Stock plunge creates IRA break

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Dear Dr. Don,
I’ve watched my IRA investments take a major hit over the last few weeks. In trying to plan for the long run, is now a good time to roll over what’s left of my IRA into my Roth IRA? Am I taxed for the current value of my IRA?

— Justin Time

Dear Justin,
Assuming a Roth IRA makes more sense for you than a traditional IRA, now is a good time to convert from the traditional IRA to the Roth.

The income taxes due on the conversion are based upon the value at conversion. To convert, you have to be eligible to make a Roth IRA contribution, even though a conversion isn’t considered a contribution to the account.

You can find the specific conversion requirement standards in IRS Publication 590, “Individual Retirement Arrangements“:

Converting From Any Traditional IRA Into a Roth IRA

You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.

  • Your modified AGI for Roth IRA purposes (explained in Chapter 2) is not more than $100,000.
  • You are not a married individual filing a separate return.

Note: If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.

Readers who converted from a traditional IRA to a Roth earlier this tax year — only to later see the account value greatly diminished by market losses — should consider recharacterizing the contribution as a traditional IRA. This way, they will not have to owe income taxes on the diminished value of the account.

IRS Publication 590 has additional information on recharacterizations. See your tax professional for advice specific to your situation.

If you can afford it, paying the income taxes out of savings keeps more money working in your retirement accounts.