The Only Good Way To Time the Market
Market volatility is uncomfortable. But for investors with large Traditional IRA or 401(k) balances, it might also be an opportunity. It is difficult to know when to get out and when to get back into the market, and in practice few people if any have done it well consistently. That being said, is there a way to take advantage of the volatility in the market? Depending on your situation, yes, possibly through tactical Roth conversions.
Many retirees and near-retirees have most of their investment assets in Traditional 401(k) or IRA accounts. These accounts can quietly become a significant tax liability over time (read more here). One strategy to address this is Roth conversions, transferring funds from the Traditional 401(k)/IRA into a Roth IRA, paying the taxes today, but gaining tax-free growth with no Required Minimum Distributions. Assuming that Roth conversions make sense in your situation (they may not, book a call to see if they do for you), you might be able to do even better with a little market timing.
Some people like to do their Roth conversions at the beginning of the year, to take advantage of a year of tax-free growth. Some people like to wait until the end of the year to see how much taxable income they have that year. But there might be an opportunity to do Roth conversions during market drawdowns to convert a larger percentage of the tax-deferred account for the same tax dollars. For example, say you have a Traditional IRA with $1 million. If you convert $100,000 of the IRA to a Roth, you've converted 10% of the account. If the market drops 15%, however, the value of the IRA is now $850,000. If you convert the same $100,000, that's now almost 12% of the account. The taxes on the conversion remain the same, but a larger percentage of the account was converted. And if the market recovers — as it has historically, though past performance is no guarantee of future results — the recovery will be in the tax-free account, assuming the same assets are sold and purchased in each account.
While this isn't timing the market in the way it is usually framed, it is a way to potentially take advantage of market volatility to your benefit. Knowing whether Roth conversions are right for you, how much to convert, and when to convert can be complex, and I'm here to help simplify the decision. Book a call to discuss whether Roth conversions make sense for your situation.
Planalto Financial LLC is a registered investment adviser in the state of Alabama. Registration does not imply a certain level of skill or training. This content is provided for educational purposes only and does not constitute personalized financial, tax, or legal advice.