Does it make sense to convert a Traditional IRA to a Roth when the market’s down?

If your modified adjusted gross income (MAGI) is $100,000 or less and you are not married filing separately, you may initiate a taxable conversion of a Traditional IRA to a Roth IRA. You can do a direct trustee-to-trustee transfer or receive a distribution of your traditional IRA and then roll it over into the Roth IRA; the rollover must be completed within 60 days from the time you receive the distribution.

So, when is the best time and method of doing this? Since a conversion to a Roth IRA is a taxable event, the best time to convert is in a year when you expect to be in a low federal income tax bracket or when the value of the traditional IRA is down due to poor performance.

Figure the tax due on the conversion (treated as ordinary income) and then weigh whether you have sufficient funds outside the plan to pay the tax, and where there is substantial tax due on the conversion, whether you want to give up the future income that would be earned on the funds used to pay the tax. You can also reduce you tax bill by doing smaller conversions spaced out over several years. Once a conversion is complete, the funds grow tax-free in the Roth IRA, provided you stay within the rules established for Roth IRA accounts. (Learn more about Roth conversions in our article: The Simple Tax Math of Roth Conversions.)

(This question was answered by Steven Merkel.)