Should you consider a Roth IRA conversion when the market drops?

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If you’re considering a Roth conversion, stock market drops may make the strategy more appealing, according to financial experts.  

While the popular move, allowing higher earners to bypass income limits for Roth individual retirement account contributions, was in peril as House Democrats passed Build Back Better, the spending package stalled in December.

Nevertheless, the move may be attractive amid stock market volatility triggered by the Russia-Ukraine conflict, said certified financial planner Jordan Benold, partner at Benold Financial Planning in Prosper, Texas.

More from Advice and the Advisor:

Roth conversions may trigger levies on pretax contributions or earnings, so investors will need a plan for covering the bill.

For example, let’s say you have a pretax traditional IRA worth $100,000, you like the investments, and when the entire market goes down, the value drops to $65,000. 

“That might be an opportune time to do it,” Benold said, explaining how you’ll pay taxes to convert $65,000 rather than the original $100,000. But you need to weigh more than asset values alone.

Upfront taxes

Watch for the five-year rule

While Roth IRAs typically offer tax and penalty-free withdrawals anytime for contributions, there is an exception for conversions known as the “five-year rule.”

Investors must wait five years before they can withdraw converted balances, regardless of their age, or they will incur a 10% penalty. The timeline begins on Jan. 1 on the year of the conversion.

Increasing adjusted gross income

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