Why a Down Market Can Be the Perfect Time for a Roth Conversion

When markets dip, it’s easy to feel uneasy. But savvy investors know that downturns can create powerful planning opportunities—especially when it comes to retirement savings. One standout strategy? A Roth IRA conversion.

What’s a Roth Conversion?

A Roth conversion means moving money from a pre-tax retirement account—like a traditional IRA or 401(k)—into a Roth IRA.

Yes, you’ll owe income taxes on the amount you convert. But once the funds are in your Roth, they grow tax-free—and you can make qualified withdrawals in retirement without paying taxes. That’s a significant long-term advantage.

Why Convert When the Market Is Down?

Market dips aren’t just setbacks—they can actually lower your tax bill when converting to a Roth. Here's how:

• Lower account values mean a lower taxable amount.
  A smaller balance means less taxable income at the time of conversion.
  
  
• You convert more shares for the same dollar amount.
  With lower market prices, your conversion buys more shares, which then grow inside your Roth.
  
  
• All future gains are sheltered from tax.
  As the market recovers, that growth occurs inside the Roth account—completely tax-free.
  
  

Example: Timing Can Matter

Imagine you have $100,000 in a traditional IRA. A market downturn knocks that value down to $75,000.

If you convert during the downturn, you’re only taxed on $75,000. Once the market rebounds, the recovery happens inside the Roth account—and you won’t owe taxes on those gains.

Things to Consider Before Converting

Before initiating a Roth conversion, take these factors into account:

Tax Strategy

You’ll owe income tax on the converted amount. Make sure you’ve identified a smart, sustainable way to pay the taxes—ideally from non-retirement funds.

Impact on Your Tax Bracket

Conversions increase your taxable income. Consider spreading the conversion across multiple years to manage your bracket and avoid unnecessary tax spikes.

Income Limits and Eligibility

There are no income restrictions for Roth conversions, but your overall income for the year could affect how much tax you’ll owe. Be sure to evaluate how the conversion fits into your broader financial picture.

Final Thoughts

No one enjoys a market downturn. But with the right strategy, that dip can be a springboard.

A Roth conversion during a down market can reduce your tax liability now while setting your investments up for long-term, tax-free growth. Like any tax-related decision, it’s important to ensure the move aligns with your full financial, investment, and retirement plan.

Considering a Roth Conversion? HealthHarbor can help you weigh the pros and cons and create a plan tailored to your goals. Contact us to learn more.