traditional individual retirement account (IRA) which is funded with pre-tax dollars, to a Roth IRA that is funded with after-tax dollars. This means that you will owe tax on the money you convert. One way to lessen the tax burden is by making the switch when your IRA’s value has dropped due to a market downturn. This switch, in combination with a lower expected 1099 earnings year for non-retirement accounts, can be very effective.
The key difference between traditional and Roth IRAs is the timing of the tax advantages. With a traditional IRA, you deduct contributions from income now and pay taxes later on withdrawals. Conversely, you do not receive any up-front tax breaks with a Roth IRA, but qualified distributions are tax-free.
Additionally, Roth IRAs carry no required minimum distributions (RMDs), so money not needed can remain in the account to grow tax free for your heirs. This feature makes a Roth IRA an ideal wealth-transfer vehicle.
I have been coaching clients to do Roth conversations for over 20 years with much success. One client almost tripled their Roth account balance since doing a conversion during the stock market down turn in the early 2000s.
Call us to see if you can benefit from a Roth IRA conversion!