Editor’s Note: This story originally appeared on Boldin.
Watching your balances shrink during a market downturn isn’t easy. But there’s a lesser-known upside: It creates a good opportunity to do a Roth conversion at a lower tax cost.
This is one of the better planning moves a sliding market makes possible, and many investors miss it entirely.
“When markets are down, it’s hard to avoid the noise, and people have a natural tendency to want to do something versus just watch their balances decline,” says Mike Pappis, CFP and Head of Support at Boldin. “One of those potential things is looking into a Roth conversion to take advantage of lower valuations.”
It’s a rare scenario where a lower account balance can give you a strategic opening, which is easy to overlook when your portfolio takes a hit.
What’s a Roth Conversion?
A Roth conversion involves moving money from a pre-tax account, such as a traditional IRA or 401(k), into a Roth IRA. You owe income tax on whatever you convert in that year. After that, the money grows tax-free, withdrawals are tax-free if qualified, and there’s no RMD clock ticking on it. Anyone can do a conversion.
There’s also no income ceiling, meaning no cap on how much you earn to be eligible. That isn’t true for direct Roth contributions, which phase out at higher income levels. The only real constraint is the tax bill a conversion generates, which is why the amount you convert deserves some thought.
How Can a Down Market Lower Your Roth Conversion Tax Bill?
When share prices drop, you can convert the same number of shares for a lower dollar value, which means a smaller tax bill for the same position.
Here’s what that looks like with actual numbers.
Say you want to move 200 shares of a broad index fund that was trading at $60 last fall. Converting them last fall would’ve put $12,000 of ordinary income on your return. At $48 a share today, the same 200 shares come to $9,600. You’re moving the same position for $2,400 less in taxable income.
Those shares don’t know they’ve moved to a Roth. When they recover, the gains accumulate inside the tax-free account. You’ve effectively shifted future growth into a tax-free environment at a lower tax cost.
This is what retirement planners mean when they say downturns create Roth conversion opportunities. It’s a concrete, specific advantage, and it closes the moment prices recover. Advisors in the Boldin network consistently flag it as one of the most underused windows in retirement tax planning.
Who Should Actually Consider a Down-Market Conversion?
If you’re in the gap between leaving work and when Social Security and RMDs kick in, and markets are also down, a Roth conversion is worth modeling. But the key is that the decision should still be the right call even without the down-market discount.
“If a conversion makes sense for someone in a good market, a downturn is a real opportunity to act on it as a planning opportunity,” advises Mike.
Roth conversions pay off when your rate today is lower than what you’ll face later. For a lot of pre-retirees, that window opens when they leave work and closes when Social Security and RMDs push income back up. Tax brackets have room, and the Roth balance has years to compound before you need it.
Catch that window while markets are also down, and your Roth conversion strategy has two advantages running at once.
For people still working through peak earning years, the case is harder to make. The conversion adds to income that’s already getting taxed at a high rate. The down-market discount helps at the margin, but often isn’t enough on its own.
“People tend to overthink the timing of Roth conversions,” Mike notes. “There’s no perfect month and it doesn’t have to be an all-or-nothing decision. Spreading conversions out can give you more flexibility than trying to get it exactly right.”
Not sure if this applies to your situation? Start here:
- Are you in a lower tax bracket this year than you expect to be later?
- Do you have room to convert without jumping into a higher bracket?
- Do you have cash outside your IRA to cover the taxes?
If the answer to all three is yes, a down market makes the case even stronger.
What Are the Roth Conversion Limits for 2026?
The Roth conversion rules are simple: there’s no annual dollar cap and no income limit.
Direct Roth IRA contributions are a different story: $7,500 per year in 2026 ($8,600 if you’re 50 or older), and you can’t make them at all above $153,000 single or $242,000 joint (modified adjusted gross income, or MAGI).
Conversions skip all of that. The converted amount simply gets added to your ordinary income for the year and taxed at whatever rate applies.
How Do You Decide How Much to Convert to a Roth IRA?
The most common approach is bracket-filling: Determine how much room you have within a target tax bracket and convert up to that level.
The 2026 federal income tax brackets put the 22% bracket for married filing jointly (MFJ) between $100,800 and $211,400, with 24% starting above that.
Taxable income (MFJ)
Top of 22% bracket
Conversion room
$130,000
$211,400
$81,400
$160,000
$211,400
$51,400
$185,000
$211,400
$26,400
How much actually makes sense depends on where your income is headed, your mix of pre-tax and Roth money, and whether you’re trying to chip away at future RMDs.
“It’s really about looking at their total situation,” Mike says.
“Income for the year, what tax bracket they’re currently in, and their current tax rate versus their future rate. If someone’s projected to be in a lower bracket today than when they’ll take that money out in the future, then that’s where a Roth conversion can potentially make sense.”
What Are the Tax Side Effects of a Roth Conversion?
A few things are worth factoring in before you convert, like Social Security, Medicare surcharges, and how your IRA is structured. These aren’t reasons to avoid conversions. They’re just variables to plan around.
If you’re collecting Social Security, a big Roth conversion can pull up to 85% of your Social Security benefit into a taxable level, since conversions count toward combined income.
Then there’s Income-Related Monthly Adjustment Amount (IRMAA), the surcharge on Medicare Part B and Part D premiums tied to your income. It’s calculated using income from two years prior, so a conversion this year can raise your Medicare costs two years out.
The 2026 IRMAA thresholds (based on 2024 MAGI) are $109,000 for individuals and $218,000 for married filing jointly. That threshold adjusts for inflation each year, but many retirees still cross it each year as their RMDs grow.
Also, if your traditional IRAs hold a mix of pre-tax and after-tax dollars, the IRS treats each conversion as a proportional slice of your entire IRA balance. You can’t cherry-pick just the pre-tax portion. That’s called the pro-rata rule.
None of this makes a conversion a bad idea, but it can change what the right amount looks like, which is exactly why modeling Roth conversions matters.
Can You Undo a Roth Conversion?
You can’t take a Roth conversion back. A processed conversion is permanent, which raises the stakes on getting the amount right before you pull the trigger.
How you pay the tax bill matters too. Using money from outside the IRA preserves the full converted balance inside the Roth, where it compounds without drag.
“A common mistake I see is people paying the taxes from the conversion itself, especially if they have outside money available,” Mike says.
“You generally want to pay for the taxes from a Roth conversion from outside money. Cash in a savings account, a checking account, or money from a taxable brokerage account. Paying for the taxes from the conversion itself reduces the amount that actually makes it into the Roth. It undermines the whole strategy.”
Thinking through the full year before converting also matters. A portfolio rebalancing, a home sale, or a larger-than-usual IRA withdrawal can stack on top of the conversion and push you past a bracket line or IRMAA threshold.
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