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

By Steven Merkel AAA
A:

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.)

RELATED FAQS

  1. Why would I need total debt to total assets represented as a ratio, as opposed to ...

    Learn why having the relationship between a company's total debt and its total assets is more valuable when expressed as ...
  2. Why is the crowding out effect less likely to occur during a deep recession?

    Learn more about the crowding-out effect of government fiscal policy on private investment markets and whether it changes ...
  3. What phase of the economic cycle tends to be strongest for companies in the Internet ...

    Learn which phase of the economic cycle features the best performance for the Internet sector and how portfolio managers ...
  4. What is GDP and why is it so important to investors?

    The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents ...
RELATED TERMS
  1. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  2. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  3. Gold IRA

    Definition of Gold IRA
  4. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  5. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  6. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...

You May Also Like

Related Articles
  1. Professionals

    Are Longevity Annuities in 401(k)s a ...

  2. Investing

    Looking To Invest In the Third-Largest ...

  3. Professionals

    Why Retirement Advice Is Better But ...

  4. Professionals

    Coming Soon: Private Equity In 401(k) ...

  5. Professionals

    Ways To Cut 401(k) Expenses

Trading Center