When Markets Drop, Opportunity Rises
Market downturns can make even the most seasoned investors uneasy. But for those in a specific financial position, they also present one of the best tax-planning opportunities available: the Roth conversion.
If you’re in a lower income year—whether because you’ve just retired, paused work, sold a business, or taken a sabbatical—a market dip might be the ideal moment to move funds from a traditional IRA to a Roth IRA. Why? Because a conversion during a downturn means you’re paying taxes on temporarily reduced asset values—and locking in tax-free growth when those values recover.
In this article, we’ll break down how Roth conversions work, when it makes sense to use them, and why downturns are such a powerful window of opportunity if you’re in the right income bracket.
The Roth Conversion: A Powerful but Strategic Tool
What Is a Roth Conversion?
A Roth conversion involves transferring assets from a pre-tax retirement account (like a traditional IRA) into a Roth IRA. You pay ordinary income tax on the converted amount in the year of the conversion—but once it’s in the Roth, all future growth and withdrawals (if qualified) are tax-free.
Why Down Markets Create Leverage
When the market drops 15–30%, your IRA balance does too. That means:
- You’re converting a lower dollar value, paying tax on a discounted amount.
- When the market recovers (and history shows it eventually will), that growth happens inside a tax-free vehicle.
This is the kind of strategic planning that separates average investors from those who grow wealth tax-efficiently over time.
Timing: Who Should Consider This (and Who Shouldn’t)
✅ Best Candidates for Roth Conversions:
- Early retirees in their 60s who haven’t started Social Security or RMDs
- Professionals in between jobs, post-liquidity event, or taking time off
- Individuals in the 10%, 12%, or 22% federal tax brackets
- Those with large pre-tax balances and long time horizons
❌ When It Doesn’t Make Sense:
- You’re currently in the 32%+ tax bracket (unless doing small, strategic annual conversions)
- You don’t have outside cash to pay the taxes (never use IRA assets to cover the tax)
- You need the funds within 5 years (Roth conversions have a 5-year rule)
This is why blanket advice like “everyone should convert to Roth” is dangerous. It’s all about context.
2025 Tax Brackets to Keep in Mind
For individuals and couples in low-income years, the 12% and 22% brackets offer prime windows for conversions:
- 12% bracket (married filing jointly): up to $96,950
- 22% bracket (married filing jointly): up to $206,700
Once you move into the 24%, 32%, and 35% brackets, the benefits diminish quickly—unless you have strategic reasons for a partial conversion.
Strategy: How to Execute a Roth Conversion During a Market Downturn
Step 1: Confirm Your Current Income Level
Project your total income for the year. Include:
- Wages or consulting income
- Rental or passive income
- Capital gains
- Any required distributions (for those over 73)
If you’re in a low-income window, calculate how much room you have in your current bracket to convert without spilling into the next one.
Step 2: Identify Depressed Assets
Choose investments within your IRA that have dropped in value but still have long-term growth potential (e.g., high-quality equities or growth funds).
Converting those while they’re down means:
- You owe less tax today
- You benefit from future rebound growth—tax-free
Step 3: Execute the Transfer
Your advisor or custodian can perform a direct transfer from traditional to Roth. Avoid indirect rollovers (where you receive the money) to prevent mistakes.
Step 4: Pay the Taxes with Outside Funds
This part is critical. Always pay the conversion tax with non-retirement assets. That way, you keep the entire converted amount growing tax-free.
Alternatives and Tradeoffs
What If You Don’t Convert?
- You’ll defer taxes—but could face higher required minimum distributions (RMDs) later
- Your Social Security and Medicare premiums may be impacted by higher future income
- You may lose the chance for tax diversification in retirement
Other Roth Conversion Scenarios:
- Serial Conversions: Convert small amounts over several years to manage brackets
- Backdoor Roth: For high earners still working, this is another pathway (though not related to market timing)
- Roth Conversions Inside Trusts: Advanced strategy that may benefit multi-generational wealth transfer
The key is coordinating your Roth strategy with your income, taxes, time horizon, and estate goals.
FAQs: Roth Conversions in a Down Market
When is the best time to do a Roth conversion?
When your taxable income is low and markets are down—this creates a tax-efficient window to move assets into a Roth IRA.
Should I convert my entire IRA?
Usually not. It’s more effective to convert just enough to stay within a favorable tax bracket. Work with a wealth advisor to model an optimal amount.
Do I have to sell my investments to convert?
No. Most custodians allow in-kind transfers, meaning your actual assets move to the Roth without selling them.
What’s the 5-year rule?
Each Roth conversion has a 5-year holding period before you can withdraw the converted funds without penalty (regardless of age).
Is a Roth conversion reversible?
No. Since 2018, Roth conversions are irrevocable—once done, you can’t undo it. That’s why planning ahead is essential.
Your Window Won’t Stay Open Forever
Market dips don’t last forever—and neither do low-income years. If you’ve recently retired, taken a step back from full-time work, or sold a business, you may be in a prime position to use this strategy.
Roth conversions aren’t just about tax savings today. They’re about giving your future self the gift of tax-free income—and protecting your portfolio from unpredictable future tax rates.
At Truly Aligned, we help clients assess their full financial landscape—investments, income streams, estate goals—and use Roth conversions as one part of a bigger strategy to build flexible, purpose-aligned wealth.
If you think this window might apply to you, we’re here to run the numbers and build the plan.
Traditional IRA account owners have considerations to
make before performing a Roth IRA conversion. These primarily include income
tax consequences on the converted amount in the year of conversion, withdrawal
limitations from a Roth IRA, and income limitations for future contributions to
a Roth IRA. In addition, if you are required to take a required minimum
distribution (RMD) in the year you convert, you must do so before converting to
a Roth IRA.
Contributions to a traditional IRA may be tax deductible
in the contribution year, with current income tax due at withdrawal.
Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition
to current income tax.
LPL Financial representatives offer access to Trust
Services through The Private Trust Company N.A. an affiliate of LPL Financial.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through The Wealth Consulting group, a registered investment advisor. The Wealth Consulting group, WCG Wealth Advisors and Truly Aligned, INC are separate entities from LPL Financial.