Why a Market Dip Might Be the Best Time to Do a Roth Conversion

Markets don't move in a straight line, no matter how much we'd like them to. Earlier this year, the S&P 500 fell nearly 20% between February and April before climbing back to set new highs by summer. And history tells us that while this type of volatility will likely happen again, it is nearly impossible to know when to expect it; it could be next month or next year. What we do know is that many people treat a dip as a reason to freeze. But we see it as an opportunity to act, at least when it comes to one specific move: converting a traditional IRA or 401(k) to a Roth.

This is a good example of what we mean when we talk about optimizing your life instead of maximizing your account balance. It isn’t about timing the market or chasing a bigger number. It's about making a smart money decision in the most tax efficient ways possible, and a downturn can present us with that moment.

The Logic, in Plain Terms

When you convert a traditional retirement account to a Roth, you owe income tax on whatever you convert, right now, at your current tax rate. In exchange, that money grows tax-free forever, and if you follow a few simple rules, you will never owe another dime of tax on it, including when you withdraw it in retirement.

The tax bill is based on the dollar value of what you convert, not the number of shares. And that's exactly what makes a dip useful.

Say you hold 500 shares of a fund worth $100 each in your $50,000 IRA. If the market drops 20%, those same 500 shares are worth $80 each, or $40,000. Convert now, and you pay tax on $40,000 instead of $50,000, but you still move all 500 shares into the Roth. If the market later recovers to $100 a share, since you moved all the shares to the Roth, that growth is tax free. If that growth occurred inside the traditional account, you'd eventually owe tax on every dollar of it.

You're not predicting where the market goes next. You're taking a temporary discount on a tax bill you were going to owe anyway.

Who This Actually Makes Sense For

A Roth conversion isn't free money. You're paying real tax, today, out of pocket (ideally not from the retirement account itself, which defeats some of the benefit). A Roth conversion tends to make the most sense when:

• You're in a lower tax bracket now than you expect to be later, whether because of a career change, a lighter income year, or simply because you're years away from Social Security and required minimum distributions pushing you into a higher bracket.
• You have cash outside your retirement accounts to cover the tax bill, so the full converted amount keeps growing tax-free instead of a chunk of it going to the IRS from the account itself.
• You don't plan to withdrawal the converted funds for at least 5 years, otherwise you will potentially pay an early withdrawal penalty on the converted amount.

It’s important to note you do not have to convert your entire account balance at once. That means you can choose how much you convert to “fill up” a tax bracket you are comfortable paying, without pushing into a higher bracket. 

What a Down Market Adds to the Equation

None of this requires a downturn to make sense. Roth conversions can be smart in any market, in the right circumstances. What a dip adds is a lower price of admission. You're converting the same number of shares, the same ownership stake, for a smaller tax bill, and giving the eventual recovery a tax-free home instead of a taxable one.

This is also where the emotional side of investing tends to work against people. A falling market makes many of us look for hiding spots, checking the account less, touching nothing, waiting it out. A Roth conversion asks you to do the opposite: look directly at the number that's making you uncomfortable and use it. That's genuinely hard, which is exactly why so few people do it, and why it's worth having a plan in place before the next dip arrives rather than trying to decide in the moment.

This Isn't a Do-It-Yourself Tax Move

We say this as a fee-only firm with nothing to sell you: a Roth conversion touches your tax return, your Medicare premiums down the road if you're near that age, your eligibility for certain credits, and your overall financial plan, all at once. Converting too much in one year can trigger a higher tax bracket, push up your Medicare IRMAA surcharge, or eliminate credits you'd otherwise qualify for. Converting too little just means you did less than you could have with the opportunity in front of you. This is exactly the kind of decision worth running by an advisor and a tax preparer together before you act, not after.

Questions We Are Answering

Is a Roth conversion still worth it now that the 2025 tax law changes made current rates permanent?

For the right household, Roth conversions still make sense, but for slightly different reasons. The old argument was "convert now before current tax rates expire." With current rates locked in (for now), the case now rests on whether your tax bracket today is lower than the one you expect in retirement, particularly once required minimum distributions and Social Security are both landing in the same tax year.

How much should I convert at once?

Everyone’s situation is different. It depends on your current bracket, your other income, and how much you can pay in tax without draining savings you need for something else. Many people convert in stages over several years rather than all at once, specifically to avoid jumping into a much higher bracket in a single year.

Can I undo a Roth conversion if I change my mind?

No. Conversions used to be reversible through a process called recharacterization, but that option was eliminated in 2018. Once you convert, it's final, which is exactly why it's worth modeling the tax impact carefully before you do it rather than after.

Do I need earned income to do a Roth conversion?

No, that requirement applies to regular Roth contributions, not conversions. You can convert a traditional IRA or old 401(k) to a Roth regardless of your income or employment status, which is part of why it's a popular strategy for people in a career transition or an early-retirement gap year.

Will a Roth conversion affect my Medicare premiums?

It can, if you're 63 or older. Medicare premiums for a given year are based on your tax return from two years earlier, so a large conversion can temporarily push you into a higher premium bracket. This is one of the most common reasons to convert gradually rather than in one lump sum once you're within a few years of Medicare eligibility.