Roth Conversions: A Silver Lining to Lower IRA Balances in a Volatile Market

Maura Schauss |

By Todd Youngdahl, CFP® at Washington Wealth Advisors

In June 2022 the markets posted their worst numbers since March 2020 and officially entered bear market territory.[1] Though they have rebounded slightly in the weeks since, even the most optimistic of investors are finding it hard to see the glass half full.

At Washington Wealth Advisors, we believe there is a silver lining to the recent market events: Roth conversions. Here’s what you can do to make the most of your lower IRA balances.

What Is a Roth Conversion?

A Roth conversion occurs when you move money from a traditional IRA into a Roth IRA. Because traditional IRAs are funded with pre-tax contributions and Roth IRAs are funded with after-tax contributions, you are required to pay ordinary income tax on the transferred funds at the time of the conversion.

Benefits of a Roth Conversion

Once the money has been converted to a Roth IRA, it will grow tax-free, meaning no income tax will be owed upon withdrawal in retirement.

Another benefit of a Roth IRA is that the converted funds will no longer be subject to required minimum distributions (RMDs) once you reach age 72. Instead, funds can be kept in your account for as long as you’d like. Your money can be left to grow over time, potentially becoming a legacy for your loved ones if you don’t need the funds for retirement.

Roth IRAs also have greater flexibility when it comes to withdrawals prior to age 59½. This is an attractive feature for many people who would like to access their funds prior to retirement without incurring a penalty.

Timing Is Everything When it Comes to Roth Conversions

So why are market volatility and lower IRA balances a good sign for Roth conversions? Because timing is everything when it comes to this strategy. Since you will owe tax on the value of the funds converted, it makes more sense to convert the funds when they are worth less than their true value.

For instance, imagine you have an IRA worth $150,000 during a period of market stability. Now imagine that your account dropped to $100,000 due to the recent market drops. You could potentially convert $150,000 worth of investments at the $100,000 tax rate. That could equate to significant savings on your tax bill. And because we know that markets have historically rebounded after a drop, you could potentially earn back the $50,000 (and then some) tax-free!

If your IRA has lost significant value and your income is lower than usual, you could save even more in taxes by converting the funds when you find yourself in a lower tax bracket.

Who Should Consider a Roth Conversion?

Roth conversions are not for everyone, but there are certain circumstances that make them more ideal. Consider a Roth conversion if:

  • You have lower income this year than is typical.
  • You expect to be in a higher tax bracket in retirement than you are right now.
  • You want to avoid RMDs and keep your money invested for longer.

Review the Benefits of a Roth IRA

Need a quick review of Roth IRAs?  Tune in to this video from Todd Youngdahl, CFP® to learn more.

The Benefits of Roth IRA  |  Video with Todd

How Washington Wealth Advisors Can Help

If you are interested in a Roth conversion strategy, we would welcome a conversation to see if it may be the right approach for you and your unique goals. Washington Wealth Advisors can help you determine how much you should convert and when.

To learn more about how we can help, call our office at 703.584.2700, email clientservices@washingtonwealthadv.com, or schedule a meeting with Todd.

 

IMPORTANT WASHINGTON WEALTH ADVISORS DISCLOSURE INFORMATION

 

ABOUT WASHINGTON WEALTH ADVISORS

Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our fiduciary approach, independent advice, and proactive investment management help to support our clients’ overall financial peace of mind.

 

[1]https://www.forbes.com/sites/sergeiklebnikov/2022/06/17/stocks-post-worst-week-since-march-2020-amid-deafening-recession-worries/?sh=6ef08e98770d