While the market may not be a fun time for investors, there are some bright spots and opportunities to be had. Stock market drops like we\u2019ve seen recently might make a Roth IRA conversion more appealing as a strategy for investors.<\/p>\n
Should you consider converting a traditional IRA to a Roth during a down market? There are a few things to consider before doing so.<\/p>\n
What is a Roth conversion?<\/strong><\/p>\n Before you embark on a Roth conversion, you need to fully understand what it is. When you have a traditional IRA, those are pre-tax dollars that you\u2019re investing. While money grows tax-free, when you later go to take a withdrawal, every dollar you pull will be taxed.<\/p>\n With a Roth IRA, you are investing post-tax dollars, and when you convert a traditional IRA to a Roth, you pay the full tax during the year that you convert, at ordinary income rates. Then, the dollars that you\u2019ve converted will grow tax-free for the remainder of the time that they sit within the investment. When you later take money out of a Roth, it\u2019s all tax-free, if you are 59 \u00bd or older and follow a few rules.<\/p>\n Important information on Roth conversions in a down market<\/strong><\/p>\n When you start a Roth conversion, you\u2019ll be responsible for paying the tax due on any pre-tax contributions or earnings with the traditional IRA. The benefit here is that if the market has dropped, it\u2019s likely that your IRA value has dropped along with it \u2013 so your full value has gone down, and you\u2019ll be paying taxes on the current value (which is lower, due to the market being down). So, in theory, you can convert a larger portion of your IRA in a down market and pay less in taxes than you could in years when the market is up.<\/p>\n