Anyone converting to Roth while market is down?

[Pat]

I get all that but why is it beneficial to roll 401k into Roth when the market is down?

Minimizes the taxable event of conversion

FWIW I have money in both traditional and Roth accounts. I have no idea what tax brackets are going to look like when I retire, and I don’t trust our benevolent overlords not to change the rules to extract more taxes, so I’m doing my best to hedge.

 

[JP4CY]

We tried that with our family but they preferred giving them cheap crap and cash.

It's the toughest with grandparents for us but they appreciate the idea of saving.

 

[Skyh13]

I get all that but why is it beneficial to roll 401k into Roth when the market is down?

Ah -- sorry, maybe OP can shed some light. My best guess would be that since their 401k/IRA is down with the market being down, they could take advantage of the fact that if they rolled to a Roth now that the tax burden would be less than if the markets were up. So paying tax on a smaller sum _now_ rather than paying tax on a, hopefully, larger sum later when (hopefully) the markets are back up.

 

[VeloClone]

I like to have a mix of Roth and conventional. I can use the conventional for regular expenses after retirement and the Roth for bigger irregular purchases (car, trip, etc.) That way buying a new car or taking a month long trip to Europe one year doesn't kill us in taxes.

 

[CascadeClone]

That's why you would only do it if the market takes a total dump.

Selling 45% of my shares to pay the tax is selling 45% of my shares, regardless of the absolute value. I don't have anywhere NEAR the cash to pay that out of pocket. Like I said, this pot has been on the stove for 25 years...

 

[clonedude]

C'mon people..... the market is down.... you should be buying! That's what I'm doing now.

The only thing worrying me is how long will it be down? Our country is pretty screwed, with no signs of life at all down the road. But I've got a good 12 years to retirement.... it's gotta improve by then, right?

 

[BryceC]

I put the first 6% of my income contribution into the Roth because my employer matches that and then I put the rest in as a regular 401k amount. Trying to hedge my bets there though.

 

[ruxCYtable]

I get all that but why is it beneficial to roll 401k into Roth when the market is down?

When you convert, you pay taxes up front based on the current value of your account. It is beneficial to do it when the market is down, as you'll be paying taxes on a lesser amount. For instance, when the market crashed 30% in 2020 would have been an awesome time to do it.

 

[ruxCYtable]

Selling 45% of my shares to pay the tax is selling 45% of my shares, regardless of the absolute value. I don't have anywhere NEAR the cash to pay that out of pocket. Like I said, this pot has been on the stove for 25 years...

When the market's down you'll still pay less in taxes. And you don't have to pay out of pocket, you can pay out of your holdings.

 

[CascadeClone]

When the market's down you'll still pay less in taxes. And you don't have to pay out of pocket, you can pay out of your holdings.

Let's just say you have $1M in an IRA and 10 years til retirement. The market tanks 30%. In the following 10 years, the value doubles (roughly 7% return).

Converting:
I convert, and pay appx 40% in taxes taking it out of my holdings. I now have about $400k left of my $1M. It doubles to $800k. I pull out 5% per year ($40k) tax free until I die.

Not-converting:
The $1M goes to $2M. I take out 5% per year ($100k) and pay 30% tax, netting $70k until I die. That's a hell of a lot more.

Yes you would pay less to convert the lower amount than if the market didn't tank, but you would be better off in this scenario NOT converting.

My point is just it depends a LOT on how much you have and what tax bracket it throws you into, as well as how much time you have left. Opposite extreme, my son has probably $50k and is 30. For him it probably makes a lot of sense. For those here that aren't super confident about their financial jiu-jitsu, please consult a financial advisor for help.

 

[ricochet]

Let's just say you have $1M in an IRA and 10 years til retirement. The market tanks 30%. In the following 10 years, the value doubles (roughly 7% return).

Converting:
I convert, and pay appx 40% in taxes taking it out of my holdings. I now have about $400k left of my $1M. It doubles to $800k. I pull out 5% per year ($40k) tax free until I die.

Not-converting:
The $1M goes to $2M. I take out 5% per year ($100k) and pay 30% tax, netting $70k until I die. That's a hell of a lot more.

Yes you would pay less to convert the lower amount than if the market didn't tank, but you would be better off in this scenario NOT converting.

My point is just it depends a LOT on how much you have and what tax bracket it throws you into, as well as how much time you have left. Opposite extreme, my son has probably $50k and is 30. For him it probably makes a lot of sense. For those here that aren't super confident about their financial jiu-jitsu, please consult a financial advisor for help.

Your math is a little off because you didn't do the 30% market drop in your not converting scenario. You don't have $2M you have $1.4M. I think it comes out to $49K vs $42K in your scenario. The difference is entirely because your conversion had 40% tax and your withdrawal had 30% tax. If you make the tax rates the same it comes out exactly the same in both cases.

 

[CycloneNorth]

My recommendation is to liquidate Roth IRAs and 401K and invest in Bitcoin. You'll never have a chance to buy this low again.

 

[bos]

My recommendation is to liquidate Roth IRAs and 401K and invest in Bitcoin. You'll never have a chance to buy this low again.

 

[CysRage]

Minimizes the taxable event of conversion

FWIW I have money in both traditional and Roth accounts. I have no idea what tax brackets are going to look like when I retire, and I don’t trust our benevolent overlords not to change the rules to extract more taxes, so I’m doing my best to hedge.

If my wife and I already max out our Roth IRA contributions every year and I have a 401k balance with my employer, is there even an option or is it beneficial for me to somehow move to an IRA?

 

[CysRage]

My recommendation is to liquidate Roth IRAs and 401K and invest in Bitcoin. You'll never have a chance to buy this low again.

My $15 free super bowl bit coin is now worth $6. And no I don’t view that as a reason to buy.

 

[CyclonesRock]

My recommendation is to liquidate Roth IRAs and 401K and invest in Bitcoin. You'll never have a chance to buy this low again.

I hear there's a stock called Gamestop that is undervalued... jimlad

 

[cygrads]

If politicians are good at anything it's figuring out a new way of taking your money so even if you plan the best you can they'll screw you over first chance they get.

 

[SayMyName]

My recommendation is to liquidate Roth IRAs and 401K and invest in Bitcoin. You'll never have a chance to buy this low again.

This BDK's alt account??

 

[CycloneSpinning]

If my wife and I already max out our Roth IRA contributions every year and I have a 401k balance with my employer, is there even an option or is it beneficial for me to somehow move to an IRA?

You can convert above and beyond the annual limit, but with no offense intended to the OP, I would question whether anyone has really recommended this strategy. Even with a reduced balance (due to a market downturn), that would be a substantial tax bill. You would almost certainly pay at a far higher rate than you would in retirement. Even noting that now all of the money was going to now grow tax-free…look at the money you paid in taxes.

And where did that money come from? If you have enough cash lying around to pay those taxes, wouldn’t you be better off taking that money and investing it while the market is down? Put it in a brokerage account and let it grow. You can likely use that money to pay your 401k taxes plus buy a nice little vacation home in 20 years.

 

[Bestaluckcy]

Most people that do the conversions do so with the idea that the tax bite may be higher when they are retired and time comes for minimum distributions, than the tax bite when they do the conversion. One is speculating on the future which is always unknown.

The biggest unknown of course is ones longevity. If one does not reach the golden years (heaven forbid) a conversion is complicated because now you are not only considering your tax liability but also your heirs tax liability, as to whether it was worthwhile. Another assumption is that the investment will increase once the conversion has been made. That may not be the case where people raided their retirement funds after losing a job or having a family emergency. Just lots of unknowns with Roth conversions.

I am retired and have decided against doing any. My advisors have always recommended to not pay a penny of tax until it is absolutely necessary. So that is the approach we have taken. Our tax savings are in the here and now, and I think that is going to be the best course for us.