Dear Friends,
As I sit in the office on a rainy Saturday, it seems like an appropriate time to consider putting into practice the proverbial phrase, “When life gives you lemons, make lemonade”.
Those who are watching noticed that the stock market took another tumble this week (although it did make a nice rally late in the week). When the stock market is low is the ideal time to implement a couple Roth IRA strategies. Mind you, I am not saying that the market is at its lowest. Don’t all of us wish we knew beforehand when the market had reached its trough. Whether the market is “low” now is a determination that you and your financial advisor will need to make.
- Roth IRA conversions are best when our IRA’s are at their lowest value. Because a taxpayer is taxed on the value on the IRA at the date of conversion, it makes sense to do the conversion when the IRA is at its lowest value. Remember that you do not have to convert your entire IRA when doing a Roth IRA conversion. You can convert portions at a time by selecting only certain assets (the ones which have the greatest opportunity for future appreciation) to roll out into a Roth IRA. For most people, it makes sense to do Roth conversions in “nibbles” so that the conversion does not push one into the higher tax brackets. Roth conversions are not a “tax-wise” strategy for many, or maybe most taxpayers, so please consult with us if you think this might be a good time for a Roth conversion.
- Undoing a Roth conversionis a strategy to consider when IRA values have declined. Suppose you converted to a Roth IRA in the past when your IRA had a much higher value than today. You were taxed on that higher value. Tax rules are very generous with regards to undoing a Roth conversion. If you did a Roth conversion as far back as 2014, you can still undo the conversion. If the conversion was in 2014, you had better hurry. The deadline for undoing that conversion is October 15. You still have that opportunity even if you have already filed your 2014 return. Of course, you must file an amended return if you were to undo (or “recharacterize”) a 2014 Roth conversion. If you undo the Roth conversion, you must wait until the later of 30 days or the end of the year to re-convert those assets back into a Roth IRA. However, there is nothing preventing you from immediately converting other assets into a Roth IRA. Unless you intend to re-convert assets at a lower value, the characterization strategy really doesn’t make sense, that is unless you have decided that the Roth conversion was just a bad strategy for you overall.
Please let us know if we can assist you in making the best decision for you concerning these Roth strategies. And bring me a glass of lemonade while you are at it!