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getting-the-most-bang-for-your-buck-roth-conversion-during-a-market-pullback/According to a March 2020 report from Fidelity Investments, in the year after the “trough” of a bear market, the S&P 500 has gained an average of 47%. That is in comparison to the little over 8% per year on average that the S&P 500 has returned over the last 20 years*. To go back to my example of a $50k conversion, let’s assume you did that when the market was at the low on March 23rd of this year. The S&P 500 is up 44.54%* from March 23rd through yesterday, July 28th, so that $50k grew to just over $72k in about 4 months, $22k of tax-free growth.
2020_was_the_Perfect_Year_for_a_Roth_ConversionA Roth conversion may not always be in a
taxpayer’s best long-term economic interests if:
• The current tax cost of the conversion is prohibitively high. A Roth conversion, in
its simplest sense, is a trade-off between paying taxes now vs. paying taxes later.
For the strategy to be impactful, the current tax cost of the conversion should not
be so expensive that it outweighs the benefit of any expected future tax-free
• The taxpayer is making regular and material withdrawals from their pre-tax IRA.
• The taxpayer does not have the cash to pay the tax due on conversion.
We recommend converting shares of investment positions rather than selling investments in
the IRA and then converting cash proceeds. This ensures that the taxpayer continues to have
market exposure during the conversion process, and also saves on the transaction fees that
may be levied when selling an investment position.