Finding the Silver Lining: Bear Market = Cheaper Roth Conversions

You’ve probably heard the old joke about the optimist who fell out of a tenth-story window. As he fell past an open fifth-story window, somebody heard him say, “So far, so good!”

At this point, nearly halfway through 2022, it’s pretty hard to be optimistic; the market feels like it fell out of a tenth-story window. But not everything about the current bearish market conditions is necessarily bad. That might be hard to believe, but think about it: Dozens of well-run companies that are financially sound are more attractively priced now than they have been in many months; as bond prices fall, yields are rising, which means that over the long haul, fixed-income investors can probably look forward to better income streams; many portfolios are benefitting from tax-loss harvesting, which bodes well for offsetting future capital gains and reducing the amount of checks written to the IRS.

And another benefit of the falling market is that taxpayers holding traditional 401K and IRA accounts now have an opportunity to convert to Roth accounts—jettisoning RMDs and securing tax-free income in retirement—at bargain prices. Because assets in traditional 401Ks and IRAs represent pre-tax contributions, converting to a Roth account requires paying taxes on them now in order to gain tax-free status when funds are withdrawn in retirement. That means that the most advantageous time to make those conversions is while the taxpayer is in a lower bracket or the assets are at depressed prices—or preferably, both. Then, when the markets have resumed their upward trajectory (which they always have) and the taxpayer is potentially in a higher tax bracket, the balance in the account will look a lot healthier and, even better, if the owner takes retirement income from account, that income will not be subject to income tax.

It’s also worth keeping in mind that the current, relatively low income tax rates in effect as part of the Tax Cuts and Jobs Act of 2017 are scheduled to “sunset” in 2026 unless Congress acts to extend them. While there’s no way to predict what Congress will or won’t do, many taxpayers could be in a higher bracket in future years than they are now. That’s one more reason to consider a Roth conversion; it takes future income out of the taxable category.

The other benefit to a Roth IRA account is the absence of required minimum distributions (RMDs). With a traditional account, taxpayers must begin taking RMDs by age 72, which can sometimes thrust them into a higher tax bracket. But with a Roth IRA, there is no RMD requirement; account holders can leave the money in the account as long as they wish. Note that Roth 401Ks do have RMDs, but many taxpayers can avoid them by rolling their Roth 401K into a Roth IRA.

At Empyrion Wealth Management, our core focus is on helping our clients make smart, tax-efficient decisions for their retirement and other important financial goals. To learn more, click here to read our “Financial Planning Checklist for Retirement.”

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Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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