There’s always opportunity amidst hazard. With the stock market having taken a bath, this could be the right time to take a regular IRA and do a conversion to a Roth IRA.
When you convert an IRA to a Roth, you pay tax (but no penalty) on the converted money. With the market having declined, this makes sense because you convert to a Roth on a smaller base of money and then that money will flow to you tax free in retirement. (As an added bonus, you have until next tax season to come up with money to pay the tax.)
I also want to put out a reminder for people who followed my path last tax season and converted IRAs to Roths, but then did an extension of their tax return for last year. Normally I always file my return on time, but this year I didn’t because there’s a right to re-characterize a conversion of a Roth back to a regular IRA within certain limits.
So the deal is my wife and I did a conversion last tax year from a regular IRA to a Roth. Now we’re sitting with the accounts being worth less than when we did the conversion. It’s one of those situations where the IRS lets you do a do-over or a mulligan, if you prefer that term and you’re a golfer!
You’re able to take it back roundtrip to an IRA, eliminate the tax liability, and at a later date convert to a Roth, instead of paying tax on money that at this point doesn’t exist anymore.
I know it sounds complicated. Unfortunately, that’s just the way it is under our current tax code.
But back to my main point: For you sitting there today, if you have regular IRA, look at the possibility and benefit that may be there of doing a conversion to a Roth. While your account is looking punier than it was, you get the benefit of a lower tax bill.