Market losses typically signal investors to put a hold on big financial moves. But if you’re saving for retirement, a downturn could be one of the least expensive times to complete a Roth conversion. Missing this opportunity could cost you thousands of dollars in unnecessary taxes. Here’s why.
Same Shares, Smaller Tax Bill
The value of your investments determines how much of a Roth conversion is taxable. When markets fall, that value falls too, creating a temporary opportunity to convert the same investments at a lower tax cost.
For example, if your IRA holds 1,000 shares of a mutual fund worth $100 each, your account is worth $100,000. If the market then drops 20%, those same 1,000 shares would be worth $80,000. Converting during the downturn means you’d pay income tax on $80,000 instead of $100,000, even though you’re transferring the exact same 1,000 shares into a Roth IRA.
If those investments later recover inside the Roth IRA, future earnings can generally be withdrawn tax-free as part of a qualified distribution, provided you satisfy the IRS requirements. That means the recovery occurs in a tax-free account instead of increasing the tax cost of a future Roth conversion.
A financial advisor can help you evaluate different opportunities to make a Roth conversion. Speak with an advisor today!
Roth Conversion Mistakes That Can Wipe Out Tax Savings
A Roth conversion during a market dip can work in your favor, but timing isn’t the only thing to get right. The amount you convert carries real weight. Move too much in one year, and you can push yourself into a higher tax bracket.
To show how much more you could pay in taxes, let’s assume you convert $200,000 from a traditional IRA on top of a $100,000 annual salary. That would increase your total taxable income to $300,000. For tax year 2026, the additional income from the Roth conversion would be taxed approximately as follows: 1
- 22% on $5,700 = $1,254
- 24% on $96,075 = $23,058
- 32% on $54,450 = $17,424
- 35% on $43,775 = $15,321
Your estimated additional federal tax from the conversion would be about $57,057. This estimate does not account for deductions, credits or any applicable state income taxes.
The added taxable income may also make more of your Social Security benefits taxable, increase your Medicare premiums through IRMAA, and reduce your eligibility for certain tax benefits.
You might be able to take a better approach: Converting smaller amounts over multiple years instead of all at once can help keep more of your income in lower tax brackets while reducing the impact on Medicare premiums and Social Security taxes.
Finally, you may also want to avoid paying the tax bill with IRA assets: If you have cash available outside your retirement accounts, using those funds may leave more money in your Roth IRA for future tax-free growth.
Why Waiting to Convert Can Cost You More
Many retirees wait for markets to recover before completing a Roth conversion. But that often makes the conversion more expensive. If an $800,000 IRA rebounds to $1 million, you’ll pay taxes on an additional $200,000.
Waiting can also increase the size of your future required minimum distributions (RMDs). Starting at age 73 (75 if you were born in 1960 or later), you’ll generally have to take annual distributions from your traditional IRA based in part on your account balance. A larger balance means larger taxable withdrawals, which can increase your tax bill and raise your Medicare premiums.
A financial advisor can help you make strategic Roth conversions to reduce future RMDs and minimize taxes.
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