Should I Do a Roth Conversion When the Market Is Down?

Your IRA was worth $1 million.

Then the market falls.

You log in and see:

$820,000.

That hurts.

Then somebody says:

“This is actually the perfect time to do a Roth conversion.”

Now you’re thinking:

“How can losing $180,000 possibly be good news?”

A lower account value can create an interesting Roth conversion opportunity.

But I wouldn’t call a market decline an automatic Roth conversion signal.

The market being down can improve part of the conversion math without proving that the conversion itself makes sense.

Quick Answer: Should You Do a Roth Conversion When the Market Is Down?

A market decline can make a Roth conversion worth evaluating because assets may be converted at lower current values.

If those assets later recover while held in the Roth IRA, future growth occurs inside the Roth structure.

Qualified Roth IRA distributions are generally tax-free when applicable requirements are satisfied.

But several things still have to be tested:

• Your taxable conversion amount
• Your marginal tax bracket
• Your conversion timeline
• Your available cash for taxes
• Future growth assumptions
• Medicare IRMAA
• Social Security
• Future RMDs
• Your liquidity
• Your surviving spouse
• Your legacy goals

A lower market value creates an opportunity to run the math. It doesn’t create an obligation to convert.

Why Can a Market Decline Help the Roth Conversion Math?

Think about the assets rather than only the account balance.

Suppose you own an investment inside your traditional IRA.

It was worth $200,000.

After a market decline, it’s worth $150,000.

If you convert that investment while its value is $150,000, the conversion is generally based on the value transferred at the applicable time.

You’re moving the asset at a lower current value.

If the asset later recovers inside the Roth, that recovery occurs inside the Roth account.

You’re not converting yesterday’s value. You’re converting the asset at its current value.

A Simple $200,000 Example

Imagine an investment inside your traditional IRA is worth $200,000.

You were already considering converting it.

Then the investment declines 25%.

Now it’s worth $150,000.

For a simplified illustration, assume the asset is entirely pretax.

If you convert it now, you’re generally creating approximately $150,000 of conversion income rather than $200,000.

Then imagine the asset eventually recovers to $200,000 while inside the Roth IRA.

The $50,000 recovery occurred after the conversion.

That’s the basic reason market declines get the attention of Roth conversion planners.

But You Don’t Know When the Market Will Recover

This is where the sales pitch can get sloppy.

Someone says:

“Convert now while the market is down. It’ll come right back.”

Maybe.

But nobody knows exactly when the market will recover.

The account could fall another 10%.

Or 20%.

Or recover quickly.

A Roth conversion shouldn’t require pretending we know where the market bottom is.

What If I Convert and the Market Keeps Falling?

This is a real risk.

Suppose you convert $200,000.

You create taxable conversion income based on the transaction.

Then the converted assets fall to $150,000.

Your first thought might be:

“Fine. I’ll just undo the conversion.”

Under current federal rules, Roth conversions made after 2017 generally can’t be recharacterized back to a traditional IRA.

So a later market decline doesn’t normally give you an undo button.

The market can change after the conversion. The tax decision has already happened.

That’s Why I Don’t Want to Guess the Bottom

The strategy doesn’t need:

“This is definitely the bottom.”

It needs:

“At this valuation, does converting this amount produce stronger projected retirement math than the alternatives?”

That’s a completely different question.

Could You Convert in Stages During a Market Decline?

That’s one strategy worth modeling.

Instead of converting $300,000 immediately, you may evaluate several partial conversions.

For example:

$75,000.

Then reassess.

Another $75,000.

Then reassess again.

This doesn’t guarantee a better result.

It doesn’t guarantee you’ll capture the market bottom.

But it can create another way to manage the size and timing of taxable conversions.

You don’t need to correctly identify the worst market day of the year to have a Roth conversion strategy.

What If I Was Already Planning to Convert?

This is where a market decline may become especially relevant.

Suppose your Roth Blueprint already supported a multi-year conversion.

You planned to convert $150,000 this year.

Then the market drops 20%.

Now we have new information.

Maybe the original conversion amount still makes sense.

Maybe more assets can be converted around the tax-bracket target being evaluated.

Maybe the strategy should stay exactly where it was.

The market decline doesn’t replace the Roth conversion plan. It gives us a reason to rerun it.

Our Roth Blueprint Software Can Assess Thousands of Potential Scenarios

This is why we use our Roth Blueprint software.

I don’t want to see a 20% market decline and say:

“Convert everything.”

I want different strategies to compete.

Roth Blueprint can assess thousands of potential modeled scenarios involving different:

• Conversion amounts
• Conversion starting years
• Conversion periods
• Tax-bracket targets
• Projected conversion taxes
• Traditional IRA balances
• Roth balances
• Retirement dates
• Social Security
• Pension income
• Projected RMDs
• Potential Medicare IRMAA
• Personal liquidity
• Retirement-income outcomes
• Surviving-spouse outcomes
• Legacy outcomes

Then we can update the model as account values change.

A Roth conversion model should respond to reality. Reality shouldn’t be forced to match an old model.

Does a Lower Account Value Mean a Lower Conversion Tax?

It can mean less taxable conversion income when the same assets are converted at a lower value, assuming those amounts are otherwise taxable.

But don’t confuse:

“The investment is down 20%”

with:

“My tax bill will be 20% lower.”

Your actual tax liability is based on your complete tax situation.

That includes:

• Other income
• Filing status
• Taxable conversion amount
• IRA basis
• Deductions
• Credits
• Marginal tax brackets
• State taxes

Lower asset value can reduce the income associated with converting those assets. Your actual tax bill still needs to be calculated.

Should I Convert More Because the Market Is Down?

Not automatically.

This is where enthusiasm can become expensive.

Suppose you planned a $100,000 conversion.

The market falls.

Now someone says:

“Let’s do $300,000 instead.”

Why?

If the answer is only:

“Because the market is down,”

that’s not enough.

The larger conversion could push more income into higher marginal brackets.

It could affect Medicare IRMAA.

It could consume substantially more cash for taxes.

A market discount doesn’t make the income-tax consequences disappear.

Should You Target a Specific Tax Bracket?

That’s one approach we can model.

We can ask:

“What tax bracket are we trying to target, and how much conversion income can the model accommodate around that target at the current account value?”

Then compare alternative targets.

The Roth Blueprint software doesn’t control tax law.

It helps us control the conversion amount in the model around the bracket target being evaluated.

Could a Higher-Bracket Conversion During a Market Decline Still Win?

Potentially.

Suppose a market decline creates an opportunity to move substantially more assets into Roth.

Doing so puts some conversion income into a higher marginal bracket.

That’s a larger current tax cost.

But if those assets later recover inside the Roth, future traditional IRA balances may be materially different.

So might projected:

• RMDs
• Taxable retirement income
• Medicare costs
• Surviving-spouse outcomes
• Legacy outcomes

That doesn’t mean the higher-bracket conversion wins.

It means it deserves to compete.

The lowest current tax bill isn’t automatically the strongest projected retirement outcome.

What If the Market Recovers Quickly?

Imagine you convert assets worth $150,000.

A year later they’re worth $190,000.

The recovery happened inside the Roth.

That can be attractive.

But don’t build the strategy around assuming a quick recovery.

Markets don’t sign contracts promising to return to their previous highs on your schedule.

Market recovery can improve the outcome. It shouldn’t be the only thing holding the strategy together.

What If the Market Takes Years to Recover?

Then the analysis needs to survive that too.

You’re not 35.

Maybe you’re 62.

Or 67.

You may need withdrawals while the account is recovering.

Your time horizon matters.

Your asset allocation matters.

Your income sources matter.

Your liquidity matters.

A Roth conversion tax strategy and an investment strategy are connected, but they’re not the same decision.

Don’t Let the Tax Tail Wag the Investment Dog

Here’s another mistake.

You own an investment you no longer want.

But someone says:

“Don’t sell it. Convert it to Roth first because it’s down.”

Tax planning shouldn’t force you to keep an investment that no longer belongs in your portfolio.

Investment suitability and tax strategy both matter.

A tax-efficient bad investment is still a bad investment.

Can You Convert Investments In Kind?

Custodian procedures can allow eligible securities to be transferred from a traditional IRA to a Roth IRA without selling them first in some situations.

The value associated with the conversion still matters for tax reporting.

Actual procedures and valuation methods should be confirmed with the custodian and qualified tax professionals.

This can matter during a market decline because the investment itself may move from the traditional IRA into the Roth.

What About Future RMDs?

A market decline doesn’t make the RMD issue disappear.

If you leave assets in the traditional IRA and they later recover, the traditional balance may grow again.

Future RMDs are based on applicable account values and distribution rules.

Converting assets reduces the amount remaining in the traditional IRA compared with leaving those same assets there.

That can reduce projected future RMDs.

But:

The future RMD reduction has to earn the conversion tax.

What If I’m Already Taking RMDs?

A market decline can still make additional Roth conversion analysis relevant.

But if an RMD is required for the year, the required distribution itself isn’t eligible to be converted.

After the applicable RMD is addressed, additional eligible traditional IRA assets may still be evaluated for conversion.

Today’s RMD and today’s Roth conversion are two different transactions.

What About Medicare IRMAA?

A market decline doesn’t change the fact that taxable Roth conversion income can increase modified adjusted gross income used for Medicare IRMAA calculations.

You may save conversion tax by moving assets at a lower value and still create additional Medicare costs.

Both belong in the comparison.

Make IRMAA compete against the rest of the retirement math.

What About Social Security?

If you’re already receiving Social Security, taxable conversion income can interact with the calculation used to determine how much of your Social Security benefits are included in taxable income.

Under current federal rules, up to 85% of Social Security benefits can be included in taxable income for some taxpayers.

That’s not an 85% tax rate.

A market decline doesn’t remove that interaction.

What If I Retired During the Market Decline?

Now two planning opportunities may arrive at the same time.

Your salary stops.

Your traditional IRA falls in value.

Social Security may not have started.

RMDs may still be years away.

That can create a very interesting Roth conversion window.

But it can also create anxiety because your retirement assets just fell right when your paycheck disappeared.

The tax opportunity may be improving at the exact moment your willingness to take financial risk is falling.

This Is Where Psychology Can Destroy a Good Decision

You open your statement.

$1.2 million became $950,000.

You don’t feel like you have an opportunity.

You feel like you lost $250,000.

Then somebody asks you to voluntarily pay a large tax bill.

Your brain says:

“Absolutely not. I’m not doing anything until this money comes back.”

That’s understandable.

But waiting for the account to recover before evaluating a conversion may mean evaluating the same assets at higher values later.

Feeling worse about the account doesn’t automatically mean the planning opportunity got worse.

The Opposite Emotional Mistake Is Just as Dangerous

Somebody tells you:

“This is a once-in-a-lifetime Roth conversion opportunity.”

Now urgency takes over.

You feel like you have to convert immediately before the market rebounds.

That’s dangerous too.

You still need to know:

• How much to convert
• The projected tax
• Where the tax money comes from
• What happens if markets fall further
• What happens if markets recover
• What happens to liquidity
• What happens to Medicare
• What happens to future RMDs

A falling market isn’t permission to skip the analysis.

What About the Surviving Spouse?

Imagine you’re married with $1.5 million in traditional retirement assets before a downturn.

The account falls to $1.2 million.

You evaluate partial Roth conversions while values are lower.

The question isn’t only what happens if markets recover during your lifetime.

We also want to see what happens if one spouse dies first.

The surviving spouse may still face:

• Traditional IRA balances
• RMDs
• Social Security changes
• Pension changes
• Medicare
• A different tax-filing picture

A market downturn can create a temporary valuation opportunity inside a retirement problem that may last for decades.

How Do You Pay the Conversion Tax During a Market Decline?

This becomes especially important when markets are falling.

You may be reluctant to sell investments at depressed values to pay taxes.

So the tax-funding strategy deserves its own analysis.

Option 1: Personal Savings

You use outside cash.

That may allow more of the converted assets to remain positioned inside the Roth.

But your personal liquidity decreases.

And during a market decline, cash can feel especially valuable.

Option 2: Retirement Assets

You may evaluate retirement assets as part of the tax-payment strategy.

This can preserve outside savings.

But it may reduce the amount remaining in the retirement strategy and can create additional tax consequences.

Selling depressed assets for taxes can also change the economic comparison.

Option 3: Contractual Carrier Bonus Value

When suitable, certain annuity contracts may provide contractual carrier bonus value.

That value can be included in the economic comparison.

In some modeled strategies, contractual carrier bonus value may economically offset some or potentially all of the conversion-tax cost over the strategy period.

That can potentially reduce the need for additional personal out-of-pocket cash from an overall economic standpoint.

The insurance carrier doesn’t assume your IRS tax liability.

The bonus isn’t an IRS tax credit.

The tax still exists and remains the client’s responsibility.

Bonus terms, vesting, surrender provisions, liquidity, product charges, participation rates, crediting methods, guarantees, and other contractual features need to be evaluated.

A Market Decline Doesn’t Make a Bonus Product Automatically Better

Product choices still need to compete.

A bonus annuity may preserve more personal cash in a modeled conversion strategy.

A non-bonus product may offer different participation rates, crediting terms, liquidity, or growth potential.

The tradeoffs need to be measured.

A 20% bonus inside a bad overall strategy is still a bad strategy.

Don’t Start With the Market

Here’s the order I want.

First:

Does a Roth conversion deserve consideration?

Second:

How has the market decline changed the conversion math?

Third:

How much should be converted?

Fourth:

Over what timeline?

Fifth:

How should the conversion tax be addressed?

The market decline can improve the opportunity. It doesn’t get to make the decision.

The Real Fear Isn’t the Market

You’re 62.

Your IRA just dropped $200,000.

Now you’re being asked to create a taxable event.

You think:

“What if we convert and the market drops another 20%?”

Then the deeper thought arrives:

“What if we mess this up and regret it?”

This isn’t money you can casually replace with another 30-year career.

You don’t want a mistake becoming your children’s problem.

“I don’t want to ask my kids for help.”

You’ve handled your own finances your entire adult life.

“We should be able to handle this ourselves.”

That’s why I don’t want fear making the decision.

And I don’t want excitement making it either.

I want the conversion to prove itself at the new account value.

The Retirement Math Method™

This is why we use our Retirement Math Method™.

We don’t start with:

“The market is down. Convert.”

We don’t start with:

“The market is scary. Wait.”

We start with your actual retirement situation.

Then our Roth Blueprint software can assess thousands of potential modeled alternatives.

We can compare:

• No Roth conversion
• Partial conversions
• Different conversion amounts
• Different conversion starting dates
• Different multi-year conversion periods
• Different tax-bracket targets
• Projected conversion taxes
• Traditional IRA balances
• Roth balances
• Projected RMDs
• Social Security
• Pension income
• Potential Medicare IRMAA
• Different tax-funding approaches
• Personal liquidity
• Projected retirement income
• Surviving-spouse outcomes
• Legacy outcomes

Then when the market changes, we can update the numbers.

Maybe the conversion becomes more attractive.

Maybe it doesn’t.

Maybe the amount changes.

Maybe the timeline changes.

The point isn’t to predict the market bottom. The point is to understand what the market decline changed.

I don’t try to sell you on the strategy. I make the strategy prove itself with the math.

Frequently Asked Questions About Roth Conversions During Market Downturns

Is a market downturn a good time for a Roth conversion?

A market decline can create a Roth conversion opportunity because assets may be converted at lower current values. The conversion still needs to be evaluated against taxes, liquidity, future growth assumptions, RMDs, Medicare, Social Security, and the no-conversion alternative.

Why can a lower IRA value help a Roth conversion?

If an investment has declined in value, converting that investment at its lower current value may create less taxable conversion income than converting the same investment at a higher value, assuming the amount is otherwise taxable.

What happens if the market recovers after my conversion?

If converted assets recover while held in the Roth IRA, that recovery occurs inside the Roth structure. Qualified Roth IRA distributions are generally tax-free when applicable requirements are satisfied.

What happens if the market falls after I convert?

The Roth assets can continue declining after conversion. Current Roth conversions generally can’t be recharacterized back to a traditional IRA simply because the investment subsequently loses value.

Can I undo a Roth conversion after a market loss?

Under current federal rules, Roth conversions made after 2017 generally can’t be recharacterized back to a traditional IRA.

Should I convert my entire IRA because the market is down?

A market decline alone doesn’t justify a full conversion. A large conversion can create substantial taxable income, affect marginal tax brackets and Medicare, and require significant liquidity for taxes.

Can I do several smaller conversions during a downturn?

Partial conversions can be evaluated rather than converting the entire planned amount at once. This can provide another way to manage taxable conversion income as market values and the tax picture change.

Can a market decline reduce future RMDs?

A market decline itself can reduce account values used in future calculations, while Roth conversions can separately reduce the amount remaining in traditional retirement accounts. Future values and RMDs remain uncertain.

Can I convert after RMDs have started?

Yes, eligible traditional IRA assets may still be evaluated for conversion after RMDs have begun. The RMD required for the year itself isn’t eligible for conversion.

Can a Roth conversion during a downturn affect Medicare?

Yes. Taxable conversion income can increase modified adjusted gross income used in Medicare IRMAA calculations and may affect future Part B and Part D premiums.

Should I use savings to pay the conversion tax during a downturn?

Outside savings can be evaluated as one tax-funding source. This may allow more converted assets to remain positioned inside the Roth, but it reduces personal liquidity.

Can Roth Blueprint model a market-downturn conversion?

Our Roth Blueprint process can assess modeled scenarios involving conversion amounts, conversion timelines, projected taxes, tax-bracket targets, RMDs, Medicare IRMAA, Social Security, retirement income, liquidity, spouse outcomes, and other factors.

Can a carrier bonus help address Roth conversion taxes?

When suitable, certain annuity contracts may provide contractual carrier bonus value that can be included in the economic analysis. In some modeled strategies, that value may economically offset some or potentially all of the conversion-tax cost over the strategy period. The carrier doesn’t assume the client’s IRS tax liability, and the bonus isn’t an IRS tax credit.

Don’t Wait for Someone to Ring a Bell at the Market Bottom

Nobody knows exactly when the bottom arrives.

You don’t need to know.

You need to know whether the current account value changed the Roth conversion opportunity enough to justify action.

Run the new numbers.

Compare doing nothing.

Compare partial conversions.

Compare different tax-bracket targets.

Compare different timelines.

Then decide.

A market decline can create a Roth conversion opportunity. The math still has to prove that the opportunity is worth taking.

Want to See What a Market Decline Does to Your Roth Conversion Math?

If you have $500,000 or more in IRAs, 401(k)s, or other tax-deferred retirement assets, a significant market move can be a good reason to rerun the Roth conversion numbers.

Using our Roth Blueprint software and Retirement Math Method™, we can assess thousands of potential scenarios.

No conversion.

Partial conversions.

Different annual amounts.

Different multi-year timelines.

Different tax-bracket targets.

Projected conversion taxes.

Projected RMDs.

Potential Medicare IRMAA.

Social Security.

Pension income.

Retirement income.

Liquidity.

Your surviving spouse.

Your legacy.

And different approaches to addressing the conversion-tax cost.

You see what changed.

You see what happens if you convert.

You see what happens if you don’t.

Then you decide.

We don’t sell you a retirement strategy. We run the math and let you decide.

Schedule Your No-Pressure Retirement Strategy Appointment

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Important Disclosure

This article is for educational purposes only and isn’t intended as individualized tax, legal, investment, accounting, insurance, Medicare, Social Security, or retirement-planning advice. Investing involves risk, including possible loss of principal, and market declines can continue after a Roth conversion occurs. No market recovery, investment return, account value, or future performance is guaranteed. Roth conversions generally create taxable income to the extent converted amounts would otherwise be taxable. Current federal rules generally don’t allow a completed Roth conversion to be recharacterized back to a traditional IRA. Roth conversions may affect federal and state taxes, marginal tax brackets, Medicare premiums, Social Security taxation, future RMDs, liquidity, beneficiary outcomes, and other parts of a financial plan. Qualified Roth IRA distributions are generally tax-free when applicable requirements are satisfied. Tax laws, retirement-account rules, Medicare rules, Social Security rules, and RMD provisions can change. Roth Blueprint calculations and other projections are based on assumptions and information entered into the analysis and cannot guarantee a particular tax result, tax bracket, Medicare premium, RMD reduction, investment result, market recovery, retirement-income result, surviving-spouse result, legacy result, or future product performance. Insurance and annuity products may contain fees, charges, surrender periods, liquidity restrictions, eligibility requirements, bonus provisions, participation rates, caps, spreads, crediting methods, and other contractual terms. A carrier bonus isn’t an IRS tax credit and doesn’t transfer the client’s tax liability to an insurance company. Statements that contractual carrier bonus value may economically offset some or potentially all of a modeled conversion-tax cost aren’t statements that the tax disappears or that the carrier directly pays the client’s tax liability. Before implementing a Roth conversion, changing investments, taking a distribution, purchasing an insurance or annuity product, or making other retirement decisions, consider working with qualified financial, tax, insurance, legal, and other appropriate professionals who can evaluate your individual circumstances.