Soaring inflation, interest rate hikes, and the war in Ukraine have led to ongoing stock market volatility. Retirement savers may be wondering, “Is now a good time to convert to a Roth IRA?”

With a variety of factors affecting the stock market, it may or may not feel like a great time to be an investor. If you have a traditional IRA, there are times you might consider converting it to a Roth IRA, in which case you’ll have to pay income taxes on the account balance transferred in the same year you make the conversion.

No one thinks there is ever a good time to effect a transaction that causes a tax bill, but if there ever was such a time, this may be it due to low interest rates and market conditions. In other words, considering a conversion to a Roth IRA when the market is down means that your account will be worth less, so your tax bill may be smaller.

Take into account the following hypothetical example: Suppose you have a $500,000 IRA and you are in the 35% tax bracket. If you converted, it would result in a $175,000 tax bill. If in that same account there is a market downturn of 20% (prior to converting), that changes the IRA’s value to $400,000. Using the same tax bracket, the new tax liability upon conversion would be $140,000, or $35,000 less.

While it’s impossible to predict market downturns, any thought and decision to convert should be done with the help of a Financial Advisor and with respect to your entire financial picture.

Let’s now add in two other considerations. First, if you plan on passing on your IRA, inherited IRAs must now be fully distributed within 10 years if not passed on to an eligible designated beneficiary (new tax laws now limit when a stretch IRA is allowed).

That means heirs inheriting IRAs will potentially pay taxes over a shorter period of time. Converting to a Roth IRA may help to avoid higher taxes down the road for your heirs. Second, IRAs are subject to required minimum distributions while Roth IRAs are not. Accordingly, Roth IRAs have the potential to increase net worth over time versus traditional IRAs.

Is a Conversion Right for Everyone?

Generally, one strategy does not work for everyone. Remember, increased income may impact your current year deductions, credits, exemptions, phase-outs, taxation of Social Security benefits, and certain Medicare premiums. Likewise, you should keep in mind you can no longer re-characterize a Roth IRA conversion back to a traditional IRA. Other important considerations are that Roth IRA distributions are tax- and penalty-free and Roth IRA earnings are tax-free when distributed.

Finally, a conversion is not an all or nothing action; you can decide to start with a partial conversion of your traditional IRA.

There are obviously many factors to include when considering converting from a traditional IRA to a Roth IRA. The next step in finding out what option may be best related to your personal goals is to discuss conversion considerations with your Financial Advisor.



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The examples provided are all hypothetical and do not take into account any specific situations. The hypothetical examples are provided to help illustrate the concepts discussed throughout and do not consider the effect of fees, expenses, or other costs that will effect investing outcomes. Please consult a professional to help you evaluate your situation before implementing any of the strategies discussed here.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

About the author

Jack Cintorino

Vice President & Senior Financial Planner

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