Q: Stocks and bonds are in a bear market. Is this a good time to convert my regular IRA to a Roth? -L.N.
A: It’s best to convert your traditional IRA to a Roth IRA when values are low. Everyone likes a bargain. But the stock market is so volatile that it’s very hard to time the market for a Roth conversion. Market values may be down when you decide to convert, but by the time your transaction goes through, values could have already increased some. Roth conversions are a long-term strategy.
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Probably the best way to smooth out this market volatility is to systematically do a series of smaller monthly or annual conversions over time. This will soften the risk of large market swings.
While stock market values may be one factor in your Roth conversion decision, it’s a relatively minor one over the long run. The more important planning factor is your projected tax bracket. A Roth conversion works best for those who believe their tax rates will be higher in retirement than they are now.
A Roth conversion is the best retirement account to own since the funds grow income tax free for the rest of your life. The only question is, “How much are you willing to pay in taxes now to get it?”
You want to know how much it will cost you before you convert. Roth conversions are permanent. They cannot be undone. Once you convert, you will owe the tax even if your financial situation changes later when the tax bill comes due.
So yes, it’s good to convert if current market values are low, but you never really know where the bottom is. Values could always drop lower after you convert. If you are planning for the long term and you are worried about future higher tax rates, you’ll generally do better converting now when your tax rates may be lower, regardless of today’s market values. Over the long run, the stock market tends to increase, and that appreciation in a Roth IRA will be tax-free to you for life.
Q: I’ve been taking my required minimum distribution (RMD) every year as required. If my standard deduction (married filing jointly) is $28,700 for 2022 and I have no other income, can I withdraw up to my standard deduction and pay no tax? -C.B.
A: The maximum standard deduction for 2022 for a married couple where each spouse is age 65 or over is $28,700. The basic standard deduction for 2022 is $25,900; each spouse age 65 or over receives an extra standard deduction of $1,400 ($25,900 + $1,400 + $1,400 = $28,700).
So, in theory, yes. If you truly have no other taxable income, then you can withdraw up to that amount from your IRA and pay no income tax. However, you don’t have the option of withdrawing only an amount equal to your standard deduction. Your RMD (required minimum distribution) is not related or tied to your standard deduction. You must take your entire RMD even if it exceeds your standard deduction, and that could result in some tax being owed. The good news is that your tax will still probably be at very low rates, unless you have a very large IRA.