When markets get rough, it’s tempting to panic. Even if you understand that investing and saving are long-term endeavors, nobody likes seeing the value of their nest egg shrink. But it’s important to also know that bear markets can be an opportunity — and if you’ve got a traditional IRA, you could do your retirement fund a big favor right now.
Individual retirement accounts come in two main flavors. Traditional IRAs allow tax-deductible contributions that you can’t touch without a penalty before the age of 59½. Its major counterpart is the Roth IRA, which is especially attractive to younger investors: While your contributions aren’t tax-deductible, you can ultimately withdraw tax-free from the account. Investment gains within Roth IRAs are also not taxed. They’re a great way to fight inflation, since you’re paying tax on a much smaller amount up front, versus down the road, when your investments have matured.
Now may be the time to consider converting your traditional IRA into a Roth IRA, thanks to a loophole governing these conversions. While moving your money to a Roth IRA does create a taxable event, the amount you are converting may be worth less due to the bear market. By the time you draw down from the Roth IRA, your investment should have recovered and rebounded, your payout is tax-free and you’ve taken advantage of low stock prices to boost the positive impact of the move.
This isn’t necessarily the right path for every investor, but there are some guidelines for who a Roth conversion can help most. Younger and early-career workers who pause their earnings to go back to school are good candidates, as are retirees who have not yet started required age-related withdrawals of their traditional IRAs. Both expect their tax bracket to either increase or remain steady, as well as that of any beneficiaries or heirs, since Roth IRAs can be passed along as well.
Roth conversions aren’t necessarily a one-and-done deal — financial advisors often structure them in stages, over several years.
Work with an investment advisor to go over you retirement plans and examine whether a Roth conversion is in your best interest. Get in touch with Dodd Disler, the CEO of Sagace Wealth Management, a wealth management firm integrated with SBF and Spoor Law to provide comprehensive investment, tax and estate planning expertise.
Visit the website at sagacewealth.com for more information or to schedule an appointment to discuss your financial future.