Why a Down Market is the Best Time for a Roth IRA Conversion
Plunging stock prices may keep investors up at night. But there's a silver lining to a down market: it's a prime time to save taxes on a Roth IRA conversion.
Watching your retirement portfolio take a hit is painful, but it offers an unexpected gift: a discount on your future tax bill. Converting to a Roth IRA during a down market lets you pay taxes on depressed share prices now, turning market losses into years of tax-free growth.
Kiplinger's investing experts expect the second half of 2026 to remain strong. At the same time, there are signs that some asset classes or industries (such as AI) may struggle, which could provide an opportunity for savvy investors to convert holdings that see a significant drop.
The benefits of doing a Roth conversion in a down market
Since the amount you pay in taxes on a Roth conversion is based on the dollar amount you convert, a lower account balance means you’ll pay less to the IRS.
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"The tax payment on the conversion is going to be smaller since the account value is lower," says Ben Rizzuto, wealth strategist with the Specialist Consulting Group at Janus Henderson Investors.
When moving a specific position, a smaller account balance doesn't mean the number of shares you convert to a Roth will be lower. In a down market, the value of the stock, mutual fund, or exchange-traded fund (ETF) may be depressed — but you'll still be able to convert the same number of shares.
How a Roth conversion in a down market works
Let's say you planned on converting a traditional IRA balance of $100,000. But the asset you own in the retirement account, say, an AI memory chip maker, suffers a 20% drop, reducing your balance to $80,000. The big decline in the stock price means you'll be able to convert all of your shares to a Roth IRA while only recognizing $80,000 in taxable income.
The depressed shares you convert to a Roth will benefit from an eventual market recovery inside the tax-free Roth wrapper. The upside? The future growth of those converted shares benefits from a longer runway to compound without IRS taxation, compared with a traditional IRA, which is taxed as ordinary income in retirement.
The best time to do a Roth conversion is in a year when not one but two financial forces are working in your favor.
The first, as discussed above, is a market pullback (a drop of 5% to 9.99% from a high), a correction (a 10% to 19.99% drop) or a bear market (a decline of 20% or more). Or, even if the market remains strong, you may be able to take advantage of a price drop in an industry or asset class.
The second is when your taxable income is lower than normal. In years when you report less income, you can convert more dollars to a Roth at a lower tax rate.
"That's a double benefit," says Steven Conners, founder and president of Conners Wealth Management. You end up converting fewer dollars and get taxed at lower rates.
How to decide if this Roth conversion strategy makes sense for you
Financial advisers, however, stress that a big market drop isn't the only factor a retirement saver should consider before doing a Roth conversion. Timing a Roth conversion based on market conditions is akin to trying to time a stock's purchase or sale.
The biggest factor by far when deciding whether to do a Roth conversion is the overall tax impact. Saving some money on taxes by doing a conversion during a down market doesn't necessarily mean doing the conversion is a slam dunk, financial pros say. You must look at the bigger tax picture you face in any given tax year.
A Roth conversion makes the most sense if your current income tax rate is lower than it will be in retirement. The idea is to pay a lower tax rate on the conversion now and pay zero taxes on withdrawals in the future when your tax rate is expected to be higher.
So, if you think your tax rate may be lower in retirement than it is now, you may want to hold off on a conversion even if a down market makes it a more attractive option, says Rizzuto.
Another factor to consider is whether converting a larger dollar amount to a Roth in a down market could result in an income increase large enough to bump you up to a higher — and more costly — tax bracket. That's something you want to avoid, especially if the conversion amount puts you at risk of going from the 22% or 24% tax bracket to the 32% bracket.
"You need to think about how much of a traditional IRA you are going to convert, and whether that conversion will bump you up into a higher tax bracket," says Rizzuto.
One way to dodge a higher tax bracket is to convert only a portion of your traditional IRA in a single tax year. Convert just enough dollars to stay below the higher bracket's threshold, then repeat the process over time. "The conversion can be done piecemeal," says Rizzuto
Once you've determined that the tax aspect of the conversion works in your favor, taking advantage of a down market to do the conversion makes an awful lot of sense, adds Conners.
That's especially true if you own a hard-hit tech stock or other company whose business model and future growth outlook remain intact. As explained above, moving a mispriced asset that’s likely to bounce back into a tax-free Roth account is likely to benefit you over the long haul.
"With a Roth, all your withdrawals will be tax-free, so you're better off from a conversion with a starting point when tech stocks are down 15% to 25% from their highs," says Conners. "That's a much safer spot to buy into something (i.e., a Roth) that's going to give you tax-free benefits down the line."
What to watch out for when following this strategy
Avoid Roth conversions that bump you up into a higher tax bracket. "Talk to your accountant and ask, ‘How much of my traditional IRA can I convert without bumping up my tax bracket?'" says Conners.
Make sure you have free cash to pay the tax bill. You don't want to sell assets from your IRA to pay the tax bill on the conversion, as it reduces the number of shares you can convert into a Roth and benefit from tax-free withdrawals. The goal of a Roth conversion is to move as many shares as possible under the tax-free umbrella to benefit from long-term growth. Remember that using IRA funds to pay the tax bill triggers an additional 10% early withdrawal penalty if the account holder is under 59½.
Avoid generating too much income and paying a Medicare penalty. A Roth IRA conversion increases your taxable income for that year, which can raise your premium two years later due to IRMAA (Income-Related Monthly Adjustment Amount) surcharges on Parts B and D if your modified adjusted gross income (MAGI) tops an income threshold ($109,000 for single filers and $218,000 for joint filers). For this calculation, the IRS looks back at income from two years ago. So, 2026 MAGI will impact 2028 Medicare premiums.
The bottom line? A down market doesn't necessarily mean it's always a good time to do a Roth conversion. But if the tax piece works in your favor, a bear market in stocks is a great time to move traditional retirement assets into a Roth account.
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