At a time when it’s easy to feel helpless watching the news unfold, we are focused on helping our clients find ways to regain a sense of financial control.  While no one can predict how or when the current economic turmoil will resolve, there are specific actions you may be able to take today to better position yourself and your family when the market recovers.

Now is an opportune time to consider a Roth IRA conversion.

If you’re a high-income earner, don’t stop reading now!  You may not have been able to contribute to a Roth IRA for many years because you surpassed the income limit.  However, a Roth conversion is open to anyone, regardless of current income.

With traditional IRAs, you pay federal and state taxes when you withdraw funds from the account in retirement. With Roth IRAs, you pay taxes upfront rather than when you withdraw from the account.

If you have liquid cash available, you should consider this conversion from a traditional to Roth IRA to minimize the taxes you will pay later when you’re ready to start withdrawing.

Here’s a simple example to show how it works:

  • Say you have a traditional IRA that was valued at $100,000 on January 1. With the recent market downturn, the account has reduced in value to $50,000.
  • On January 1, the account was embedded with ~$25,000 in taxes ($20k federal, $5k state) assuming an average 25% income tax bracket for retirees.
  • Today, due to the market downturn, that tax obligation (while still 25% as a rate) is cut in half in terms of absolute dollars to $12,500.
  • By converting the now $50,000 traditional IRA to a Roth IRA, your account will continue to grow when the market recovers – but your dollars will grow on the tax-free side of the fence.

A natural reaction in the current environment is to question optimal timing of when to take this action, with everyone wanting to know “when will we hit the bottom of the market?”

No one can accurately predict the answer, so we recommend against getting caught up in the idea of perfectly timing a Roth conversion. Looking at the example above, it’s clear that you’re still better off making this move at current market levels than you would have been earlier this year.

In addition to lowering your total taxes paid over time, a Roth conversion passes assets to your heirs tax-free, which is increasingly important following changes enacted earlier this year with the implementation of the SECURE Act.

But given the frustrating, chaotic environment we’re all facing daily, the real win for investors with a Roth conversion may be reclaiming a sense of control over your financial future.

Every client’s circumstances are different, and we can work with your unique circumstances to model and advise whether a single or multi-year Roth conversion makes the most sense for you. Our team of wealth advisors is here to help if you’re interested in pursing a Roth conversion or exploring other smart money moves now that can help turn frustration into action while bolstering your wealth accumulation over the long run.