With the economy facing ups and downs—from rising interest rates to inflation and global trade issues—many Americans are reevaluating how they plan for retirement. One option that more people are exploring is converting traditional retirement accounts to a Roth IRA. While this strategy isn’t right for everyone, it can offer significant advantages, particularly when the market is down. In this article, we’ll explore the key benefits of Roth IRA conversions, as well as considerations to keep in mind to help you determine if this approach aligns with your retirement goals.

How Market Changes are Influencing Retirement Planning

With ongoing market uncertainty, Americans are looking for retirement accounts that offer more tax stability and long-term benefits, such as the Roth IRA. Unlike a traditional IRA or 401(k), your money grows tax-free with a Roth IRA, and you won’t owe taxes when you take qualified withdrawals in retirement. Another benefit? Roth IRAs don’t require minimum withdrawals (RMDs) once you reach a certain age, giving you more flexibility and control over how and when you use your retirement income.

What Is a Roth IRA Conversion?

A Roth IRA conversion involves moving money from a tax-deferred retirement account, such as a traditional IRA or 401(k), into a Roth IRA. This process requires paying ordinary income taxes on the converted amount, but once the money is in the Roth, it grows tax-free and can be withdrawn tax-free in retirement.

A Roth IRA conversion is particularly appealing in a market downturn. Converting when account balances are lower reduces the immediate tax burden while building tax-free retirement income.

Why Down Markets Can Be an Advantageous Time to Convert to a Roth IRA

Market downturns might seem like the worst time to make financial moves, but they can create prime conditions for converting to a Roth IRA. When the stock market drops, the value of your retirement investments usually declines as well. If you transfer money into a Roth IRA during this dip, you’ll pay taxes on the lower account value. Then, when the market recovers, your investments can grow tax-free inside the Roth account.

For example, if your traditional IRA is worth $100,000 but falls to $75,000 due to a market decline, converting now means you’ll only pay taxes on the $75,000. If that money grows back to $100,000 or more when the market rebounds, that growth happens tax-free in your Roth IRA, and you won’t owe any taxes when you take the money out in retirement.

This strategy can turn a short-term market loss into a long-term tax advantage, especially if you believe your investments will recover over time. It’s a smart way to make the most of a down market while preparing for a more flexible retirement.

What to Consider Before Doing a Roth IRA Conversion

While converting to a Roth IRA can offer powerful tax benefits, it’s not the right move for everyone. Before making a decision, it’s important to think through a few key factors:

• Your Current and Future Tax Bracket: If you think your income—and therefore your taxes—will go up in the future, it might make sense to pay taxes now by converting to a Roth IRA. On the other hand, if you expect your income to go down in retirement, the upfront tax bill may not be worth it.
• How You’ll Pay the Taxes: When you convert to a Roth IRA, you have to pay taxes on the money you move. Ideally, you should use cash from savings to pay this tax—not money from your retirement account. Using your retirement funds to cover the tax can reduce how much you have growing for the future, and it could also lead to penalties if you’re under age 59 ½.
• Your Retirement Timeline: The longer the money stays in a Roth IRA, the more it can grow tax-free. That’s why Roth conversions are especially helpful for people who still have 10-15 years or more until retirement. It may still work if you’re close to retirement or already retired, but the benefits might be smaller.

Is a Roth IRA Conversion the Right Move for You?

A Roth IRA conversion could be a smart move, especially during a market downturn, if you’re looking for a way to lower future taxes and gain more control over your retirement income. Converting when investment values are lower may help reduce your tax bill today while setting you up for tax-free growth in the years to come.

However, this strategy isn’t one-size-fits-all. Your income level, tax situation, age, and retirement goals all play a big role in whether a Roth conversion makes sense for you. A financial advisor or tax professional can help you weigh the pros and cons, run the numbers, and create a personalized plan that supports your long-term financial goals.