Have you converted your traditional IRA to ROTH yet? The market turmoil presents an excellent opportunity to do so with a lower tax impact. Here’s how it works.
Since the market is down, the stocks & bonds in your traditional IRA are likely worth less than they were last year. This means the amount of tax you have to pay on the conversion will also be less. Over time, we know the market will recover & the value will go up, but once you pay taxes on a ROTH conversion, that’s it; no more taxes even on the growth.
ROTH IRAs are retirement accounts for which you’ve already paid all the tax. You contribute with after-tax dollars & don’t have to pay tax again, even when you take it out.
There are income limits to directly funding a ROTH, & that’s when the backdoor conversion comes in.
To make a conversion, you must first fund a traditional IRA account. Then work with your advisor to convert it to a ROTH. It’s best to have both the traditional & ROTH accounts with the same custodian as it simplifies the conversion process.
The key to ROTH conversations in a bear market is not to be too aggressive. It is impossible to time the market. Volatile markets tend to be volatile for a while & the converted amount could continue to drop in value resulting in taxes on a value that is no longer there. Ask us if a ROTH conversion is appropriate for your tax situation.