frontline
roth Conversions Get More Attractive As Market Slides
Investors may be on pins and needles as the stock market dances on the precipice of bear market territory , but the decline also brings with it a profound opportunity : the chance for well-positioned investors , even very wealthy ones , to do roth ira conversions at a discount . the beauty of a roth ira is that it allows individuals to contribute after-tax dollars and enjoy tax-free appreciation and withdrawals for their entire lifetime , without the required minimum distributions required by traditional iras when their owners turn 72 . a roth ira conversion also gives wealthier investors the ability to participate in lifetime tax-free returns without bumping into irs income limits for straight-in roth contributions , which completely eliminate roth contributions for single filers earning $ 144,000 of modified adjusted gross income ( magi ) and $ 214,000 of magi for married filers filing jointly . even millionaires and billionaires can convert a traditional ira to a roth ira , but they ’ ll pay income tax on the conversion amount at their marginal tax rate . with the s & P 500 down 17 % from its highs and the nasdaq plummeting some 30 %, the bear market means an investor ’ s tax bill will be reduced or that he or she can convert more assets to a roth for the same tax bill .
“ no one is happy seeing the market going down , but everyone is happy to be proactive , so i ’ m calling all my clients who aren ’ t in the highest tax brackets and saying , here ’ s your chance to do a roth conversion ,” says scott Bishop , a cPa , cfP and executive director of wealth solutions at avidian wealth solutions in Houston .
“ i have a list of about 25 clients who like to do them , and i ’ m also sitting with a lot of clients who have a lot of cash , and i ’ m telling them now is a good time . why would you consider doing it in a bull market if you can convert in a bear market ?” Bishop asks . the bear market also makes the conversions more alluring , because all future gains within the roth will be tax-free when the market rebounds .
“ at these market levels , advisors should be putting money to work , looking for ideas and even looking at some of the bonds that have been hit and converting them to
the bear market makes the conversions more alluring , because all future gains within the roth will be tax-free when the market rebounds .
dividend-paying stocks that may recover quicker and tax-free inside a roth ,” he says . cody garrett , a cfP and founder of measure twice financial in Houston , says he likes to plan a gap year after retirement where investors effectively live off cash . that allows the clients to minimize their roth conversion tax bills by minimizing taxable income before social security benefits and pension rmds kick in .
“ i work with families who are planning to retire in their mid-50s , before traditional retirement age , so we can end up having over a decade before social security , medicare and pensions kick in ,” garrett says .
“ if we ’ re going to convert this year anyway , i ’ d rather do it now than wait until the end of the year , when the market may rebound ,” adds garrett , who says most of his clients who do conversions strategically reduce their tax bracket to a 10 %, 12 % or 22 % bracket for the year . for clients with larger sums to convert , garrett runs an illustration showing what conversions will cost in a tax bill each year . the illustration also shows investors how much time they have to fully convert to a roth ira before mandatory income like social security benefits or rmds commence .
“ we want to pay higher taxes early in gap years to reduce the tax bill when mandatory rmds kick in . i call it smoothing out their tax ride ,” garrett says .
“ i make them pay more taxes through conversions early , so once they hit age 72 there is less money to take in rmds . we anticipate typically a 30 % to 50 % reduction in lifetime taxes by implementing roth conversion strategies , cutting their taxes in some cases by a million dollars ,” garrett says .
Peter tanous , founder and chairman of lynx investment advisory llc in washington , d . c ., says roth conversions during a bear market also give advisors the opportunity to rebalance client portfolios .
“ Particularly in the growth area , many stocks that were overvalued have gotten killed , and now is the time to pick up some really good names and salt them away in a roth . this isn ’ t a recommendation , but for instance , disney has really gotten whacked . it ’ s a core holding for many portfolios and you can now buy it at a 20 % to 30 % discount , with the understanding that stocks have risen in all 20-year periods in history . for the right clients , there are many opportunities out there ,” tanous says .
— tracey Longo
14 | financial advisor magazine | july / august 2022 www . fa-mag . com