How the Falling Market Could Help You Save in Retirement

By Alan Olsen
How the Falling Market Could Help You Save in Retirement

The falling stock market has been a real downer for most investors to watch. The massive drops, as well as the volatile nature of the market in recent weeks and months, have left many investors trembling. But as with most bad news, there might be a silver lining to the story. The recent downturn in the market could actually help you save on your taxes in retirement.

Time to Convert to a Roth?

So how can you save on retirement taxes, and what does it have to do with the falling stock market? If you have a traditional IRA, or 401(k) plan then chances are it has recently taken a hit. The stock market has been tough on a lot of these plans. That’s why now might be the perfect time to make the switch to a Roth IRA. Converting to a Roth could help you reduce your taxes in retirement.

Pay Now, Save Later

The downside is you would have to pay income tax on the present amount based on your tax bracket, when you convert. However, there are some nice long-term benefits that could help you down the road. When you open or contribute to a Roth IRA that money gets to grow tax-free because you’ve already paid taxes on it once. Additionally, when you withdraw money during retirement, you also get to take that money tax-free. With a traditional IRA, you have to pay taxes every time you withdraw.

Who Should Convert

Why Convert Now – The two reasons converting now makes sense is that many people have declining shares with the market currently down. The other reason is that the current income tax percentages are lower than they have been, thanks to the Tax Cut and Jobs Act. That means if you convert, you will pay a lower tax percentage than you would’ve in the past, or might in the future.

Why Not Convert – It used to be that you could convert to a Roth and see how it went before deciding to stick with it. That gave people the chance to convert earlier in the year and watch the results. If things didn’t go well, they could convert back before the year ended. Under the new tax law, you can no longer do that. Roth conversions are now permanent.

The Verdict – Based on that information, converting to a Roth before the year ends, might make the most sense for retirees younger than 70½ who have already deferred on Social Security. If you are considering converting to a Roth, just make sure you have enough available funds to pay the amount of taxes that will be owed on the conversion. It’s best not to use money from your retirement account to pay the tax bill. Although anyone with a personal retirement account could choose to convert to a Roth IRA, everyone is different.And a conversion might not be the best move for every taxpayer. Make sure you assess your individual situation before choosing to convert. You can also speak with the tax professionals at GROCO for more help.