When Life Gives You Lemons, Make Lemonade

Why a Roth conversion (the lemonade) might make sense during a stock market correction (the lemon)

I’m often asked when a good time is to do this or that when it comes to investing. My answer is usually the same. You can’t intentionally time anything in the stock market, but you can take what the stock market gives you to make some decisions. As I write this, most major stock market indexes are at or near correction levels (down between 10% and 20% from the most recent high). When the stock market is down, it might be a smart time to convert pre-tax IRA money into a Roth IRA. Here's why: the value of your investments is probably lower during a downturn, so the amount you're converting (and paying taxes on) will also be lower. Once in the Roth IRA, your investments can grow tax-free, and you won't owe taxes on withdrawals in retirement if you follow the rules. Plus, if you're expecting to be in a higher tax bracket later or think tax rates might go up, this move could save you money in the long run. It's like locking in today's tax rates and setting yourself up for future growth. Before doing anything, please chat with a tax professional and a financial professional before making any decisions to make sure it fits your overall tax and retirement strategy.

Below are six potential long-term benefits you may experience when your IRA assets are held in a Roth IRA versus a pre-tax IRA:

1. Tax-Free Growth and Withdrawals: Money in a Roth IRA grows tax-free. When you retire and meet the qualifying conditions, no taxes are due on your withdrawals, including the earnings.

2. Potentially Avoid “Bracket Creep”: Large pre-tax IRA withdrawals, mainly from RMDs later in life can push you into higher marginal tax brackets. Assuming you meet all conditions, Roth withdrawals avoid this problem since they are tax free.

3. No Required Minimum Distributions (RMDs): Unlike pre-tax IRAs, Roth IRAs don’t require you to take mandatory distributions. The tax savings means you keep more of your money which may help guard against longevity risk (living too long) and may allow you to pass on more to your heirs.

4. Reduce Future RMDs: Converting pre-tax assets to Roth assets removes the requirement to take RMDs on those assets thereby reducing the amount of future RMDs. Reduced RMDs when retired may reduce future taxes on Social Security benefits as well as avoiding surcharges on Medicare.

5. Locking in Current Tax Rates: By converting now, you pay taxes on the amount converted based on your current income and tax rates. If tax rates rise in the future or you end up in a higher tax bracket during retirement, you’ll have already paid taxes at a lower rate.

6. Estate Planning Benefits: Roth IRAs can be passed to heirs with continued tax-free growth. This can be a strategic way to leave a tax-efficient legacy.

These benefits depend on your individual financial and tax situation, so consulting with a tax professional and financial advisor to weigh the costs and advantages for your specific needs is always a smart move.

This article was written by Sal D’Angelo, Founder and President of LakePointe Advisors LLC, a fee-based investment advisory firm specializing in retirement, tax and estate planning. LakePointe Advisors is located in Mentor, Ohio and serves all of Northeast Ohio and surrounding communities.

Advisory services offered through Fourth Dimension Wealth, LLC, a Registered Investment Advisor. Fourth Dimension Wealth, LLC and LakePointe Advisors, LLC are separate entities.

The information contained in this article is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. All investments come with a risk of loss.

We are not giving tax, legal or accounting advice. Each investor’s situation is unique so please work with a professional financial adviser, tax accountant or legal representative, as applicable, to develop an individualized plan or address any questions you may have.

 Please refer to adviserinfo.sec.gov for the adviser's ADV Part 2A, CRD No. 306703 for material risks and conflicts of interest disclosures.