AN UPSIDE TO A DOWN MARKET

When the balance on a traditional IRA takes a major hit, consider converting it to a Roth.

- SANDRA BLOCK

WHENEVER THE STOCK MARKET has a bad day and there have been a lot of bad days in recent weeks-it's not uncommon to hear people warn darkly that they may have to postpone retirement. Some folks suggest that at the rate things are going, they may never be able to retire at all.

But perilous markets offer opportunities, not only for investors who are willing to swim against the tide (see "Practical Portfolio," on page 63) but also for savers who convert funds in their traditional IRAs to a Roth. Instead of crimping your retirement lifestyle, this bearish market could enable you to lower taxes on your nest egg, leaving you with even more money when you retire.

When you convert a traditional IRA to a Roth, you must pay taxes on all deductible contributions at your ordinary income tax rate. But the tax bill is based on the value of your IRA at the time you convert. For example, suppose your IRA was valued at $300,000 in January and is now worth $250,000. If you convert before your portfolio rebounds, you'll only pay taxes on the lower amount. Once you've converted, future growth is tax-free, as long as you're at least 591/2 and have owned the Roth for at least five years before taking any withdrawals.

Before you take this step, it's important to understand that your decision is irrevocable, even if the value of your IRA continues to decline. Before 2018, individuals who converted to a Roth had until the tax-extension deadline typically October 15-of the year following the year they converted to change their mind. The "do-over" option was eliminated in the Tax Cuts and Jobs Act, so if, for example, your $250,000 IRA declines to $200,000 after you convert, your tax bill will still be based on $250,000.