Market downturns, while challenging, can present unique opportunities for strategic financial planning. One such strategy is converting a traditional IRA to a Roth IRA during these periods.
In April 2025, amid renewed market volatility – fueled in part by the latest wave of tariffs introduced by Donald Trump – investors are seeing portfolio values dip.
While unsettling, these drops may actually open a tax-smart window: converting a traditional IRA to a Roth IRA when account values are low can reduce your tax bill and lock in future tax-free growth.
This approach is especially appealing for taxpayers expecting higher income in retirement or those anticipating future tax hikes. Converting at a lower valuation means paying tax on a smaller amount now, while reaping the full benefits of tax-free withdrawals later.
Understanding Roth IRA conversions
A Roth IRA conversion involves transferring funds from a traditional IRA, which is tax-deferred, to a Roth IRA, where future withdrawals can be tax-free.
During the conversion, the transferred amount is subject to income tax. However, executing this move during a market downturn can minimize the tax impact due to lower account values.
| Tax rate | Single filer | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 12% | $11,926 $48,475 | $23,851 $96,950 | $11,926 $48,475 | $17,001 $64,850 |
| 22% | $48,476 $103,350 | $96,951 $206,700 | $48,476 $103,350 | $64,851 $103,350 |
| 24% | $103,351 $197,300 | $206,701 $394,600 | $103,351 $197,300 | $103,351 $197,300 |
| 32% | $197,301 $250,525 | $394,601 $501,050 | $197,301 $250,525 | $197,301 $250,500 |
Note: See IRS guidelines for full tax bracket details.
Knowing where your income falls can help you decide whether to convert all or part of your IRA this year.
A full conversion could push you into a higher tax bracket — sometimes making a partial conversion the smarter move.
Benefits of converting during a market downturn
1. Lower taxable income
When the market dips, the value of your traditional IRA decreases.
Converting at this lower value means you’ll pay taxes on a smaller amount, reducing your immediate tax liability.
2. Tax-free growth potential
Post-conversion, any market recovery and subsequent gains occur within the Roth IRA.
This growth is tax-free, enhancing your retirement savings.
3. No required minimum distributions (RMDs)
Unlike traditional IRAs, Roth IRAs do not mandate RMDs during the account holder’s lifetime, allowing your investments to grow uninterrupted.
4. Estate planning advantages
Roth IRAs can be passed on to heirs, offering them tax-free withdrawals, provided certain conditions are met.
This makes Roth conversions a valuable tool in estate planning.
Strategic considerations
Assessing your Tax Bracket
Evaluate your current and anticipated future tax brackets. If you expect to be in a higher tax bracket during retirement, converting now could be beneficial.
Partial conversions
You don’t have to convert your entire traditional IRA at once.
Spreading conversions over several years can help manage tax implications and avoid pushing yourself into a higher tax bracket.
Availability of funds to pay taxes
Ensure you have sufficient funds outside of your IRA to cover the taxes due upon conversion.
Using IRA funds to pay taxes can diminish the benefits of the conversion and may incur penalties if you’re under 59½.
Potential drawbacks
- Immediate Tax Payment: Converting triggers a tax event, requiring payment in the year of conversion.
- Impact on Financial Aid and Benefits: The increased income from a conversion can affect eligibility for financial aid, tax credits, or Medicare premiums.
- Market Timing Risks: While converting during a downturn can be advantageous, predicting market movements is challenging.
Bottom line
Converting a traditional IRA to a Roth IRA during a market downturn can be a savvy financial move, offering tax savings and long-term growth potential.
However, it’s essential to consider your individual financial situation, tax implications, and retirement goals.
Consulting with a financial advisor can help determine if this strategy aligns with your objectives.
