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Could you make an important retirement investing move right now?
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The stock market going down isn’t something that most people want to see happen. After all, if you have invested your money in a brokerage account to save for your future, you want to see your account balance climb — not fall.
But a down market could actually present an opportunity to make one money move that might potentially improve your financial situation over the long run. In fact, finance expert Suze Orman has advised that when stocks are performing poorly, it could be an ideal time to take a particular action with your retirement accounts.
Suze Orman says to consider this money move in a down market
According to Orman, a market downturn presents a great opportunity to do a Roth IRA conversion. This would mean taking money you have in a traditional tax-advantaged retirement account and moving it into a Roth account.
If you have a traditional 401(k) or a traditional IRA, these accounts allow you to make pre-tax contributions. However, you are going to be taxed on withdrawals when you take money out as a retiree.
Sometimes, it makes sense to convert your traditional account to a Roth one. This could be a smart move if you would prefer not to have to worry about taxes as a senior. But it helps to be strategic on timing if you’re going to do a conversion. And, as Orman explains, a market downturn is the ideal moment to act.
“That is the time if you were thinking about converting to convert because…when the markets are really high and your portfolio is worth more and you convert, you owe more income taxes because your portfolio is worth more.”
See, a Roth conversion is a taxable event. Because you contributed to a traditional IRA or 401(k) with pre-tax dollars, when you move the money over, you have to pay tax on the converted funds.
If your investment account balance has declined as a result of the down market, you may have a smaller balance in your 401(k) or IRA at this time. So, if you convert to a Roth now and end up moving less money over due to the fact your investments are down, your tax bill is not going to be as big.
Should you listen to Orman?
Orman’s advice on this issue is spot-on. A down market really can be the best time for a Roth conversion.
Of course, there are a lot of factors to consider in deciding whether to convert in the first place, including how soon you are going to need the money, what your conversion will do to your tax rate in the year you do it, whether you have the funds to pay taxes on the conversion, and whether you are likely to be in a higher or lower tax bracket as a retiree.
You should do your research carefully to decide if a Roth conversion is something that makes sense for you. But, if you’ve been thinking about making this move for a while — or if your research reveals that changing your account over is right for you — you should seriously consider following Orman’s advice and taking action to convert when your portfolio balance has fallen.
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