Is now a good time for a Roth Conversion?

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Posted at 5:21 PM, Mar 16, 2022
and last updated 2022-03-16 17:21:29-04

We have recently seen a correction in the Stock Market, and News 3 spoke with our financial expert Carl Carlson CEO & Founder of Carlson Financial who says this may be a great time for a Roth Conversion.

A Roth Conversion is when you take a traditional IRA and/or 401k that you own and convert it from an IRA to a Roth IRA. Carlson said since the investments are essentially no longer in the Traditional IRA, it creates a taxable event and the taxes must be paid for the tax year the conversion was made. He said because the investments are now in a Roth IRA, they will grow tax-free and can be withdrawn tax-free after owning the Roth IRA for a minimum of five years.

According to Carlson, it is not better to do the conversion after retirement.

"I would say that more often than not, the people we work with end up being in the same tax bracket or sometimes a higher tax bracket in retirement. So, if we are going to be in the same or higher tax bracket when we retire then it may make sense to pay the taxes now as long as it is at the same or lower tax bracket than the retirement picture," Carlson said.

He said we are currently in historically low tax rates, and they are automatically set to sunset and go back up at the end of 2025.

"Often if we can manage our retirement income right we can pay substantially less taxes on our social security once we start taking it. Also, when money is in a Roth IRA there is no Required Minimum Distribution so taking money out in retirement won’t cause other income to be taxed at possibly higher brackets," Carlson states.

If planning to do a Roth Conversion, Carl Carlson said the absolute best time to do it is when the value of the investments in the IRA are at their lowest.

A stock market correction means the market has fallen by at least 20% from a recent high, which is currently the case with the NASDAQ, with many falling 30-50%.

When you do the conversion, it is based on the current market value of the investments. If you have stocks and maybe some ETF’s, then you could be selective and convert the ones that are down more than 30% to a Roth. Then, when they eventually come back up to their previous high, you will have made close to 50% on your investments with no tax on them, Carlson said.

"If you did this with $65,000 then when it comes back up to $100,000 you would have saved the taxes on $35,000. You would have gotten $35,000 out of your IRA and into a Roth IRA tax free. If your state and federal tax brackets were a combined 30%, that is a $10,500 tax savings and now the money is growing tax free and can be withdrawn tax free," he said.