Why Roth Conversions Make More Sense When the Market Is Down

Market volatility can be unsettling, but for savvy investors, it may open up unique planning opportunities—especially when it comes to Roth IRA conversions. When asset values dip, so does the cost of converting those assets to a Roth IRA. That creates a window to improve long-term tax efficiency, unlock flexible retirement income, and strengthen your estate plan. Here’s why:

1. Lower Conversion Tax Cost When Markets Fall

When you convert assets from a Traditional IRA to a Roth IRA, the value of the converted amount is taxed as ordinary income. A market decline means your investments are worth less—so converting them now generates a smaller tax bill.

Example: Suppose you want to convert 1,000 shares of a stock currently worth $100 per share. If you convert when the market is up, the taxable income from the conversion would be:

Taxable income=1,000×100=$100,000

But if the market drops 10%, and the stock falls to $90 per share:

$$\text{Taxable income}=1,000\times 90=\$90,000$$

That’s a $10,000 reduction in taxable income, just by timing your conversion during a downturn. You now own the same number of shares in a Roth account where future growth is tax-free.

2. Breakeven Return Math: When Does It Pay Off?

A key question many ask is: “How long does it take to make up for the tax cost of a Roth conversion?” Let’s assume a flat tax rate and use the concept of a breakeven return—the return needed to recover the upfront tax cost of the conversion.

3. Long-Term Roth Benefits: Control, Flexibility, and Legacy

Beyond short-term tax math, Roth IRAs offer unmatched flexibility:

• No Required Minimum Distributions (RMDs): Traditional IRAs force withdrawals starting at age 73, which can disrupt tax planning. Roth IRAs have no RMDs during the original owner’s lifetime, giving you total control over when (and if) you take money out.
• Cash Flow Control: Because Roth withdrawals are tax-free, they give you a powerful lever to manage taxable income in retirement. Need money but don’t want to jump into a higher bracket? Tap the Roth.
• Estate Planning Advantage: Roth IRAs pass to heirs income-tax free. Beneficiaries must still withdraw funds over 10 years, but they don’t owe taxes on the distributions. This makes Roths ideal for passing wealth across generations.

Final Thought

While market downturns can be unnerving, they offer a silver lining: the opportunity to do more tax-efficient Roth conversions. By converting when asset values are down, you reduce the upfront tax hit, lower the breakeven threshold, and set the stage for tax-free growth and estate advantages. If you believe the market will recover—and history says it usually does—Roth conversions during market dips may be one of the smartest financial moves you can make.