Don't Mess With Taxes

Source: Statista

A week ago, Donald J. Trump kicked off a series of tariffs on the United States’ global trade partners. He’s told us to “hang tough,” but the markets don’t seem to be listening.

If you’re trying to stay positive while watching the markets’ continued dive eat into your nest egg, here’s an idea.

The lower value of a traditional IRA could make this a great time to convert it to a Roth version.

Roth conversion opportunity: A Roth IRA is a great option for many. Its biggest tax appeal is that you pay taxes on the money you put into the Roth, but when you start taking distributions in retirement, those amounts are tax free.

You also have total control over when to make those post-work withdrawals. The required minimum distribution (RMD) rules don’t apply to Roth IRAs.

These benefits are enough to convince some traditional IRA owners to move their money to a Roth IRA.

There is, however, a downside. When you do convert a traditional IRA to a Roth IRA, you must pay tax on an amount you move from a tax-deferred traditional retirement savings plan.

But if making the move in a down market can work for you now and your future retirement savings in several ways.

First, the drop in value of your traditional IRA will mean a lower the amount of tax you owe.

For example, your traditional IRA was worth $100,000 when 2025 began. Now, the sliding stock market have pushed your retirement account balance to $80,000. If you convert your entire traditional IRA, you’ll owe taxes on $20,000 less than if you had done so earlier this year.

Second, if you were thinking of converting only a portion of your traditional IRA before the recent market drop, the lower value now could allow you to convert a larger portion of your eventually taxable IRA for the same tax cost.

Third, by moving more traditional IRA money to a Roth now, that larger amount will have longer to grow tax-free when the market rebounds. And it will rebound. 🤞 Eventually.

You also need to be cognizant of timing, which can be good or bad when dealing with the markets.

Investors who stick with their investment strategy during temporary market downswings tend to be rewarded. Historically, long-term stock investments tend to outperform short-term trades.

But market timing, moving assets around based on what you or experts predict will happen to their value can be iffy. Investors who correctly foresee when the market will go up and down can turn profits. But for the average individual investor, market timing is likely to be less effective and produce smaller returns than a buy-and-hold strategy.

So, before you convert your traditional IRA to a Roth, make sure your you’re confident and comfortable with the level to which the account has dropped.

And definitely talk with a financial and tax adviser.

Paying conversion taxes: Okay, you’ve decided a traditional IRA to Roth IRA conversion during this market downturn is the right retirement investment move for you.

Now it’s time to think about taxes. Again.

While the conversion will get you a tax-free Roth IRA, remember, as noted earlier, that you must pay taxes on the amount of traditional IRA money you move to a Roth IRA. Most tax advisers recommend that you only make the move if you have the funds outside your retirement account to pay the taxes.

If you use some of your converted account money to cover the tax bill, you’re reducing — and reducing further in this current market — the value of your retirement fund.

So, check how much you have, or expect to have, on hand from other financial sources to cover the conversion tax bill.

Conversion effect on tax rate: That tax bill also could push you into a higher tax bracket.

For 2025, those inflation-adjusted income tax brackets, by tax rates, that will apply to the tax return you file next year are —

  
If converting your entire traditional IRA will push you into a high tax bracket, consider a partial conversion.

There’s no law that says you must convert all your traditional IRA to a Roth IRA at one time. You can convert portions over time. This lets you spread the tax implications over several years.

No more do-overs: Investment value and taxes are key considerations in any retirement plan. That’s especially true now that the move from a traditional IRA to a Roth IRA permanent.

Before enactment of the Tax Cuts and Jobs Act (TCJA) of 2017, you could convert a traditional IRA to a Roth and then, if your personal financial circumstances or retirement account value changed, you could change it back.

This process, known as recharacterizing, meant you didn't have to pay the tax on the amount you initially wanted to convert to a Roth IRA.

The TCJA eliminated the IRS recharacterization option. Make the move from traditional to Roth IRA and it's now a Roth forever, conversion taxes and all. That’s true on total and partial conversions.

So, before making the traditional to Roth IRA conversion, let me emphasize the importance of talking with a tax and financial planner first. These experts can give you big picture advice based, as well as help you plan this year’s conversion.

You also might find these items of interest:

• Ways to pay Roth IRA conversion taxes
• The great traditional IRA to Roth conversion debate
• Tax loss harvesting in the wake of tariff stock losses
• Political, tax issues complicate Roth IRA conversion decision

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