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When markets dip, it’s easy to feel uneasy. But savvy investors know that downturns can create powerful planning opportunities, especially when it comes to retirement savings. One standout strategy? A Roth IRA conversion.

There’s something that often gets overlooked during market swings: volatility can create planning opportunities. That may include tax planning, portfolio positioning, and making sure retirees are not forced to pull money from the wrong places at the wrong time.

You’ll notice this is not just an investment conversation. Blair and I believe the best planning happens when investments, taxes, and cash flow are all working together. That is where a lot of the real value can show up over time.

This article explains why market drops may create a Roth IRA conversion opportunity, how the tax rate conversation works, and what to review before moving pre-tax IRA or 401(k) assets into a Roth account. If you’re ready to find out how a Roth IRA conversion could look for you, book a free 1-hour strategy session with us here.

Key Takeaways

  • A down market may create a Roth conversion opportunity because lower account values can mean a lower taxable amount at conversion.
  • The core question is whether paying tax at your current tax rate may be better than paying later at a potentially higher tax rate.
  • Conversions can increase taxable income, so it is important to watch your tax bracket, Medicare premiums, Social Security taxation, and other planning thresholds.
  • Partial conversions over multiple years may help you manage the tax impact instead of creating one large tax spike.
  • A Roth conversion should be coordinated with your broader financial planning, investment strategy, and retirement income plan, preferably with help from a CFP® professional, financial advisor, and tax professional.

What’s a Roth Conversion?

A Roth conversion means moving money from a pre-tax retirement account, like a traditional IRA or 401(k), into a Roth IRA.

Yes, you’ll owe income taxes on the amount you convert. But once the funds are in your Roth, they grow tax-free, and you can make qualified withdrawals in retirement without paying taxes. That’s a significant long-term advantage.

Put simply, a Roth conversion moves dollars from “tax me later” territory into “tax me now, potentially tax-free later” territory.

It is also important to separate Roth IRA contributions from Roth conversions: the IRS says direct Roth IRA contributions may be limited based on filing status and income, while Roth conversions and rollover activity follow their own reporting and tax rules.

Why Convert When the Market Is Down?

Market dips can actually lower your tax bill when converting to a Roth. Here's how:

  • Lower account values mean a lower taxable amount: A smaller balance means less taxable income at the time of conversion.
  • You convert more shares for the same dollar amount: With lower market prices, your conversion buys more shares, which then grow inside your Roth.
  • All future gains are sheltered from tax: As the market recovers, that growth occurs inside the Roth account, completely tax-free.

This is the heart of a down market Roth conversion: you are not trying to predict the exact bottom of the stock market, but you are asking whether today’s lower value may create a more attractive after-tax entry point.

In practice, “tax-free” generally assumes qualified Roth distribution rules are met, so the account rules and timing should be reviewed before acting.

Example: Timing Can Matter

Imagine you have $100,000 in a traditional IRA. A market downturn knocks that value down to $75,000.

If you convert during the downturn, you’re only taxed on $75,000. Once the market rebounds, the recovery happens inside the Roth account, and you won’t owe taxes on those gains.

The same logic can apply to specific investments that have temporarily fallen in value: if those assets later recover inside the Roth, the potential recovery may occur in a more favorable tax wrapper.

Of course, timing is only one variable; conversion size, cash available to pay the tax, your current tax rate, and your future retirement income plan all matter.

Things to Consider Before Converting

Before initiating a Roth conversion, take these factors into account:

Tax Strategy

You’ll owe income tax on the converted amount. Make sure you’ve identified a smart, sustainable way to pay the taxes—ideally from non-retirement funds.

Paying the tax from non-retirement funds may preserve more of the converted account for potential tax-free compounding, but this should be weighed against emergency reserves and near-term cash needs.

Impact on Your Tax Bracket

Conversions increase your taxable income. Consider spreading the conversion across multiple years to manage your bracket and avoid unnecessary tax spikes.

If converting too much in one year pushes you into a higher tax bracket, the benefit of the conversion could shrink.

For some retirees, the most useful target is not a giant one-time conversion; it may be filling up a lower tax bracket without crossing into the next higher tax bracket unnecessarily.

Income Limits and Eligibility

There are no income restrictions for Roth conversions, but your overall income for the year could affect how much tax you’ll owe. Be sure to evaluate how the conversion fits into your broader financial picture.

That is different from direct Roth IRA contributions, which the IRS says may be limited by modified adjusted gross income, filing status, and annual contribution limits.

Your Current Tax Rate vs. Future Tax Rate

Every Roth conversion is really a tax-rate decision.

If your current tax rate is lower than the tax rate you expect later, converting may make sense; if the conversion pushes you into a higher tax bracket today, the benefit may be less compelling.

This is why “how much should I convert?” is often more important than “should I convert at all?”

Required Minimum Distributions, or RMDs

Under current IRS rules, RMD timing depends on the type of account and your date of birth, and for many retirees today, RMDs begin in the year they reach age 73.

This matters because traditional IRAs, SEP IRAs, SIMPLE IRAs, and many workplace retirement plans generally require taxable withdrawals once required minimum distributions begin, while Roth IRAs generally do not require withdrawals during the original owner’s lifetime.

A thoughtful conversion strategy before RMD age may reduce the size of future RMDs, lower future taxable income, and give you more control over which bucket you draw from in retirement.

Medicare Premiums and Social Security Taxes

Roth conversions can create helpful long-term flexibility, but they can also increase taxable income in the year of conversion.

That higher income may affect Medicare premiums because Medicare uses modified adjusted gross income from a prior tax return to determine whether income-related premium adjustments apply.

It may also affect Social Security taxation because the Social Security Administration says “combined income” includes adjusted gross income, tax-exempt interest, and one-half of annual Social Security benefits.

Converting a 401(k) or 401k to Roth

Is a down market a good time to convert 401(k) assets? Potentially, but the mechanics depend on your plan.

The IRS notes that some 401(k), 403(b), or governmental 457(b) plans may allow in-plan Roth rollovers if the plan permits, and eligible retirement plan distributions can also involve rollover rules.

Before moving forward, confirm whether you are eligible for a distribution or in-plan Roth rollover, whether withholding applies, and whether any required minimum distribution must be taken first.

Dividing Conversions Across Multiple Years

Dividing Roth IRA conversions across multiple years may help manage the tax impact.

Instead of riding straight into a large one-year tax bill, a staged approach may let you convert enough to use a favorable tax bracket while avoiding unnecessary spillover into a higher tax bracket.

This approach may also help manage Medicare and Social Security planning thresholds, although the right amount depends on the full tax picture.

When a Down-Market Conversion May Not Fit

A down-market Roth conversion may not be ideal if you need to use retirement assets to pay the tax, expect to be in a much lower tax bracket later, or would create Medicare premium issues that outweigh the benefit.

It may also be less attractive if the conversion would disrupt your cash flow, emergency fund, charitable strategy, or estate plan.

The point is not to convert simply because the stock market is down; the point is to convert only when the move fits the broader retirement map.

Why Tax Planning Shouldn’t Be a Once-a-Year Exercise

A lot of people think tax planning happens once a year. Blair and I see it differently.

Sometimes the most meaningful planning opportunities show up in the middle of the year, especially when markets move sharply. Whether a Roth conversion makes sense depends on your tax bracket, your future income expectations, your available cash to pay the tax, and how the move fits into the rest of your overall plan. That is why these decisions should be coordinated with broader tax planning, not made in a vacuum.

Remember, it’s not what you make, it’s what you keep.

In other words, market volatility can be the tide that reveals planning opportunities sitting just under the surface.

This is where a CFP® professional, financial advisor, and tax professional may help coordinate investment management, financial planning, and tax planning so one move does not accidentally create issues elsewhere.

Final Thoughts

No one enjoys a market downturn. But with the right strategy, that dip can be a springboard.

A Roth conversion during a down market can reduce your tax liability now while setting your investments up for long-term, tax-free growth. Like any tax-related decision, it’s important to ensure the move aligns with your full financial, investment, and retirement plan.

Considering a Roth Conversion? Tushaus Wealth Management can help you weigh the pros and cons and create a plan tailored to your goals. Contact us to learn more.

Want to take the next step? Book a complimentary 1-hour strategy session or download our free tax planning ebook.

Frequently Asked Questions

What is a Roth IRA conversion?

A Roth IRA conversion generally means moving money from a pre-tax retirement account, such as a traditional IRA or eligible 401(k), into a Roth IRA. The converted pre-tax amount is generally included in taxable income for that year, which is why the tax rate and timing matter.

Why is it good to do a Roth conversion when the market is down?

A down market may make a Roth conversion more beneficial because the account value being converted may be lower. That can mean less taxable income at conversion, while any later recovery may occur inside the Roth account if the funds remain invested and qualified distribution rules are met.

Is a down market a good time to convert a 401k to a Roth?

It can be, depending on your plan rules, tax bracket, and cash flow. Some employer plans may allow in-plan Roth rollovers, while other situations may involve rolling eligible funds to an IRA or Roth IRA, so the mechanics should be confirmed before acting.

What time of year is best for a Roth conversion?

There is no universally best month for a Roth conversion. Many people review conversions after market drops, during lower-income years, or later in the year when income, deductions, and tax brackets are easier to estimate. The best timing is the timing that fits your tax projection, not simply the timing that feels most urgent.

Can you undo a Roth conversion?

Generally, no. The IRS says a conversion from a traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA made on or after January 1, 2018 cannot be recharacterized, so the decision should be reviewed carefully before the conversion is completed.

What are the advantages of dividing Roth IRA conversions?

Dividing conversions may help manage taxable income across multiple tax years. That can potentially reduce the chance of jumping into a higher tax bracket, triggering higher Medicare premiums, or creating unnecessary tax friction in one year.

Who should actually consider a down-market Roth conversion?

A down-market conversion may be worth considering for investors who have pre-tax retirement assets, available cash to pay the tax, a long enough time horizon, and a reasonable expectation that their future tax rate could be similar or higher. It may be especially relevant for retirees or pre-retirees who want to manage future RMDs, build tax diversification, or create more flexible retirement income buckets.

Did the RMD start age change to 73 in 2023?

For many retirees, yes. IRS guidance explains that SECURE 2.0 changed the required beginning date rules so the applicable age is 73 or 75 depending on date of birth, and the IRS’s current RMD FAQs state that many retirement account owners generally must begin RMDs when they reach age 73.

How can a Roth conversion affect my Medicare premiums or Social Security taxes?

A Roth conversion can increase taxable income in the year of conversion, which may affect Medicare income-related premium adjustments and Social Security taxation. Medicare uses modified adjusted gross income from a prior tax return for income-related premium adjustments, and Social Security uses “combined income” to determine whether benefits may be taxable.

Sources

The information presented in this piece is the opinion of Tushaus Group, LLC and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. Tushaus Group, LLC is a Registered Investment Advisor. The estate planning information offered by the advisor is general in nature, is provided for informational purposes only and should not be construed as legal advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.