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Roth Conversion – Why a down market could be a tax advantage

Roth Conversion – Why a down market could be a tax advantage

June 27, 2022

When the market craters, it may be hard to think about what it’s doing to your retirement savings. But if you have a Traditional IRA or your 401(k) has a significant portion that was contributed pre-tax – a down market could be a tax-saving opportunity.

With a Roth Conversion, you can take any amount of pre-tax assets and convert them into a post-tax Roth. You will need to pay the income tax due on the converted amount when you pay taxes for that year. But then you're set; you won't need to pay tax later when withdrawing from the Roth.

It also means that all of the future growth will be tax free. With a Roth, you reduce the amount of required minimum distributions you'll be required to take at age 72, and the account will pass 100% tax-free to your beneficiaries.

Doing a Roth Conversion in a down market could work to your advantage. The value of your 401(k) or Traditional IRA may have taken a steep drop recently. Making this transition in a bear market enables you to convert the same amount of shares, but because their value is lower, you will owe less taxes on the converted amount. When those shares recover their previous value (or more), all of that gain will now be tax-free.

Not all retirement plans offer this option. However, for LANL employees, the TRI-AD 401(k) provides the opportunity to do an in-plan Roth Conversion. Depending on your income level and when you plan to retire, you’ll want to carefully consider the various tax implications of converting assets. You can learn more about that in our blog: 401k Roth conversion – Is it right for you?

If you have questions or want to explore your options, feel free to schedule a conversation with Zach. You can book a meeting right here on our site.