The Midterms Offer a Unique Tax Planning Opportunity, But Most Retirees Miss It
Markets tend to experience uncertainty leading up to midterm elections, followed by recovery. Canny investors recognize that dip as a great opportunity for tax planning.
Most people with about $1 million or more in pretax 401(k)s and IRAs see a rough market year and do exactly nothing. When the market is falling, paralysis feels like safety.
But a midterm election year pullback can be one of the most powerful tax planning windows available in personal finance.
Earlier this year, a client came to us with about $2 million in a traditional IRA. The market had pulled back roughly 8% — and she was nervous.
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Instead of sitting tight, we converted about $200,000 to her Roth IRA at the discounted value. That single decision is on track to potentially save her tens of thousands in lifetime taxes.
Here's why that opportunity tends to show up in midterm years — and how to recognize it in your own retirement plan.
What history actually shows us about midterm years
Since 1950, nearly every midterm election year has produced a meaningful intrayear pullback in the S&P 500. The average intrayear drop across midterm years has been about 16.7%. Uncertainty around election outcomes, potential policy shifts and investor sentiment have tended to compress returns in that pre-midterm window.
That compression may create an opportunity.
Because, historically, once the midterm passes, returns have tended to recover meaningfully.
The average 12-month return following midterm year lows has historically come in at about 36.5%. It is important to note that past performance is not indicative of future results, and these historical patterns may not repeat.
Think about what that could mean for a Roth conversion strategy. Converting during a dip may allow the potential recovery to happen inside the Roth account — where that growth could be completely tax-free for the rest of your life, assuming qualified distributions.
Why a portfolio drop may equal a discount on your tax bill
When you do a Roth conversion, the IRS taxes you on the dollar amount you convert — not on how many shares you move.
So if your IRA holds shares of a broadly diversified index fund, and those shares are down about 15% from their peak, you may be able to convert the same number of shares at a roughly 15% lower taxable value.
Same shares. Potentially lower tax bill.
Consider a hypothetical scenario (for illustration purposes only). Say you have about $2 million in an IRA and the market pulls back about 15%. Your account might be worth roughly $1.7 million. You convert about $150,000 worth of shares.
If the market then recovers — and there is no guarantee it will — that recovery would happen entirely inside your Roth account. So, no income tax on the gains. No required minimum distributions (RMDs) later. No additional tax when you eventually withdraw, assuming qualified distributions.
A down market is not necessarily a threat to a Roth conversion strategy. It may actually be an opportunity.
Who should be paying attention right now
The ideal candidate is generally between ages 50 and 65, with roughly $1 million to $5 million in pretax accounts and most of their retirement savings in those pretax buckets.
This is what I call the income valley: The window between when you stop working and when Social Security, pensions or RMDs begin. Taxable income may be temporarily lower during this period, creating space in your income tax bracket that many people never take advantage of.
In 2026, the 22% bracket for married couples went up to about $191,450, and the 24% bracket stretches to about $364,200. Converting in a year when Social Security and RMDs haven't started may allow you to stay inside those brackets.
That same conversion at about age 75, stacked on top of RMDs and Social Security, could potentially push you into the 32% bracket or higher.
One more consideration: IRMAA. A Roth conversion raises your modified adjusted gross income (MAGI) in the year you convert, which gets reported to Medicare about two years later.
A poorly sized conversion could potentially increase your Medicare premiums. Tax brackets and IRMAA thresholds are subject to change and should be verified with a tax professional.
Three steps to consider before this window closes
Step 1: Know about where you stand in your tax bracket. Review your most recent tax return and estimate how much room you have before hitting the next bracket threshold. Know your number before converting a single dollar.
Step 2: Consider your IRMAA thresholds before acting. Model the impact of your conversion on your MAGI and the potential Medicare premium effect two years out. Size conversions thoughtfully to avoid unnecessary surcharges.
Step 3: Work with a tax-first adviser before executing. The interaction between your conversion amount, tax bracket, IRMAA exposure, Social Security timing and RMD projections requires a detailed multiyear model specific to your situation. Done thoughtfully, a Roth conversion strategy over a seven- to 10-year window may potentially save significant amounts in lifetime taxes.
The window may be open — but not forever
Markets recover. Bracket space fills up. RMDs begin. The combination of a market pullback, lower income and time still available is historically one of the more favorable environments for Roth conversion planning.
For anyone with about $1 million or more in pretax accounts who has not yet run a detailed Roth conversion analysis, 2026 may be worth a closer look.
The investors who look back on this period may not remember it as the year the market made them nervous. They may remember it as the year they made a thoughtful, well-timed move.
The bottom line
Midterm election years have historically brought more volatility and deeper drawdowns than average. While that can be unsettling, it also creates a retirement income planning window that doesn't show up every year.
Roth conversions are fundamentally about paying taxes at the most efficient time. And when market values are temporarily lower, that efficiency can improve significantly.
The key isn't predicting the bottom. It's having a conversion plan in place before the next dip arrives and knowing your tax bracket, your conversion ceiling and which accounts to move first.
If you're within five years of retirement or already there, ask yourself this: If the market dropped 15% tomorrow, would I know exactly how much to convert and into which account?
If the answer is no, that's the planning gap to close now. Because sometimes, the best tax opportunities come from uncertain markets, not calm ones.
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