Roth IRA Conversions At A Discount

Roth IRA Conversions At A Discount

The stock and bond markets are off to a rough start in 2022. The odds are that your portfolio has taken a haircut since the beginning of the year, particularly for investors with a passive buy-and-hold strategy. While watching your portfolio drop in value may be painful, the recent pullback may have a silver lining. A Roth IRA conversion strategy can be an effective lifetime tax minimization plan. 

When your IRA account declines, it can be your opportunity to implement a Roth conversion strategy and incur fewer taxes than you would have before the market correction. If you have already started a Roth conversion strategy, lower account values can be an opportunity to accelerate phases of your plan.


When you contributed to your traditional IRA or 401(k), you likely did so with pre-tax dollars, which reduced your taxable income in the years you made the contributions. Contributing to your Retirement plan with pre-tax dollars is a powerful incentive for you to save a portion of your income for your retirement years.  

Additionally, your IRA account grows tax-deferred, meaning you won’t pay taxes on the growth until you withdraw funds from your account, typically in your retirement years.


While reducing taxes in the years you make the contributions, traditional IRA’s and 401(k)’s can increase your tax bill later in life when you withdraw funds from your account. Not only are your initial contributions taxed, but so is all the growth accumulated over the years.  

Even if you don’t need to withdraw funds from your traditional IRA for living needs, tax laws require you to start. Required Minimum Distributions at age 72. Afterward, you will pay taxes on the required distributions every year for the rest of your life. 

On the other hand, you fund Roth IRA and 401(k) accounts with after-tax dollars, meaning that you pay taxes in the year that you make your contribution or convert from a traditional to a Roth account. However, Roth accounts provide potentially significant benefits later in life.

For one, when you withdraw funds from Roth accounts in retirement, the withdrawals are tax-free. Not only can you withdraw your initial contributions or conversion dollars tax-free, but also years of potential investment gains.   

Another benefit of Roth accounts is that tax laws do not require you to withdraw funds at age 72. You can continue to invest the funds for many more years, continuing the tax-free benefits for your and your spouse’s needs later in life.

Finally, if your heirs inherit Roth accounts, they can withdraw funds tax-free. Meanwhile, if they inherit traditional IRAs, they will have to pay taxes at ordinary income rates on withdrawn funds. Even if leaving a legacy is not your highest priority, a portion of your IRA is likely to pass to the next generation, making Roth accounts a highly tax-efficient way to transfer your wealth.


When your IRA account declines with the market, it can be your opportunity to implement a Roth conversion strategy and incur fewer taxes than you would have before the market correction. 


At the beginning of the year, let’s assume your traditional IRA account was valued at $1 million. Further, suppose that you plan to convert $200,000 each year to a Roth account, so all of your traditional IRA is converted in the next five years. 

If your lifetime tax plan includes a Roth conversion component, you may want to consider implementing a portion when stocks and bonds are at depressed levels. If, for example, your IRA account dropped to $800,000, you can accomplish the same goal in the next four years by converting the same $200,000 annually.

Another reason many are considering Roth conversions today is the tax environment. While no one can know what will happen to tax rates, the current tax law, the Tax Cuts and Jobs Act of 2017 (TCJA), lowered rates for most families.

Unfortunately, TCJA is only temporary. Tax rates are scheduled to revert to 2017 levels beginning in 2026. Performing Roth conversions today at lower tax rates can significantly reduce your taxable income later in life when rates are designed to increase.


You should have a well-thought-out lifetime tax minimization plan. It is difficult to determine if Roth conversions make sense for your situation unless you do some reasonably sophisticated analysis, typically using specialized software. 

Roth conversion strategies can significantly affect your lifetime tax minimisation plan. Executing conversions when portfolio values are depressed can mean significant tax savings. 

Are your plans appropriate in the current market, economic, and tax environment? Consider seeking a second opinion from a wealth manager with tax planning expertise to refine your Roth conversion or lifetime tax minimization plan. 

By: John Hollahan


To be an “accredited investor,” an individual must have had earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years and “reasonably expects the same for the current year.” Or, the individual must have a net worth of more than $1 million, either alone or together with a spouse, excluding one’s primary residence

The information included in this material is for informational purposes only and should not be relied upon for any financial or legal purposes. Arlington Capital Management Inc, dba Arlington Wealth Management (AWM) is an investment adviser registered with the U.S. Securities and Exchange Commission.  Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training, nor are we selling you any product.  Rather, we are seeking to provide you with advisory services.   Please consult with your own tax and legal advisers before investing. AWM cannot and does not guarantee the performance of any investment.  Past performance is no guarantee of future results.