“If we’re going to convert this year anyway, I’d rather do it now than wait until the end of the year, when the market may rebound,” added Garrett, who said most clients who do conversions strategically reduce their tax bracket to a 10%, 12% or 22% bracket for the year.
For clients with larger sums to convert, Garrett runs an illustration showing what conversions will cost in a tax bill each year. The illustration also shows investors how much time they have to fully convert to a Roth IRA before mandatory income like Social Security benefits or RMDs commence.
“We want to pay higher taxes early in gap years to reduce the tax bill when mandatory RMDs kick in. I call it smoothing out their tax ride,” Garrett said.
“I make them pay more taxes through conversions early, so once they hit age 72 there is less money to take in RMDs. We anticipate typically a 30% to 50% reduction in lifetime taxes by implementing Roth conversion strategies, cutting their taxes in some cases by a million dollars,” Garrett said.
Peter Tanous, founder and chairman of Lynx Investment Advisory LLC in Washington, D.C., said Roth conversions during a bear market also give advisors the opportunity to rebalance client portfolios.
“Particularly in the growth area, many stocks that were overvalued have gotten killed, and now is the time to pick up some really good names and salt them away in a Roth. This isn’t a recommendation, but for instance, Disney has really gotten whacked. It’s a core holding for many portfolios and you can now buy it at a 20% to 30% discount, with the understanding that stocks have risen in all 20-year periods in history. For the right clients, there are many opportunities out there,” Tanous said.