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Are Roth Conversions the Lemonade to the Stock Market's Lemons?

March 25, 2020

Are Roth IRA Conversions the Lemonade of this Stock Market Lemon?

By: Darren Violette ChFC, CLU, RICP, ChSNC

Are there planning opportunities that should be addressed during this market downturn? Yes! Consider Roth IRA conversions. Roth conversions in a down market can yield returns exceeding those completed during better market times. Will this work for you?

Here is a hypothetical example. We are going to assume Kelly starts with $100,000 in an IRA that she is considering for a Roth conversion and that she has $30,000 of liquidity to pay the tax. We will further assume that she will be taxed at 30% total (state and fed taxes). We will look at 3 options. We will also assume cash accounts return 2% (calculated as tax-free for simplicity) and investment accounts return ~7.2%. This is not predictive of returns!

This is meant to be illustrative not prescriptive – this is not a recommendation for you to do this. That’s a conversation for you and your advisor. Many folks would not have the exact same tax bracket throughout. And we assume that using the cash to complete a Roth conversion does not reduce Kelly’s cash position below her recommended levels.

  1. No Roth Conversion.

The best way to evaluate is by calculating the net after-tax value of the strategy. At the start, the $100,000 IRA nets $70,000 after paying taxes. Adding in the $30,000 cash, there is $100,000 net to Kelly. Fast forward 10 years and there is $200,000 in the IRA and $36,570 in the cash account. After paying taxes, the IRA nets $140,000 and adding in the cash totals $176,570.

  1. Roth Conversion

Completing an immediate Roth conversion uses the entirety of the cash account to cover the tax bill. This leaves the Kelly with a $100,000 Roth IRA. This leaves her in the exact after-tax position that she was currently in prior to the conversion. Looking at values 10 years in the future we can see the benefit of Roth conversions. The after-tax value is now $200,000 because no tax bill is due on the liquidation of the Roth IRA.
How does this happen? Because the cash is used to pay the taxes, it is now no longer growing at the 2% rate. Because Uncle Sam is no longer claiming a share in the Roth IRA, the entire $100,000 is hers as well as the growth on that money.

This would yield Kelly an additional $23,430 for her in 10 years.


  1. Roth Conversion in a Down Market

What happens if the market falls 30% while she is considering the Roth Conversion? This spells opportunity for Kelly. She wants to convert the entire IRA to a Roth IRA but can now do so with a lower tax cost because the IRA has a lower account balance.

With the cash still at $30,000 and the IRA down to $70,000, she can convert the entire IRA and only use $21,000 to pay the taxes. This leaves her with $9,000 remaining in cash as a result of the lower tax cost. For our example, assuming the market recovers back to the initial level after her Roth conversion, Kelly now has a $100,000 Roth IRA and still has the $9,000 in cash.
Not only will she take advantage of the benefits of the Roth conversion, she will do so at a lower cost than Scenario 2. While Roth conversions are not for everyone, market downturns create a unique opportunity to lower the tax cost of a Roth conversion.


Should you convert to a Roth IRA during this market drop? There are benefits to doing so. Is it right for your situation? That’s not an answer for a blog post but it is a question to be answered with your financial advisor.

This blog is intended for general public use and is for educational purposes only.  By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity.  Please contact a financial professional for guidance and information that is specific to your individual situation.”