Hadley’s Intro: Discover the best ages to do a Roth IRA
conversion to preserve wealth when the market’s down —
courtesy of this Wall Street Journal analysis
By Laura Saunders
Attention, retirement savers: Don’t get spooked
by the bear market and forget about doing a Roth
IRA conversion. With prices down, the upside could
On the other hand, don’t rush into a conversion
willy-nilly. This move is never appropriate for
some people and not a sure thing for anyone.
“A Roth IRA is the best retirement plan to own;
the big question is how much you have to pay to
get it,” says Natalie Choate, a tax lawyer in
Wellesley, Mass., who has long specialized in
retirement accounts and done several conversions
The reason to consider a conversion in a bear
market: When the value of assets like stocks and
funds fall, the taxes on conversions to Roth IRAs
often drop as well, and there’s greater
potential for asset growth and withdrawals that
A growing number of taxpayers have opted for Roth
IRA conversions in recent years. Taxpayers
reported 892,000 Roth conversions totaling nearly
$17 billion in 2019, according to the latest IRS
data. That’s about twice the levels of 2014,
when 489,000 taxpayers converted about $8 billion.
Conversions have been especially popular with
taxpayers earning $200,000 to $500,000.
So let’s review what’s involved. A Roth
conversion entails moving assets from a
traditional IRA to a Roth IRA. Both accounts allow
tax-free growth, but there are key differences.
With traditional IRAs, the contributions are often
tax deductible, and withdrawals at age 59 ½ and
older are fully taxable at ordinary-income rates
like the ones for wages. Traditional IRAs often
include rollovers from workplace plans like
401(k)s, so these IRAs can be very large.
With Roth IRAs, the contributions are in after-tax
dollars, but withdrawals can be tax-free. In
addition, Roth owners don’t have to take
required withdrawals during their lifetime, while
traditional IRA owners must start them at age 72.
The required withdrawals from traditional IRAs
rise over time, depleting the account.
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Under current law, savers can convert traditional
IRAs to Roth IRAs by moving assets from one
account to the other and paying income tax on the
transfer. This tax bill can be stiff, and
there’s no assurance future growth will
compensate the saver for having accelerated taxes.
But converting when prices are down puts more
income beyond the reach of Uncle Sam if prices
recover and grow.
Ms. Choate says she has experienced both good and
bad outcomes with her own Roth conversions. Her
first one was of a basket of blue-chip stocks
worth $100,000 in 2010 and has paid off
handsomely—dividends alone have added $100,000
to the total. But another, of a beaten-up energy
stock she liked, flopped because the stock went to
zero. So she paid tax she wouldn’t otherwise
Many factors matter when determining whether a
Roth conversion makes sense. To help savers
decide, here are key issues.
Tax rate at conversion vs. tax rate at withdrawal
If the tax rate on the Roth IRA conversion is
lower than the expected rate when the assets would
be withdrawn, that weighs in favor of a
conversion. If the rate at conversion is higher
than the expected rate at withdrawal, that weighs
So savers should try to do Roth conversions in
lower-tax-rate years. For example, a conversion
could make sense for an older person who has
retired but hasn’t started taking required IRA
payouts, or for a young worker who has IRA or
401(k) savings who pauses work to go back to
For this reason, advisers often recommend doing
partial Roth conversions over several years to
avoid income that pushes a saver into a higher tax
The lower prices are, the lower the tax bill on a
Roth conversion often is. That’s a boon—as
long as prices recover and grow.
Spokespeople for Fidelity Investments, Charles
Schwab Corp., and Vanguard Group confirm that they
allow investors to select individual holdings from
traditional IRAs and convert them to Roth IRAs
“in kind.” So investors who want to transfer a
beaten-down holding don’t have to sell it,
transfer cash, and re-buy the holding in the Roth
Ability to pay the tax bill with ‘outside’
Savers who can’t pay the tax bill on a Roth
conversion with funds outside the account probably
shouldn’t convert, say specialists. Paying the
taxes with IRA assets shrinks the amount that can
The ‘widow’s penalty’
The year after a spouse dies, the survivor can no
longer file jointly. As a result of being a single
filer, the survivor’s tax rate often rises even
if income has dropped.
If this is likely, the couple may want to do Roth
conversions to avoid higher tax rates for the
State and local taxes
State and local taxes on traditional and Roth IRA
contributions and withdrawals vary greatly, so
take them into account when analyzing a
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For example, a soon-to-be retiree who plans to
leave a high-tax area in California or New Jersey
for a low-tax one in Florida or Nevada will likely
want to move before doing a Roth conversion.
And watch for quirks. Attorney Mark Klein of the
Hodgson Russ law firm notes that while New York is
known as a high-tax state, it allows many
residents who are 59 ½ or older to skip state
income tax on the first $20,000 withdrawn from a
traditional IRA annually. This benefit can lower
taxes on a Roth conversion.
Leaving an IRA to nonspouse heirs
Leaving Roth IRAs to nonspouse heirs such as
grandchildren will often provide them more
flexibility than leaving them traditional IRAs.
Both types of accounts often must be emptied
within 10 years, but heirs of Roth IRAs can wait
until the end of the term to withdraw their
tax-free funds. Heirs of traditional IRAs must
take taxable payouts annually if the owner died
after age 72.
If an IRA owner lives in one of the few states
with estate or inheritance taxes or will owe
federal estate taxes, leaving a Roth IRA instead
of a traditional IRA to heirs could reduce death
Potential for future large deductions
Savers who could have outsized tax deductions in
retirement—such as for nursing-home
costs—should remember that such deductions can
shelter withdrawals from traditional IRAs. A Roth
conversion of such amounts now could bring an
unnecessary tax bill.
Potential to minimize other taxes
Having tax-free Roth IRA withdrawals helps some
taxpayers minimize other taxes or surcharges, such
as Medicare Part B and Part D premiums that rise
as income does. This can also help filers stay
below the $200,000 (singles) or $250,000 (joint
filers) threshold for the 3.8% surtax on net
Age at conversion
Savers age 72 and older must take their required
annual payouts before doing a Roth IRA conversion.
That raises taxable income and makes conversions
How will you use this news to preserve and grow wealth?