REVIEW: Roth IRA Conversions: Silver Lining to Market Downturns

Did you know Roth conversions periodically go “on sale,” and, on top of that, the tax cost to convert comes with a “price match guarantee?” This article explains how it works.

You see, when you convert a traditional IRA to Roth, you pay ordinary income tax, based on the total amount converted. A 10% drop in your converted amount results in a 10% decrease in your tax cost. A 20% decline? You got it – a corresponding 20% off that conversion tax bill.

It would be an understatement to say we are opposed to market timing when it comes to buying and selling securities. That sort of timing requires predicting the future – a skill that, we humbly admit, escapes us. But carefully timing your Roth conversion is a completely different game. It’s about looking at today’s price in comparison to historical prices – no predictions necessary.

Maybe you’re thinking: “Ok, I can see when prices have dropped. But how do I know they won’t continue to fall?” Good point. You don’t. That’s where the “price match guarantee” comes in. The IRS lets you “recharacterize” a Roth conversion back to a traditional IRA – up until October 15 of the year following the conversion. If market prices continue to decline after conversion, just hit the “undo” button with a recharacterization.

And although the article doesn’t mention it, if prices declined farther, you could even “re-convert” a recharacterized amount after a waiting period. You can even split the conversion into pieces – each of a different asset class – so you can “cherry pick” which asset(s) to recharacterize.

Roth conversions aren’t for everyone, but if you’re in the market for one, be sure to keep an eye out for the next sale!



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