This Year Has Been Ugly. Here's a Trick to Make Up Some of the Damage

The first half of 2022 was one for the record books, but not in a good way. This will have been the worst first half of the year in decades. The tidbit below, though, can give heart. There's never been a 15% or more, 6-month decline, to start a year that did not precede a much better second half. Knowing that the odds are now in our favor suggest it's a fabulous time to consider doing full, or partial conversions of traditional IRA holdings into Roth IRA accounts. What are the benefits of doing Roth Conversions? Transferring shares, which are way down in value means paying less tax on the privilege of converting. You are only charged for the value at the time of transfer not the substantially higher price you might have paid. You cannot write-off losses in tax-sheltered accounts, but converting beaten-up shares that later recover accomplishes the same effect over time. Taxes can be deferred until April of 2023 (if you desire) by choosing not to withhold taxes at the time of transfer. Future rebounds in price will be tax-free forever in a Roth IRA, barring an unexpected change in tax policy. Changing the rules on Roth IRA taxation would be so vilified by the public that no politician would want to be the one who proposes it. Future mandatory distributions, currently slated to kick at 72-years of age, would likely be reduced vs. non-converted assets. That is because they are calculated on the Dec. 31 value of your Traditional IRA in the year before the distribution will take place. If you are lucky enough to have accumulated substantial wealth over your lifetime prepaying taxes on Roth Conversions will lower estate taxes, as well. The younger you are at the time of conversion, the more ultimate benefits you are likely to obtain. All future dividends, covered call premiums received and/or interest earned in the Roth Account will be tax-free forever. If earned in Traditional IRA status they'd be taxed at your highest marginal rate upon withdrawal. I did some major dollar value conversions during March 2020, which proved to be quite valuable for all the reason detailed above. I've been moving even more money over the past month or so to take advantage of insanely low valuations on many of my favorite stocks that made up good chunks of my traditional IRA. Here is the math on a $100,000 transfer value of American Woodmark Corporation and Berry moved at today's price points. I fully expect that both will more than double over the coming 12 to 18 months, and perhaps sooner. Many of us are subject to much higher rates than illustrated above. If so, the tax savings will be even larger. Note, too, that the compounding effect of the permanently decreased taxes will only grow over time as your overall portfolio value increases. Are there any negatives to Roth Conversions? Sure. There are no free lunches. To get the maximum benefit you need to be able to pay the taxes due in the year following the conversion from a source other than the IRA which the shares came out of. If you need to withhold tax from the conversion amount you won't get the full effect that you can by paying separately. Convert $100,000 in cash and withhold Combined Federal and State taxes at $33% combined and you'll only have $67,000 to rebound with, not $100,000. If you choose bad stocks to convert, and they fall further, or become worthless due to bankruptcy, you'll have wasted the tax money owed on their conversion. That means moving only shares in which you have high conviction that they will ultimately be headed much higher. Risky, speculative names should probably not be in your Traditional IRA. If they are, leave them there, where the taxman can share in your loss if that is what happens. If you see what's going on in America today, you should envision higher marginal income tax rates down the road for those who successfully provided for their own well-being in retirement. Roth IRAs are your only defense against that likelihood. That's about it. We can't change the way stocks behaved over the start of 2022. We can benefit from those major declines, though, if you still have assets in a Traditional IRA account. Note: I convert smaller amounts from my Tradition IRA to my Roth IRA in normal years. During large selloffs, I bite the bullet, pay the tax and move major amounts to capture rebounds in the tax-free manner detailed above.

This Year Has Been Ugly. Here's a Trick to Make Up Some of the Damage

Let's look at the incredible value of Roth conversions, during trying times.

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