Weekend Reading: When Roth Conversions Go ‘On Sale’: Discounted Roth Conversions During a Bear Market Decline

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Amidst market volatility, I believe there’s always some form of opportunity. Today, that comes in the form of tax planning and the option to maximize “discounted” Roth conversions.


Leveraging a low tax rate environment: If you expect your future tax rate to be higher than it is today, listen up! One upside of a down market is that it temporarily puts the conversion of a Roth “on sale” at a depressed value. In this instance, you have the opportunity to convert a greater percentage of your pre-tax account to a Roth, all the while without moving into a higher tax bracket.

Cash is king: This can largely depend on which funds are utilized to pay conversion taxes, but cash is the ideal choice if possible. Why? As stated here, “If the reality is that the tax liability can be paid with money that wasn’t invested in the first place… then the tax-free Roth account enjoys a market rebound that the money used to pay the taxes never would have benefitted from anyway!”

Time for a tax strategy check-in: Additionally, you can leverage other tax strategies by being proactive and paying attention to the tax code. Some options listed here include "conversion-cost averaging", which involves “dividing a selected annual conversion amount into regular, smaller conversions throughout the year.” Or, "Roth barbelling", which involves “converting once at the beginning of the year and again at the end of the year…” In the end, knowing what tax-efficiency levers you have at your disposal is key to pocketing the dollars you might otherwise owe Uncle Sam.