Might be a good time for a Roth conversion (April 2025)

[MarieIG]

I've done modest conversions - my last one was done Monday. If a particular fund is down a significant amount, I tend to up the conversion a bit "in kind". And, of course, I can't time it perfectly.

 

[davidfin]

I know we don't like to talk timing too much here.

However. With the recent market drop, this *might* be a good time to do your Roth conversion.

For those new to the idea, it goes like this:
- Given: the market has ups and downs
- Given: the market will recover over time
- Given: gains in a Roth account are not taxed
- Therefore: convert to Roth or fund Roth during low times in the market

Anyone thinking about it?

I have taken this opportunity to move stocks from tIRA to my Roth IRA at discount expecting a SnapBack once the turbulence settles down.

 

[junkanoo]

Today's market is awarding tax-free gains to those who converted Friday or Monday.

Not clear yet.

Let's say that you have stocks/ETFs that are 30% off their high. You do an in-kind IRA to Roth Conversion. The only way that it's not "clear" is if your premise is that those investments will go down in the long-term. However, as the history of the stock market is that it always reaches new highs, you're betting against history.

So, if someone is in the 22% marginal tax bracket and expects to be in that bracket going forward and expects his/her heirs will be in that same bracket, it's reasonable to suggest that they just converted stocks on sale. Or said another way, they just did a Roth conversion effectively at the 15.4% tax rate as long as they didn't bump up into IRMAA penalties.

What if you died tomorrow? I'm guessing that many of us were in a higher tax bracket than 15.4% when we enjoyed the tax deferral on our 401k or T-IRA. And not to get in the weeds, but that was when the dollar was worth more. So, many of us are ahead of the game with such a conversion.

 

[Out-to-Lunch]

Let's say that you have stocks/ETFs that are 30% off their high. You do an in-kind IRA to Roth Conversion. The only way that it's not "clear" is if your premise is that those investments will go down in the long-term. However, as the history of the stock market is that it always reaches new highs, you're betting against history.

So, if someone is in the 22% marginal tax bracket and expects to be in that bracket going forward and expects his/her heirs will be in that same bracket, it's reasonable to suggest that they just converted stocks on sale. Or said another way, they just did a Roth conversion effectively at the 15.4% tax rate as long as they didn't bump up into IRMAA penalties.

Let's assume the stocks/ETF regain that 30% within a couple of months. In this example, what would your financial position have looked like if you had not done the conversion? And what would it look like if you waited until the stocks recovered before doing the conversion? (Hint: Commutative law | Definition, Meaning, & Facts | Britannica )

 

[GrayHare]

The commutative property applies only if the taxes on Roth conversion are paid with IRA money. Those taxes can instead be paid with non-tax-deferred money. The latter approach has increased my post-tax net worth by six figures.

 

[kgtest]

Still working. Did aggressive conversions. Now just adding net new to Roth until we retire. Plan is to just have it all in Roth. Inheritances may push us into higher brackets later. Maybe they live to 100 and then I guess the kids will benefit greatly.

 

[Out-to-Lunch]

The commutative property applies only if the taxes on Roth conversion are paid with IRA money. Those taxes can instead be paid with non-tax-deferred money. The latter approach has increased my post-tax net worth by six figures.

Of course, I agree that paying the taxes with taxable funds is preferable. One effectively moves money from a taxable account to a tax-free account, as I am sure you are aware.

But one must be careful to compare like for like. If one were to take funds from a money market account to pay the taxes, say, the risk profile of one's overall portfolio will have changed.

 

[Koolau]

Of course, I agree that paying the taxes with taxable funds is preferable. One effectively moves money from a taxable account to a tax-free account, as I am sure you are aware.

But one must be careful to compare like for like. If one were to take funds from a money market account to pay the taxes, say, the risk profile of one's overall portfolio will have changed.

Two very good points.

One of the reasons I felt comfortable with my Roth decisions, including paying with "safer" cash was that my equity position was already relatively low. My risk definitely increased somewhat, but still within acceptable levels for sleeping at night.

Thanks for bringing up this subject as it can be ignored.