Why a Market Downturn Can Be a Smart Time for a ROTH Conversion
Josh Elmore, CFP® | CKA®- Apr 21
- 3 min read
Updated: Apr 22
When markets take a dive—dropping more than 15%, for instance—it may trigger some anxiety. But for proactive investors, it can also present a strategic opportunity: converting traditional IRA dollars to a Roth IRA. While the headlines may be shouting doom and gloom, tax-savvy investors know this is when some of the best financial planning moves can be made.
Here’s why a down market may be the perfect time to consider a Roth conversion.
What Is a Roth Conversion?
A Roth conversion involves transferring money from a Traditional IRA (or other pre-tax retirement accounts) into a Roth IRA. You’ll pay ordinary income taxes on the converted amount in the year you make the conversion, but from that point forward, the money grows tax-free—and can be withdrawn tax-free in retirement (assuming certain conditions are met).
Why Market Declines Create a Unique Opportunity
You’re Paying Taxes on a Lower Balance
When the market drops 15% or more, the value of your Traditional IRA likely falls too. By converting while account values are down, you effectively pay taxes on a reduced balance. For example:
If your IRA was worth $100,000 and drops to $85,000, converting at the lower value means you pay tax on $85,000 instead of $100,000.
When the market rebounds (as it historically has), that recovery happens inside the Roth IRA—where growth is now tax-free.
Capture the Recovery in a Roth
Timing a conversion during a downturn allows you to “shift” future gains into a tax-free environment. If the market recovers 20%, that $85,000 becomes $102,000 in the Roth. Had you left it in the Traditional IRA, you’d still owe taxes on that growth later.
Tax Bracket Management
If your income is lower this year—for example, if you’ve retired early, sold a business, or taken time off—you may be in a lower tax bracket than in future years. A down market plus a lower income year is a double incentive: low balance and low tax rate.
Other Considerations
Cash to Pay Taxes: Ideally, you should have cash outside of your IRA to pay the tax bill. Using IRA funds to pay taxes reduces the benefit of the conversion and may even trigger penalties if you’re under age 59½.
Five-Year Rule: Each Roth conversion has its own 5-year clock before the converted funds can be accessed penalty-free. Make sure you understand how this could affect your liquidity in retirement.
Impact on Medicare & Tax Credits: Large conversions may increase your adjusted gross income and affect things like Medicare premiums or eligibility for tax credits. Planning and modeling are key.
Is a Roth Conversion Right for You?
As with most financial planning techniques and guidance, the impacts of said techniques vary from individual to individual. As always, each investor should work with their team of financial pro's to model the numbers and weigh the benefits for their specific goals.
Generally, conversions make the most sense if:
You expect to be in the same or a higher tax bracket later.
You have a long time horizon before needing the funds.
You can pay the tax bill from outside the IRA.
You want to reduce future required minimum distributions (RMDs).
You’re looking to leave tax-free assets to heirs.
Bottom Line
Market downturns are painful, but they can be a gift in disguise when it comes to Roth conversions. Instead of panicking, think strategically. By converting when your account values are temporarily low, you can pay less tax now and enjoy more tax-free growth later.
If you need help deciding whether or not ROTH conversions may be a good idea for you, schedule an intro call today!
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