The Roth Conversion Window Is Open -- But Not Forever
Key Points
The best time for you to convert a traditional IRA to a Roth IRA is when the stock market is down.
Taxes are locked in at the time of the conversion, but generally not due until the following year.
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There are a bunch of reasons why you might pick a traditional IRA over a Roth IRA, or vice versa. But when the time comes to withdraw your money in retirement, the Roth IRA's tax-free withdrawals will put more money in your pocket.
For those who have savings in a traditional IRA, there's good news: Most traditional IRAs can be converted into Roth IRAs fairly easily, and now may be the perfect time to do so. Here's why the Roth conversion window is wide open right now, but might not be for long.
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Convert low, withdraw high
All Roth conversions come with a tax bill. Contributions to a traditional IRA are made with pre-tax dollars, and Roth IRA withdrawals are tax-free, so the income taxes on the converted amount are assessed when the conversion is made. Most taxpayers who make a Roth conversion today would pay the taxes in about a year, as part of their 2026 taxes (due April 15, 2027).
The best time to do a Roth conversion is when the market is down. Right now, with the Nasdaq Composite index officially in correction territory, and the S&P 500 and the Dow Jones Industrial Average both down more than 6% from their highs, most IRAs have dropped in value. Converting those lower-value holdings now locks in a lower tax bill than waiting to convert until after the market recovers.
However, this situation may not last. With Iran signaling openness to negotiations, the markets have already moved upward from their Monday lows, so the window for those lower conversion taxes may already be closing. Locking in a lower conversion tax bill now still gives most taxpayers more than a year to sock away the money to pay those taxes in April 2027.
Of course, a Roth conversion isn't right for everyone. Be sure to consult a financial advisor to see whether it makes sense for your particular situation. But there may be no better time to lock in lower taxes for your retirement account.
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John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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