Roth Conversion in a Down Market: Is it Right For You?

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Stock market volatility is alive and kicking, but that doesn’t have to be a bad thing, even if you’re not a day trader. Instead of buying on the dip, investors facing hefty future tax consequences on their retirement savings may want to consider a Roth conversion.

This occurs when you move money out of a traditional IRA or 401(K), 403(b) or 457(b), pay taxes on the withdrawals and shift it into a Roth IRA to enjoy future tax-free growth. Beyond the potential for tax-free gains, Roth IRAs have no required minimum distributions and allow tax-free withdrawals after five years and the age of 59-1/2.

Plus a Roth IRA conversion lets you convert all of your existing traditional IRA funds to a Roth IRA and get around the income limit. For 2025 if you make more than $150,000 as a single filer or $236,000 for a married couple filing jointly, you can’t contribute to a Roth IRA.

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“When markets are down you are getting more bang for your buck in terms of transferring in-kind securities at lower prices over to your Roth IRA,” says Rob Williams, managing director of financial planning, retirement income and wealth management for the Schwab Center for Financial Research. “If it bounces back within the Roth all that growth you may realize is tax exempt going forward.”

What’s more, Williams says Roth assets create more distribution options in retirement that can be used to reduce the taxes you pay on your retirement distributions.

It doesn’t hurt that, as it stands, tax rates are at historical lows compared to the past few decades. And that may not be the case next year if the Tax Cuts and Job Act expires in 2026, making a conversion all the more attractive.

Is a Roth conversion right for you?

The market selloff is not reason alone to undertake a Roth conversion. But if you check off any of the following boxes and were already considering a Roth conversion, the timing might be right.

1. You think your tax bracket will be higher when you retire. If you haven’t yet hit your peak earnings or accumulated a lot of savings in your tax-advantaged retirement accounts, then a Roth conversion could reduce future taxable income in retirement.

2. You can afford to pay the taxes for the conversion. With a Roth conversion you have two options: pay taxes from an after-tax fund or use some of the proceeds within the IRA. Nancy Gates, lead educator & financial coach at Boldin, the maker of financial and retirement software, says the rule of thumb is to pay the taxes from a separate after-tax account.

If you use funds in an IRA, you’re reducing the amount in the Roth that can grow tax free and that will benefit from compounding.

3. The conversion won’t push you into a higher tax bracket, jeopardizing your Social Security or Medicare. The Medicare Income-Related Monthly Adjustment Amount (IRMAA) is an additional premium charged for Medicare Part B and Part D if your income exceeds certain thresholds, based on your Modified Adjusted Gross Income (MAGI) from two years prior.

“If you are doing a huge Roth conversion at 63 you could unknowingly double your Medicare premiums,” says Gates. As for Social Security, a Roth conversion could raise your taxable income, leading to potentially more of a tax hit on your Social Security benefits.

4. You are sure you want to do the conversion. As of the Tax Cuts and Jobs Act of 2017, you can’t reverse the Roth conversion. Once it is complete, there’s no turning back.

“A Roth conversion is ideal for someone who has some after tax money, has high pre-tax balances and is projecting a higher future tax rate than they currently have or in intervening years,” says Gates. “RMDs (with a 401(k) or traditional IRA) can push you into a higher tax bracket.”

Consider spreading out your Roth conversions

If you were thinking about a Roth conversion, a downturn can be a motivating factor, but instead of doing it all at once, spreading it out over several years may be a better strategy. By spreading it out, Williams says you can achieve the following:

Max out your tax bracket: If you are single and make $150,000 and are in the 24% tax bracket, the next bracket kicks in when your income exceeds $191,950. By converting $41,950 of your traditional IRA, you can remain in the 24% tax bracket.

Spread it out: If you stretch your conversion out over several years, it will help you manage the tax hit and reduce the overall taxes you pay.

“If upcoming changes to tax law will adversely affect future taxes, converting some or all your traditional IRA in the year preceding the change could help you avoid paying more tax on the conversion than necessary,” says Williams.

Bottom line

Roth conversions in a down market can be a tantalizing way to transfer more assets into a retirement saving vehicle, but the stock market shouldn’t be the only reason you're taking action.

To make sure a Roth conversion is right for you, seek the advice of a financial adviser or use an online tool to test out different scenarios.

Donna Fuscaldo is the retirement writer at Kiplinger.com. A writer and editor focused on retirement savings, planning, travel and lifestyle, Donna brings over two decades of experience working with publications including AARP, The Wall Street Journal, Forbes, Investopedia and HerMoney.