Have You Thought About a Roth Conversion?

With the stock market appearing to head towards a–dare I say it–recession, now might seem like an odd time to talk about converting your traditional IRA to a Roth IRA. However, converting when the markets are low actually might be the best time to do so. When it comes to Roth IRA conversions, the tax bill for doing so is based on the value of your traditional IRA assets. Thus, when the markets are down, there’s a really good chance your IRA assets are down too, which means a lower tax number. As for the actual tax hit, as you may well know, when you convert a traditional IRA to a Roth IRA, the pre-tax funds you convert–your traditional IRA monies–will be included as part of your income for the year. That can be a hefty tax increase depending on how much you are converting and it’s important to keep in mind that that tax hit will only be for the year in which the conversion occurs. It will hurt short term, but long term, you may just avoid a bigger tax hit further down the road if you follow the Roth IRA rules. In other words, you won’t feel great about it now, but when you take your future Roth IRA distributions tax-free you’ll probably feel pretty good about the decision. Keep in mind that a Roth IRA conversion isn’t the easiest thing to do and not doing it right can open you up to some serious issues and penalties. Therefore, I encourage you to reach out to a certified financial planner or wealth manager or your plan custodian. Even if you don’t actually go through with a conversion, you can at least talk to them about the process and when it might make sense for you.