Tax and Business Alert – August 2025
Abstract:
Market volatility might shrink an
individual’s traditional IRA, but that could be an opportunity. A lower account
value means the accountholder can convert to a Roth IRA and pay less tax on the
conversion. This short article looks at the timing of a conversion and offers
advice on how to stretch out the related tax bill.
Is now a smart time for a Roth IRA conversion?
Market
volatility may have shrunk your traditional IRA, but that could be an
opportunity. A lower account value means you can convert to a Roth IRA and pay
less tax on the conversion.
Traditional
vs. Roth IRAs
Traditional
IRA contributions may be deductible (depending on income and employer-sponsored
retirement plan participation). Funds grow tax-deferred, but withdrawals are
taxed. You will owe penalties for early withdrawals and must take required minimum
distributions (RMDs) beginning after age 73 (age 75 if you don’t turn 73 before
Jan.1, 2033).
Roth IRA
contributions aren’t deductible, but withdrawals — including earnings — are
tax-free if you’re at least 59½ and the account has been open for five years. There
are no RMDs, and contributions can be withdrawn anytime tax-free. While income
limits restrict direct Roth contributions, anyone can convert a traditional IRA
to a Roth. But taxes are due on the converted amount.
Why convert
now?
A
depressed IRA balance means a smaller tax bill on a Roth conversion. Once
converted, there will be no taxes on future growth. But consider the following:
You don’t
need to convert all at once. Spreading conversions over several years can
reduce the tax impact and provide flexibility.
Let’s talk
A Roth conversion can be a savvy move, but it isn’t for everyone. Contact us to explore whether it fits your retirement strategy.