Timing can be critical with Roth IRA conversions. In that light, the recent market decline definitely made the prospect of converting regular IRA assets to a Roth more alluring for those investors who are well positioned, advisors said.

Tax-free growth has made Roths an effective retirement planning tool since Congress created them in 1997. With Nasdaq retreating more than 17% this year, the market declines offer the right investors three additional conversion incentives: a lower conversion tax bill, the ability to convert more assets and the prospect of watching the market rebound tax free.

“The market is down, so the tax liability of a conversion will be cheaper now than last year, depending on your asset allocation. We are definitely pounding the table for those in their gap years to consider a Roth conversion now,” said Brad Lineberger, founder and president of Seaside Wealth Management in Carlsbad, Calif.

In fact, years before clients reach their gap years—between age 60 and 72, when required minimum distributions kick in and add to income—Lineberger said he advises investors to prepare to minimize their Roth conversion tax bills by socking away cash reserves they can tap instead of using taxable assets like retirement plan distributions and IRAs. This allows clients to reduce their adjusted gross income (AGI) to 12% for at least one year to make conversions more affordable, he said.

When you convert to a Roth IRA, the converted IRA balance is treated as if it were a distribution. This income must be included on investor’s tax return in the year of conversion. So, a 12% federal tax bracket makes the cost of a conversion 12% in federal taxes, Lineberger said.

In the years leading up to retirement “we coach folks to delay Social Security and build up their cash and their taxable accounts, so they can live on these assets during a few years of retirement in order to keep their tax bracket lower. Anyone we can get to the 12% [federal] tax bracket, even if that’s just for one year, we’re definitely advising them to convert,” Lineberger said.

“The eventual market recovery will happen inside the Roth, so you will enjoy tax-free distributions in the future,” he added.

To achieve a 12% tax bracket in 2022, single filers need to have adjusted gross income (AGI) of $55,900 or less and married taxpayers filing jointly need to have AGI of $83, 550 or less.

The strategy can be tricky and not everyone can achieve such a low federal bracket in their gap years, especially those who rely on pension or IRA withdrawals or who start taking Social Security benefits, he admitted.

“You have to be very intentional in building up cash reserves to live on to reduce your declared AGI, even if it’s just for the year you intend to convert, but we have a number of clients, even high-income clients, we’ve helped position to take advantage of this downturn,” Lineberger added.

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