To date, 2020 has been a rough year for investors with the stock market well off its highs reached in February. You may have a number of clients for whom a Roth conversion makes sense. Financial advisor Jim Blankenship, CFP, EA of Blankenship Financial Planning feels it can be beneficial to do a Roth conversion when account values are low. Why? “Because the reduced value of your holdings will likely increase significantly as the momentum swings upward,” he explains. “This way, by the end of the year, your converted money could be worth much more than the amount you have to pay taxes on.”
Another way to analyze this is that with these lower account valuations, you can potentially convert a higher percentage of the account than you could when the account value was higher for the same amount of tax. For example, if the value of your traditional IRA stands at $250,000, a conversion of $50,000 would equal 20 percent of the value of the account. If the account value stood at $200,000, this same $50,000 would represent 25 percent of the account value. Yet, the tax liability would be the same in both cases.
For those clients for whom a Roth conversion already makes sense, you might say they are converting at a bargain rate.