A Silver Lining in a Market Downturn

Market downturns are never fun. Watching your portfolio shrink—especially after years of growth—can be nerve-wracking. But here’s the thing: volatility isn’t just a challenge; it can be an opportunity. One of the best silver linings? Roth conversions.

A market dip means lower portfolio values, which in turn means a chance to convert traditional IRA assets to a Roth IRA at a lower tax cost. If you’ve been considering a Roth conversion, a downturn might be the perfect moment to act.

Why Roth Conversions Work Better in a Down Market

When you convert assets from a traditional IRA to a Roth IRA, you pay taxes on the amount transferred. The goal is to pay those taxes at a lower rate than you might in the future. Here’s why a downturn helps:

• Lower Account Values – If your portfolio has taken a hit, converting now means moving assets at a reduced value, lowering the taxable income you recognize on the conversion.
• Tax-Free Growth – Once assets are in a Roth IRA, they grow tax-free. When the market eventually rebounds (as history suggests it will), all that recovery happens inside the Roth, free from future taxes.
• Locking in Today’s Tax Rates – With tax laws always in flux, many investors worry that future rates will be higher. Converting now secures today’s tax rate rather than rolling the dice on what Congress might do later.

How to Approach a Roth Conversion Strategically

Not every investor should rush into a Roth conversion just because the market is down. Here are key factors to consider:

1. Understand the Tax Bill: Conversions aren’t free—you’ll owe income taxes on the amount converted. A good strategy is to convert only as much as you can afford to pay taxes on without dipping into savings.
2. Use a Tax Bracket Strategy: You don’t have to convert everything at once. Consider filling up your current tax bracket instead of pushing yourself into a higher one. For example, if you’re in the 22% bracket, converting up to the top of that bracket could be more efficient than spilling into the 24% bracket.
3. Think About the Five-Year Rule: Roth conversions come with a five-year waiting period before you can withdraw converted funds penalty-free. If you need access to the money sooner, this could be a dealbreaker.
4. Consider State Taxes: Federal taxes aren’t the only concern. Some states tax Roth conversions, while others don’t. It’s worth checking how your state treats conversions.
5. How Market Conditions Impact Your Tax Bill: During a market downturn, portfolio values decrease, meaning your taxable income from a conversion is lower than it would be in a bull market. This could be especially useful if you’re in a lower tax bracket this year but expect to be in a higher one later.
6. Time It with Other Tax-Saving Strategies: Pairing a Roth conversion with tax-loss harvesting can help offset the tax impact. If you have taxable accounts with losses, you may be able to use those to help neutralize the taxes owed on your conversion.

Who Benefits Most from Roth Conversions in a Down Market?

While every investor’s situation is different, here are a few groups that may benefit the most from converting during a downturn:

• Retirees in a Low Tax Bracket – If you’re between retirement and required minimum distributions (RMDs), a downturn could be a prime time to convert at a low tax rate.
• Investors Expecting Higher Future Taxes – If you anticipate higher tax rates down the road (due to policy changes or personal income growth), a Roth conversion now could save money in the long run.
• Long-Term Investors – The longer your converted assets can grow in a Roth, the more potential tax-free compounding you’ll enjoy.
• People with Large Pre-Tax Retirement Accounts – If your traditional IRA or 401(k) is sizable, a gradual conversion over multiple years can help spread out tax liability while moving funds into a tax-free environment.

A Closer Look at the Timing Factor

Timing is everything when it comes to financial strategies. With a Roth conversion, a market downturn offers a unique opportunity to transfer assets at a lower valuation, meaning you get more bang for your tax buck.

But what happens if the market drops further after you convert? While it might feel like you mistimed the move, keep in mind that the key benefit is tax-free growth over time. Even if you convert and the market dips again, you’ve still secured those funds inside a Roth where future rebounds won’t be taxed.

Common Myths About Roth Conversions in a Down Market

Myth 1: You Should Wait Until the Market Bottoms Out

The problem? No one knows when the bottom is. If the market is already down significantly, converting at today’s lower prices could still be beneficial—waiting too long might mean missing a recovery.

Myth 2: Roth Conversions Are Only for the Wealthy

This is a common misconception. Roth conversions can be a great tool for middle-income investors, especially those in lower tax brackets temporarily (e.g., after retiring but before RMDs begin).

Myth 3: You Have to Convert Everything at Once

Not true! Many investors do partial conversions over several years to manage the tax hit efficiently. This is often the smartest approach.

Next Steps: Is a Roth Conversion Right for You?

A Roth conversion can be an effective way to use market downturns to your advantage, but it’s not a one-size-fits-all solution. Here are some key questions to ask yourself:

• Can you afford the tax bill without dipping into converted funds?
• Do you expect to be in a higher tax bracket in the future?
• How long will the funds stay in the Roth before you need them?
• Are there state tax considerations that impact your decision?

If you’re unsure, working with a financial advisor can help. At Suttle Crossland Wealth Advisors, we help clients evaluate their tax situation, model different conversion scenarios, and determine if it aligns with their long-term financial goals.

The Bottom Line: Turning Uncertainty into Strategy

A market downturn doesn’t have to be all bad news. For savvy investors, it can be the perfect time to make moves that reduce future tax burdens and set up long-term, tax-free growth. Roth conversions aren’t for everyone, but for those who qualify, they can be a powerful tool—especially when the market is down.

If you’re wondering whether a Roth conversion makes sense for you, let’s talk. At Suttle Crossland Wealth Advisors, we can help you evaluate the numbers and create a strategy that fits your long-term goals.