Market downturns can be nerve-wracking. When stocks dip, it’s easy to feel like you should hit pause on any big financial moves. But what if a downturn was actually an opportunity? If you’ve been considering a Roth conversion, now might be the best time to act.

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A Roth conversion allows you to move money from a tax-deferred retirement account (like a traditional IRA) into a Roth IRA. The trade-off? You’ll pay taxes now on the converted amount, but in return, your money grows tax-free and can be withdrawn tax-free in retirement. And when markets are down, this strategy becomes even more attractive.

In this post, we’ll break down why a downturn is an ideal time for a Roth conversion, how it works, and what you need to consider before making your move.

What Is a Roth Conversion?

A Roth conversion is the process of moving pre-tax retirement funds from a traditional IRA or 401(k) into a Roth IRA. Normally, traditional retirement accounts are tax-deferred, meaning you don’t pay taxes when you contribute, but you will when you withdraw in retirement.

With a Roth IRA, the opposite is true—you pay taxes upfront but enjoy tax-free withdrawals later. By converting funds now, you lock in today’s tax rates and eliminate the uncertainty of potentially higher tax rates in the future.

Why a Market Downturn Is a Smart Time for a Roth Conversion

A downturn in the stock market may seem like a time to retreat, but for savvy investors, it can be the perfect moment to make strategic financial moves. Here’s why:

1. You Get More Shares for Your Money

When stock prices drop, the value of your traditional IRA also declines. If you convert those assets to a Roth IRA during a downturn, you’re moving shares at a lower valuation, meaning you pay taxes on a lower dollar amount.

For example:

  • If your traditional IRA held $100,000 before a downturn and its value drops to $80,000, a Roth conversion would only trigger taxes on the $80,000 instead of $100,000.
  • When the market recovers, those assets will grow tax-free within your Roth IRA.

By converting at a discount, you position yourself for greater tax-free growth when the market rebounds.

2. You Can Pay Less in Taxes

Since the IRS taxes Roth conversions as ordinary income, the lower your conversion amount, the less you’ll owe in taxes. If a downturn reduces your taxable income (for example, if you have lower capital gains or fewer bonuses this year), you may land in a lower tax bracket—making a Roth conversion even more attractive.

3. No Required Minimum Distributions (RMDs)

Unlike traditional IRAs, Roth IRAs don’t require minimum distributions when you hit age 73. That means you can keep your money invested longer, allowing it to grow tax-free for as long as you want.

4. More Flexibility in Retirement

A Roth conversion now can provide greater flexibility later. By having both traditional and Roth funds, you can better control your taxable income in retirement, pulling from different accounts depending on your tax situation each year.

Breaking It Down: A Simple Roth Conversion Example

Let’s say you’re planning to convert $8,000 into a Roth IRA. Here’s how the numbers might play out in different market conditions:

  • When the market is high: The stock you want to buy is $100 per share. Your $8,000 buys 80 shares.
  • When the market is low: The same stock is now $80 per share. Your $8,000 buys 100 shares.

If the stock eventually rebounds to $100 per share, the account value in each scenario would be:

  • Market High Conversion: 80 shares × $100 = $8,000
  • Market Low Conversion: 100 shares × $100 = $10,000

That’s a 25% gain in your tax-free Roth account simply because you converted during a downturn.

How to Decide If a Roth Conversion Is Right for You

While a Roth conversion can be a smart move, it’s not a one-size-fits-all strategy. Consider these factors before moving forward:

1. Your Current vs. Future Tax Bracket

  • If you expect your tax rate to be higher in retirement, a Roth conversion now at a lower tax rate makes sense.
  • If you’re currently in a high tax bracket but expect it to drop later, waiting might be a better choice.

2. Your Ability to Pay the Taxes

  • Taxes on the conversion should ideally be paid from a non-retirement account.
  • Using IRA funds to pay taxes means you’ll be left with a smaller balance growing tax-free.

3. Your Retirement Timeline

  • If you plan to retire soon and need the money within five years, a Roth conversion might not be ideal. Withdrawals from converted funds within five years of conversion trigger a penalty.

4. Your Estate Planning Goals

  • If you want to pass on wealth tax-free to heirs, a Roth conversion is a great tool.
  • Unlike traditional IRAs, Roth IRAs don’t require heirs to pay taxes on withdrawals.

How to Execute a Roth Conversion in a Downturn

If you decide a Roth conversion makes sense, here’s how to get started:

  1. Evaluate Your Portfolio – Identify which assets are best suited for conversion.
  2. Estimate Taxes Owed – Work with a fiduciary financial advisor or CPA to calculate tax liability.
  3. Choose a Conversion Amount – Decide how much you can afford to convert while staying in your tax bracket.
  4. Initiate the Conversion – Work with your brokerage to move funds from your traditional IRA to a Roth IRA.
  5. Pay the Taxes – Ensure you have cash on hand to cover the tax bill without tapping into retirement savings.

Common Roth Conversion Mistakes to Avoid

Before you jump in, avoid these pitfalls:

  • Converting Too Much at Once – Large conversions can push you into a higher tax bracket. Consider a multi-year conversion strategy.
  • Not Planning for the Tax Bill – Don’t forget you’ll owe taxes on the converted amount in the year of conversion.
  • Overlooking the Five-Year Rule – If you convert funds, you must wait five years before withdrawing them without penalty.

Final Thoughts: Should You Convert to a Roth During a Downturn?

A Roth conversion is one of the smartest moves you can make during a market downturn. By converting assets when their value is temporarily lower, you reduce your tax burden and set yourself up for greater tax-free growth in the future.

However, this strategy isn’t right for everyone. If you’re unsure whether a Roth conversion fits your financial plan, contact us today to discuss whether a Roth conversion is the right move for you.