When is the best time to do Roth Conversions?
Curtis has earned the Life and Health Insurance licensure, has passed the Series 66 examination, and has earned a degree from the University of Nevada, Reno. He has over 20 years of experience in the financial industry, helping others protect, grow and manage their wealth. Curtis helps clients create customized strategies for their portfolios based on their unique financial goals.
WHEN IS THE BEST TIME TO DO ROTH CONVERSIONS?
In the past, we have discussed how Roth Conversions work as well as the benefits of doing Roth Conversions. However, we have yet to discuss whether or not there is a best time to do these Roth conversions, from both a calendar standpoint and a market standpoint. The first step is to actually do the Roth Conversion, so let’s look at how we can streamline it a bit by using time to our advantage.
In my professional opinion, I believe doing Roth conversions at the end of the calendar year makes the most sense. Before, we were able to “undo” or recharacterize a Roth Conversion. For example, if you completed a Roth Conversion in January and had a major expense that required a large distribution from your Traditional IRA, you used to be able to recharacterize your Roth Conversion back to the Traditional IRA so you would not have an adverse tax result. I would like to emphasize that this is no longer the case.
You are unable to recharacterize Roth conversions after the Tax Cuts and Jobs Act of 2017. Therefore, I find it valuable to do these conversions during the end of the year, such as in November or early December. Remember, you don’t want to wait until the very end of the year, as the processing times could put a halt to your Roth conversion, and you need to have it completed by 12/31 of that year. Also, because many people celebrate various holidays around the end of the year, you want to make sure that you have a plan in place for when you wish to execute your Roth Conversion.
The other question that comes up is if there is a best time in the market to convert to Roth. In my opinion, the answer is yes. When markets are down, it is a good time to convert to Roth because when the market recovers and goes up, all those earnings are now tax free. I don’t think anyone would argue the benefit of tax-free growth! One thing to keep in mind when doing a Roth conversion when markets are down is where you are taking the money to pay the tax. You want to make sure you aren’t creating any over challenging headwinds on your income streams by having to pay more tax than necessary in down markets.
So, I feel it is safe to say that there are some better times to do a Roth Conversion than others. However, just getting the Roth Conversion done is rule number one if that is an important part of your plan in retirement. All the above may seem simple, but it is important to have a tax strategy plan in place and that you work with your financial advisor and tax professional. You do not want to create any unforced errors by messing up some of the fundamentals. We still have a nice window to execute some Roth conversions with the tax brackets in place until 2026. At Cornerstone, we take advantage of these tax strategies for our clients. In fact, we have created a Cornerstone Retirement Tax Savings Analysis designed to show you how you could dramatically reduce your taxes in retirement. Call our office at 775.853.9033 to schedule yours today.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.