This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

As the market declines, now may be the time to consider Roth IRA conversions.

With both the stock and bond markets falling and IRA accounts possibly losing value, this may be an opportunity to investigate converting a traditional IRA to a Roth IRA. As the markets decline further, more Roth Conversions go on sale, and the conversion discount increases.

A Roth IRA vs a Traditional IRA.

As we all know, there are many benefits to a Roth IRA compared to a traditional IRA.

Such as:

· Earnings in a Roth IRA grow tax-free compared to tax-deferred in a traditional IRA.

· Withdrawals of a Roth IRA are tax-free rather than taxable in a traditional IRA.

· There are no penalties or taxes if you are withdrawing your contributions. A traditional IRA withdrawal is taxable, and if your client is under 59 1/2, a 10% penalty may also apply. Different rules apply for earnings on a Roth IRA.

· There are no Required Minimum Distributions (RMD) for a Roth IRA, whereas a traditional IRA requires you to begin depleting your IRA by taking taxable RMDs beginning at age 72.

· Roth IRAs pass on to your client's beneficiaries’ income tax-free, while a traditional IRA must be emptied no later than the tenth year after the IRA owner passed away and is taxable as ordinary income.

· You can contribute to your Roth IRA at any age as long as you have earned income from a job or profession, up to the income limit. Since 2020, this is also true of a traditional IRA.

To be fair and balanced, if your client expects to find themselves in a much lower tax bracket at retirement, you need to evaluate a Roth Conversion regarding the benefits of making a move.

This evaluation is paramount because the taxation of the entire conversion is at ordinary income. A conversion may not make economic sense if the client is at a higher tax bracket upon conversion but then at a much lower tax bracket at retirement.

However, this is where a Roth conversion being on sale comes into play.

Let's say your client files jointly, has $200,000 of income, and wants to convert a $500,000 IRA. If we focus on federal taxes, they will pay approximately $193,548 in federal taxes.1

If the IRA loses 15% of its value, at $425,000 in taxable income from the Roth conversion, that would be a $166,255 tax or a $27,293 tax savings.

If we assume a 4% state tax, our tax savings will increase to over $30,000.

While there is still a tax to be paid, it could put Roth conversions on sale.

For an additional strategy to reduce the tax bill of a Roth conversion, please complete the form below.


1Dunham & Associates Investment Counsel, Inc. May, 2022


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.

All examples are hypothetical and for illustrative purposes only. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Dunham cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. All financial decisions and investments involve risk, including loss of principal.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC.