Transcript:
Easan Arulanantham:
Should I consider a Roth or Roth IRA conversion when the market is trending downwards? Or in a down market?
Tom Vaughan:
Yeah, I mean, first, you have to figure out whether you should do a Roth conversion. You know, there’s a whole bunch of criteria, we’ve talked about that quite a bit, in my opinion, have to have the money to pay the taxes with some other asset, right. So that’s actually a really big one. So if I convert $100,000, with a Roth, and it creates 20,000, in tax, or 30,000, in tax or whatever, I have to have that money in some other vehicle, usually a non IRA type vehicle, to then kind of pay so not everybody has that. So let’s say you can do it. So that’s the first question then the second thing is, should you be doing it more in a down market? My answer is yes. With one with one criteria with one piece caveat. So first of all, when the market drops, let’s say, there’s two different scenarios. One is I have a retirement account, and I want to convert all of it. So it was 100,000. And now it is 85,000. Let’s just say, alright, wow, I’m going to convert that whole thing and pay taxes on 85,000, instead of what was 100. That makes sense. Now, there’s some timing involved, maybe it would even drop to 80. So, but nonetheless, there’s, when you’re converting an entire account over, then, you know, that makes a lot of sense.
Most of the time, though, the accounts that we’re looking at are really big, and we’re not doing all of it. And we’re basically moving a portion of it. And oftentimes, what we’re trying to do there is fill a tax bracket bucket. So this is where it gets more complicated. But so let’s just say somebody wants to make sure that they stay under under the 24% tax bracket, which is around 330,000-ish, right now, for a couple. And they already have $200,000 worth of income from all these other sources, that means they could convert 230,000, right over and still stay in that 24% bracket. I’m simplifying this drastically. But that’s the idea. And so then what happens is that you kind of need to know what incomes you have, if you’re going to push up against the edge of the tax bracket, you need to know all of your incomes that you had for that year, what you usually don’t know till the end of the year. So we do an awful lot of Roth conversions in December, just for that specific purpose. But if I felt pretty confident that I might be moving $130,000, you know, by the end of the year, I might do 50. Now, because the markets down, and what the advantage of doing 50 now is that I can move more shares. So let’s just say I have a 300,000 and Apple, right, that has now shrunk down to 270 or something. And I can move more shares to equal $50,000 now than when it was worth 300,000. Right, because more dollars per share. And and then you know, I’m able to then if that grows back to the equivalent of what would have been with it when it was that $300,000 I have, you know, some nice growth that was tax free.
So, again, down markets, you can transfer more shares for the same dollar amount. Or if you got an entire movement of an entire IRA over it’s worth less than it was less tax. So yeah, I think that’s something to definitely look at in this particular arena. I like taking advantage, you know, the markets gonna go down. It just is I mean, it doesn’t seem like it’s been going up constantly, which it basically has, but that’s not how it normally works. And so what can you do to take advantage it I think this opportunistic rebalancing that we’re working on, I think, looking at Roth conversions as another way to take advantage of a downturn. And certainly be looking at that. So that’s it. That’s a really good question.