The Three Years When a Roth Conversion Costs Almost Nothing

The market falls 25%.

Most people do one of two things. They sell, or they refuse to look at the account for six months.

There is a third thing, and it is the only one that turns the drop into money.

What you owe, in one paragraph

A conversion moves money from a traditional IRA into a Roth IRA. Whatever you move is added to this year’s income and taxed as ordinary income, at your normal rates, on top of your salary or pension.

That is the entire tax rule. $20,000 converted is $20,000 of extra ordinary income. Cash or stock makes no difference. What you originally paid for the shares makes no difference. There is no capital gains treatment, no long-term rate, no cost basis to subtract. The IRS takes the dollar value on the day it crossed, and that is your number.

Fix that first, because the rest only makes sense once it is settled.

Now move the investments, not the cash

Here is the part almost nobody is told. You do not have to sell anything to convert. Most brokerages will move the holdings across as they are. Your 300 shares leave the traditional IRA and land in the Roth as the same 300 shares. That is an in-kind conversion.

The alternative is to sell to cash, move the cash, then buy back inside the Roth.

The tax is identical either way. $20,000 of stock and $20,000 of cash both add $20,000 of ordinary income. Selling first buys you nothing.

What differs is the days in between. Selling and rebuying puts you out of the market while it settles, a day or several. You owe the same tax but hold nothing while prices move, and if the market rises in that gap your cash buys back fewer shares than you sold.

In-kind removes that risk. You are never out, you avoid trading costs, and you keep holdings you wanted anyway. Ask for it by name, because some platforms default to selling.

Why a falling market cuts the bill

Now put the two together, and think in shares.

Say you hold 1,000 shares of a fund at $120 in a traditional IRA. That is $120,000. The market falls 25%, the price is $90, and the account reads $90,000.

You did not lose a single share. You own exactly what you owned last month. Only the price is lower.

Now convert 250 of those shares in kind. Not the whole account. A quarter of it.

At $90 a share, that adds $22,500 to your income. Before the fall, those same 250 shares would have added $30,000. In the 22% bracket you pay $4,950 instead of $6,600, so you moved the identical 250 shares for $1,650 less tax.

Then the price returns to $120, as it has after every drop in history so far.

Because you moved the shares rather than selling them, you held them the whole way up. Those 250 shares are now worth $30,000 and they are sitting in the Roth. The $7,500 of recovery will never be taxed. Not this year, not at 73, not by your heirs. Left alone at 7%, that slice is worth about $59,000 in ten years and $116,000 in twenty, all of it tax-free.

Why a quarter, and not the lot

Because converting the whole $90,000 at once would have been a bad idea, and this is where people get hurt.

A conversion stacks on top of your other income. Move $90,000 in one go and you do not pay 22% on it. You pay 22%, then 24%, then more, as the amount climbs through the brackets.

Convert an amount, not an account. Pick a ceiling first, usually the top of whatever bracket you are willing to pay, convert up to it, and stop for the year.

Then do it again next time. And there will be a next time, more often than people assume. Since 1945 the S&P 500 has fallen 10% or more roughly every 2.2 years, and 20% or more roughly every 5.6 years. Of the 27 corrections since 1974, only six became bear markets. This is a recurring event, not a rare one.

Which is also why you should not wait for the perfect moment. Nobody knows where the bottom was until months after it has passed, and the average bear market runs about nine or ten months, so every one contains a long stretch of prices that are good enough.

Set a trigger, not a forecast. Convert one slice at down 15%, another if it reaches 25%. You will never catch the low, and you do not need to. A dozen small conversions over a decade will beat one large one, even if the single one landed on a perfect day.

You cannot control the market. You can control which day the IRS prices your account, and how much you hand over at once.

The Roth IRA Rule That Quietly Triggers Taxes and Penalties

The second window: any year your income drops

A crash is not the only discount. A low-income year is the other one, and it is more common than people think. A sabbatical. A layoff. A career break. A business that loses money in year one. Unpaid leave. Going back to study. The first year after you stop working.

In any of those, your tax rate collapses and a conversion is priced at that collapsed rate.

Here is how far it goes. The 2026 standard deduction is $16,100 for a single filer. If your income that year is close to zero, you can convert $16,100 and owe nothing at all. Not a low rate. Zero. Left alone at 7%, that becomes about $62,000 in twenty years, out of a year you had written off.

Most people treat a low-income year as something to survive. It is the cheapest year you will ever get to move money.

The third window: the years between retiring and claiming

Stop working at 62 and delay Social Security to 70 and you have eight years with no paycheck and no benefit yet. Your income may be the lowest since your twenties.

It is also the last quiet stretch before money gets forced out anyway. Required minimum distributions begin in your seventies, and Social Security drags your other income into a higher effective rate once it starts.

Convert $40,000 a year across those eight years and you move $320,000 out of the taxable pile. Fifteen years after the last conversion, at 7%, that block is worth roughly $1.1 million that is never taxable income again.

Notice the shape. Not $320,000 in one year, which would be taxed brutally, but eight ordinary conversions each small enough to stay low. With the $16,100 standard deduction, a $40,000 conversion in a year with no other income leaves only $23,900 taxable.

You also permanently shrink the balance that future required distributions are calculated from. A conversion is not just a tax move for this year, it reduces every forced withdrawal for the rest of your life.

Five rules that stop this going wrong

Pay the tax from outside the IRA. If you use the IRA money to cover the bill, you shrink the amount that gets to grow tax-free, and under 59½ the withheld portion counts as a distribution and gets penalised. Pay from savings or it is barely worth doing.

It is irreversible. Until 2018 you could undo a conversion that went badly. The Tax Cuts and Jobs Act removed that, effective January 1 of that year. There is no reset.

Every conversion starts its own five-year clock. Touch converted money before its clock runs out while you are under 59½ and you owe a 10% penalty, even though you already paid the income tax. Each year’s conversion has a separate timer.

Size has second-order effects. Beyond the brackets, a large conversion can raise your Medicare premiums two years later through the IRMAA surcharge, a cliff rather than a slope, and it can cut an ACA subsidy in the same year. Both are reasons your ceiling should be lower than you think.

You cannot cherry-pick which dollars you convert. If any of your traditional IRA money went in after tax, the IRS treats all your traditional IRAs as one pot and pro-rates every conversion across it. People hit this mid backdoor Roth and get a bill they were not expecting.

When not to convert at all

If your income is high now and you expect it to be lower later, you are paying tax at your worst rate to avoid a better one. Wait.

If you would have to raid the IRA to pay the tax, the maths mostly stops working. That is the most common way a good idea turns into a bad one.

And if you are near a financial aid year, conversions land in the income those formulas read.

What to actually do

You do not need a crash to start. You need a plan for the next one.

Decide now, while nothing is falling, two things: the size of the slice you would convert if the market dropped 20% or more, and where the tax money would come from. Write both down. In the middle of a drop, nobody makes a calm decision they have not already made.

And look at your own calendar. If you have a low-income year coming, a break, a move, a business year, a gap before you claim, that year is worth more than it looks.

The market decides when it falls. You decide whether the fall costs you or pays you.

The Withdrawal Order That Can Save You Six Figures in Retirement Taxes

Have you ever converted during a downturn, or did you wait it out? Tell me in the responses, and follow along for more on keeping what you build.