You should regularly revisit the decision of whether or not to convert a traditional IRA to a Roth IRA, and recent events have made this an ideal time to re-evaluate the decision.
A major reason people don’t convert their IRAs is the cost. The converted amount has to be included in gross income as though it were distributed, and income taxes must be paid. Many people don’t want to pay those taxes in a lump sum or can’t come up with the cash.
The market slide since late September, however, has reduced the cost of a conversion. The amount included in gross income is the value of the assets converted on the date of the conversion. If a conversion didn’t make sense before the market slide, it might now that most investment assets have lost value.
It’s an especially good time to do a conversion if you believe the value of the account is likely to be higher in the future. You eventually pay taxes on the value of an IRA. It might be better to pay taxes on today’s lower value than a higher value in the future.
Lower income tax rates are another good reason to convert now. If you expect tax rates to be higher in the future, it can make sense to pay the taxes at today’s lower rates and lower account values.
Of course, other factors need to be considered before you decide for or against a conversion. I discussed those in detail in our May and June 2018 issues.
With both markets and interest rates down, this is a good time to re-evaluate your decision. Use an IRA conversion calculator or work with a financial planner to determine the best decision for you.