The theme this week on the Retirement Quick Tips Podcast is: Don’t Just Sit There. Do Something! If you can do something proactive other than just sitting on your hands and hoping that the markets turn around soon, you’ll be better able to get through this difficult time while keeping your long term investment strategy intact. 

Today, I’m talking about how you can take advantage of losses in your IRA or 401k accounts to do a Roth conversion.

The goal with a Roth conversion is to maximize the amount you convert while minimizing the taxes.That’s why converting when your IRA is at a loss for the year makes a lot of sense. 

Let me explain how and why this works so well, when your portfolio is down 10-20% for the year. Let’s say you decide that in 2022, you want to convert $100,000 of your Traditional IRA to your Roth. The lower the IRA account drops, the more a conversion makes sense since the same $100,000 conversion that you might have made in a given year, now represents a larger % of your IRA account that gets converted to Roth.

My favorite Roth conversion strategy is one that is flexible and takes advantage of market volatility. This strategy would involve spreading out your conversions during the year. Let’s say you decide to convert that $100,000. Maybe you convert ⅓ or ½ now, while the market is down and close to a bear market. Will it get worse from here? That’s anyone’s guess, but that’s why spreading out your conversion makes sense. If your IRA or 401k recovers, at least you converted a portion while it was in the red. If things get worse, then you can convert more later this year, which provides some peace of mind, since by converting some later in the year, you’ll know more about your income, your tax situation and your ability to pay the taxes on your conversion.

I like this approach the most, especially right now with the market already close to a bear market, because it allows you to take advantage of potential market declines during the year. This should also be flexible. Again, you decide in advance the total amount you want to convert. If after the first conversion, your IRA drops another 10% by this summer or fall, that would be a good time to convert say another 25% of your annual total. Then you could wait to see how things play out over the rest of the year. If your account continues to drop, maybe you accelerate those conversions and do the rest of the conversion if your IRA drops further before December. If that doesn’t happen or if the stock market stabilizes, you would wait until year-end to convert the remainder.

Again the goal is to maximize the % of your IRA dollars that get converted to a Roth with minimal tax consequences, and having a flexible strategy that converts dollars at different times and circumstances during the year will help to maximize the retirement assets that are in your Roth.

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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