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Bad Market = Good Time to Convert to Roth?

On an internet usenet group misc.invest.financial-plan, I recently commented on a question and I’d like to share this with my readers:

Q: When the stock market is in the toilet, why don’t we hear more recommendations for converting traditional IRA’s to Roths? It’s the perfect time for it because it minimizes your taxes.

A: Because when you do the math, the state of the market is not so relevant. Here’s my thought, illustrated.

You have $10000 in the IRA, and convert to Roth, paying $2500 in tax (out of other funds)
Decades later you have 10X your money, $100,000 in the Roth.

I have $10000, but take the extra $3333 (which is $2500, pretax) and add it to my pretax IRA or 401(k).
Decades later, I have $133,333 which can be $100K after tax (if taxed at 25%)

The conversion has far less to do with the $10K having been $20K last year, and more to do with:
A) current bracket
B) future bracket
C) estate concerns, including kid’s brackets.

It’s usually a good idea to use Roth conversions to “top off” your current bracket, whether while working or in retirement, if you fearing higher marginal rates later on. Multiple discussions I’ve joined on this topic most often end up ignoring the relative value of the portfolio vs recent past.
One other point I’d offer; I’ve discussed the “pre-tax vs post-tax” debate, and one needs to look carefully at their present marginal rate right now compared to their average rate at retirement. Only those who expect to retire with quite a high balance would benefit from the wholesale shifting of funds over to Roth.


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