By I have had a couple of conversations recently with people who have come to the same conclusion about 2022. It goes like this: the financial markets have tanked, they have made no progress whatsoever toward their long-term investment goals, and they’re declaring the year a total loss.
To these folks, I say I hear you. I do. Yes, this year has been tough on all of us. However, I believe that in every challenge lies an opportunity, and this is no different. This month could be a great time for a Roth conversion, that is, converting a portion of your portfolio from a traditional IRA to a Roth IRA.
With the markets down somewhere between 15 and 30 percent, a conversion can help you save money. When the market is down, it is likely that your IRA value has also decreased from its original value. While this might seem like a bad thing, when it comes to paying taxes on that amount, it means you’ll have a lower tax bill. That in turn builds more tax-free income into your retirement plan. Remember: while distributions from traditional retirement accounts are taxed as regular income in retirement, with a Roth IRA, you will pay taxes now and then withdraw money tax-free in retirement, provided all conditions are satisfied and the distribution is qualified. The amount you convert from a traditional IRA to a Roth IRA is treated as ordinary income in the year you complete the conversion.
While I can’t predict the future, history indicates that markets do eventually recover, and I believe they will this time too. However, remember that past performance is no guarantee of future results.
I know the year has been hard and many of us just want to say goodbye to 2022 once and for all. I get it. A Roth conversion is one strategy that you can take before the end of the year that can help to salvage some of those losses. Give us a call today to learn more and discuss any other year-end strategies for you and yours.
Talk with both us as your financial advisor and a tax professional before implementing any strategy so you can understand your own specific financial and tax situation and to learn how a Roth conversion might impact or benefit you.
Article by Kyrk Davis, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.