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The Bear Market Playbook: ROTH IRA Conversions

Updated: Mar 15

Hi everyone, we’re back with another video, and we’re still doing the video series called The Bear Market Playbook. In this video, we’re going to talk about opportunistic Roth IRA conversions.

For the sake of this video, I’m going to skip past giving basic definitions of an IRA and a Roth IRA because a lot of people can easily Google that information. It’s not that it’s unimportant, but I don’t want to spend most of the video giving definitions. I want to dive right into it and tell you exactly about this strategy.

Right now, when negativity is really running high, people are pessimistic and not feeling great about the economy or about the market.  A lot of times, investors are really craving for things to do. They want to know like, what can I do? How can I make the pain stop?

There’s a lot of this desire to want to do something. So we want to give you some reasonable things to consider. Now, before we dive into the specifics of a Roth conversion, I want to tell you first, that anytime you deal with Roth IRAs, IRAs, or investments, you most likely also need to look at the tax implications of anything that you are doing. So, I encourage you please seek out the help of a qualified tax professional or a financial advisor that understands taxes and can give you guidance on this.

Please do not take this and do it yourself unless you are very, very knowledgeable. Even if your information is coming from a credible source, find a reputable adviser or someone that you trust that’s a financial professional or tax professional. We’d hate to do all of these maneuvers and then suddenly find a surprise come to us on tax day.

You don’t want to be caught by surprise. You want to see that stuff coming and be able to prepare yourself. Specifically, I want to talk about what we call an opportunistic Roth IRA conversions.

“What’s the difference?”

Michael, it’s kind of playing with words and semantics. I get it. “Opportunistic” sounds good because it sounds optimistic and hopeful. And we’re trying to game the system. So we like that, especially when we’re not feeling good about how our investments are doing.

Take Advantage of Lower Asset Values

These Roth IRA conversions take place when we have a downturn or downside volatility in markets. It presents people who have IRA accounts with an opportunity to convert some of those IRA assets into Roth IRA assets. What that entails is essentially taking the assets that have declined in value, maybe they’ve declined significantly in value, and transferring those assets.

This amount that you convert creates a taxable event when you make this happen. So again, you want to know what’s going to happen to you or how it’s going to impact you from a tax standpoint

One of the first things I will tell anyone is that when you are dealing with assets that are in IRAs, or Roth IRAs or investments, generally, there are tax implications. You want to know about those before you act, not necessarily after you act. So I highly encourage you to consult with someone that can give you some insights on how this may or may not impact you.

Let’s say you own shares of XYZ company and you are very long term bullish on this company or you have a fund that you really like that is a high flying growth fund that you really feel optimistic about the long term prospects for success. Right now, the markets haven’t been working in many people’s favor, and your assets are down. You could take the shares of that stock or that fund and transfer them in kind from an IRA to a Roth IRA.

What this does is it moves the assets from the IRA to a Roth IRA and allows those assets to grow inside of the Roth IRA wrapper. Eventually, if you reach age 59 and a half and that account has been open for over five years, according to the Roth IRA rules, distributions from that account can be tax free. So, it can grow tax deferred and come out tax free.

SPECIAL NOTE HERE: if you have basis in an IRA, which some people do, be careful. These ROTH conversions are for the IRAs that are essentially 100% funded with pre tax dollars. So, there’s no basis. Thus, there’s no wonky tax calculation that needs to take place. Again, please consult with a tax professional if you’re trying to do this so you can make sure you understand the tax impacts.

One of the things you want to look at specifically is how you would pay or cover the tax. It’s not just about the tax implications, but how you would want to pay the tax if you think that taxes are going to be higher in the future. Generally speaking, Roth IRAs are something you should be considering if you may have higher income in the future.

If you may inherit assets, you’re going to have significant assets, or have a financial event in the future,  that may place you in a higher tax bracket or potentially move you into a higher income tax bracket. Again, these ROTH IRA conversions may make sense for you.

So when you’re looking at this and you’re considering this ROTH IRA conversion strategy, it is not just about the future tax rates, but that is a big part of it.

Which Assets to Target?

Another thing we want to be thinking about specifically is which assets should we look at or target for a ROTH IRA conversion? Say that you’ve got a portfolio that’s got bonds in stock funds. One of the things that you want to look at are what assets in that portfolio may have declined the most? Or what assets do you feel have the greatest long term growth potential?

If everything has been depressed in value, because we’ve experienced a lot of downside volatility, those assets that have the highest long term growth potential may be the assets you want to look at first to convert over into a Roth IRA. Because those assets may give you the greatest potential for long term growth, I encourage you to take a look at this strategy if you think it makes sense.

Find a financial advisor or a tax professional and ask them. Again, you want to be very mindful of the tax consequences that may happen from using a strategy. But when you have market declines like this, this is an opportunity that presents itself to take a look. Thank you for watching.

I continue trying to do a video series on the bear market. Let’s call it the bear market playbook– giving you thoughts, ideas, strategies that you can be doing right now. Even though the market is not cooperating with us and not giving us the growth that we would like to see in the short run. But we want to still be mindful of planning opportunities that may present themselves during a bear market.

So I hope these videos are helpful. If you have any thoughts or ideas about a topic that you’d like me to cover, feel free to shoot me a note in the comments and I will see if I can get that done for you. Thank you for watching.


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