Is It the Right Time for a Roth Conversion?

June 15, 2023 HoganTaylor Wealth

The recent volatility in the stock market may have led to a decrease in the value of your retirement account. However, for individuals with traditional Individual Retirement Accounts (IRAs) invested in stocks, this decline presents a unique opportunity: the potential to convert their traditional IRA to a Roth IRA at a lower tax cost.

Understanding Traditional and Roth IRAs

Before exploring the timing of a Roth conversion, it's important to understand the key differences between these two types of retirement accounts:

  1. Traditional IRA: Contributions to a traditional IRA may be tax-deductible, depending on your modified adjusted gross income (MAGI) and participation in a qualified retirement plan like a 401(k). The funds within the account grow tax-deferred over time. However, withdrawals from a traditional IRA are generally subject to income tax. Early withdrawals before age 59½ may incur penalties, unless certain exceptions apply. Additionally, failing to take required minimum distributions (RMDs) after reaching age 72 (73 for individuals reaching age 72 after Dec. 31, 2022) can result in substantial penalties.

  2. Roth IRA: Contributions to a Roth IRA are not tax-deductible, but qualified withdrawals, including earnings, are tax-free as long as you are aged 59½ or older and the account has been open for at least five years. Unlike traditional IRAs, there are no RMD requirements for Roth IRAs. Furthermore, contributions to a Roth IRA can be withdrawn at any time without incurring taxes or penalties. However, eligibility to contribute to a Roth IRA is subject to income limits. Regardless of income, individuals are allowed to convert a traditional IRA to a Roth IRA, but they must pay income tax on the converted amount.

Reducing the Tax Impact with a Roth Conversion

If the value of your traditional IRA has declined, converting it to a Roth IRA now, rather than waiting, could minimize the tax impact. Additionally, by converting during a period of decreased value, you can avoid taxes on any future appreciation if the account's value rebounds.

Before proceeding with a Roth conversion, it's crucial to carefully consider the following factors:

  1. Tax payment: If you lack the cash to cover the taxes owed on the conversion, you may need to dip into your retirement funds, which can erode your overall nest egg. The tax impact will be greater with larger conversion amounts and higher tax brackets.

  2. Retirement plans: Generally, converting a traditional IRA to a Roth IRA is most beneficial when you have a longer time horizon for the funds to grow and compound without tax erosion. If you anticipate retiring soon and will start drawing down on the account immediately, a Roth conversion may not be the most advantageous strategy.

There are other critical considerations to evaluate before executing a Roth IRA conversion. If you find this option intriguing, it is advisable to consult with your HoganTaylor Wealth financial advisor to determine whether a conversion aligns with your specific circumstances and goals.

Gradual Conversion: Stretching Out the Tax Bill

If the idea of paying taxes associated with a traditional IRA to Roth IRA conversion seems overwhelming, you can opt for a gradual conversion. This approach allows you to spread out the tax liability over time, depending on when you plan to retire.

For instance, if you have $100,000 in a traditional IRA, you could consider converting it in increments over five years, such as $20,000 per year. This strategy allows you to estimate and manage the tax impact at each conversion step, potentially mitigating any significant financial burden.

In conclusion, while market volatility presents challenges, it can also offer unique opportunities for investors with traditional IRAs invested in stocks. Evaluating the timing and potential benefits of a Roth conversion requires careful analysis of individual circumstances and professional guidance. By carefully evaluating individual circumstances and seeking professional guidance, you can make informed decisions regarding Roth conversions. The potential benefits of a Roth conversion during a period of market volatility, such as lower tax costs and the ability to avoid future taxation on appreciation, can provide a strategic advantage in long-term retirement planning.  Consulting with your HoganTaylor Wealth financial advisor or tax professional is highly recommended to assess the feasibility and potential impact of a Roth conversion based on an individual's specific circumstances.

Ultimately, understanding the dynamics of traditional and Roth IRAs, evaluating market conditions, and carefully weighing the associated tax implications are crucial steps in determining whether it is the right time for a Roth conversion. With proper planning and professional guidance, you can navigate the complexities of Roth conversions and make strategic decisions to optimize your retirement savings.


HoganTaylor Wealth

HoganTaylor Wealth provides an integrated approach to investment and financial planning and is a registered investment advisor and subsidiary of HoganTaylor LLP. HoganTaylor Wealth takes pride in serving clients as an independent fiduciary through holistic financial planning. Learn more at

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.

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