Physician Retirement Planning

Now Is The Time To Do A Roth Conversion

Whenever you hear the words ‘bear market’, you should be thinking the words ‘Roth conversion’. The U.S. stock market is currently down more than 15% compared to its all-time high on December 27, 2021. A falling stock market is the best time to do a Roth conversion. Therefore, now is the best time to do a Roth conversion.

Summary Points:

  • Convert a portion of your traditional IRA into a Roth IRA during a bear market
  • Convert those individual investments that have lost the most in their value
  • Replenish your traditional IRA by doing a rollover from your 401(a), 401(k), 403(b), or 457 plan
  • Multiple small Roth IRA conversions are smarter than doing one large conversion in an attempt to time the bottom of the bear market


There are two situations when it is to your advantage to convert a traditional IRA into a Roth IRA: (1) when your income tax rate is low and (2) when the value of your traditional IRA falls. We are currently in a time when both federal income taxes are low compared to the past and the value of stocks and bonds has fallen. When you convert a traditional IRA into a Roth IRA, you will pay federal and state income tax on the value of the IRA at the time of the conversion. Therefore, if the value of the traditional IRA is low, you will pay less in income taxes when you do the conversion. History teaches us that when the stock market falls, it eventually goes back up. After you do the Roth conversion, the value of that Roth investment will eventually go back up and when it does, you will not have to pay any income taxes on it!

Let’s say that on December 27, 2021, you had $50,000 invested in an S&P 500 index mutual fund in a traditional IRA and you decided to convert it into a Roth. And let’s further say that your federal income tax rate is 15%. You would have to pay $7,500 in federal income tax when you did the conversion. But if you did that conversion last week, when the S&P 500 index had fallen to 3,901, the $50,000 in your traditional IRA was now worth $40,926 and you would have paid $6,139 in federal income tax – a savings of $1,361!

But what if I don’t have a traditional IRA?

There are 3 ways to put money into a traditional IRA. First, you can contribute pre-tax income directly into a traditional IRA but only if you have an income of less than $78,000 per year ($129,000 if married, filing jointly). In this situation, the traditional IRA is very similar to a 401(k) or 403(b).

Second, you can contribute post-tax income into a traditional IRA if your income is above $78,000 per year ($129,000 if married, filing jointly). Under either of these two situations, the annual contribution limit to a traditional IRA is $6,000 per year (or $7,000 per year if you are over age 50 years old). This is a great strategy for doing an annual ‘backdoor’ Roth but it is generally not a good strategy to put post-tax dollars into a traditional IRA and then leave it there. The reason is that you will pay regular income tax on the accrued value of the traditional IRA but would have paid the lower capital gains tax on the accrued value had you put that money in a regular investment.

The third way of putting money into a traditional IRA is to do a rollover from an employer-sponsored retirement plan. These plans include the 401(a), 401(k), 403(b), and 457 retirement plans. There is not a limit to the amount that you can rollover each year. There are several important rollover rules, however:

  1. You can only do 1 rollover per year. When you do a rollover, you have to wait 12 months before you can do another rollover.
  2. You must deposit the rollover money into the traditional IRA within 60 days of withdrawing it from the employer-sponsored retirement plan. The safest way to do the rollover is to do a “trustee-to-trustee” rollover meaning that the investment company that holds your traditional IRA arranges for the money to be directly transferred from the employer-sponsored retirement plan into the traditional IRA without touching your hands. If, instead, you have the employer sponsored retirement plan send you a check, then it is up to you to ensure that you deposit that money into the traditional IRA within 60 days.
  3. You can only do a rollover if eitherĀ the employer discontinues the retirement plan or you are no longer employed by that employer. The latter most commonly occurs when you change jobs to a new employer or you retire.

Traditional IRAs give you more investment choices than employer-sponsored retirement plans. Also, you can often find similar investments with lower annual expenses that you can include in your traditional IRA. When you leave your employer for a new job, you have the option of either rolling your old employer’s 401(k)/403(b)/457 into your new employer’s 401(k)/403(b)/457 or rolling the funds into your traditional IRA. I would argue that it is better to do the rollover into your traditional IRA because of the prospect of lower expenses, the wider choices of investments, AND the opportunity to do Roth IRA conversions during bear markets.

It is easiest if you have your traditional IRA with the same investment company that you have your Roth IRA. If you have your Roth IRA with Vanguard, then also have a traditional IRA with Vanguard. If your Roth IRA is with Fidelity, then have a traditional IRA with Fidelity. Using a large investment company for both makes it very simple to move money from the traditional IRA into the Roth IRA when doing a conversion. Large investment companies (like Vanguard or Fidelity) will also work with you to facilitate trustee-to-trustee rollovers from your employer-sponsored retirement plan, even if that plan is with another investment company. On-line accounts allow you to do your rollovers and conversions from your own home on your own time, without having to drive someplace to meet with an investment advisor.

Beware of the 5-year rule

When you put money into a Roth IRA, that money grows tax-free and you do not have to pay any tax on withdrawals when you take the money out in retirement. That means no income tax, no capital gains tax, no interest tax, and no dividend tax. Furthermore, unlike other deferred income accounts (such as a traditional IRA, 401(l), 403(b), or 457), there are no annual required minimum distributions from the Roth IRA after you turn age 72.

However, it is important to be aware that you cannot withdraw money that you put into a Roth IRA for 5 years. In other words, if you convert $10,000 from a traditional IRA into a Roth IRA today, you cannot withdraw that money from your Roth IRA account until 2027.

Because of the 5-year rule, you should consider any Roth conversion to be a long-term investment. In other words, don’t put the newly converted money into a low rate of return investment such as a money market account or certificate of deposit within the Roth account. Money from Roth conversions should ideally be put into a broad stock market index fund in the Roth account. In the past 30 years, there have only been 2 times that the S&P 500 index took more than 1-year to recover from a downturn: in 2000 (7 years to recover) and 2007 (6 years to recover). In both of these prolonged downturns, if you had waited to do a Roth conversion until the S&P 500 index had fallen by 15% of its peak, you would have only had 3 1/2 years to recover after the 2000 downturn and only had 2 1/2 years to recover after the 2007 downturn. In both cases, your Roth fund would have fully recovered and then increased in value by the time the 5-years was past.

How should I time my Roth conversion during a bear market?

One of the simultaneously wonderful and maddening things about the stock market is that no one can predict when it is going to go up and when it is going to go down. In a bear market, when stock prices are falling, the only way to know for sure when prices have bottomed out is in retrospect, after prices have started to rise again. Rather than trying to guess when stock prices have hit their lowest and then doing your Roth IRA conversion, it is safer to spread your conversion out and do multiple small conversions every month or two.

A bear market is usually defined as a 20% drop in the prices of stocks. But for the purposes of Roth conversions, I don’t think you need to wait for the S&P 500 index to fall by 20%. Instead, think of a ‘big bear’ market as a 20% drop in value and a ‘little bear’ market as a 15% drop in value. Begin doing small Roth conversions when the broad stock indices fall to the level of a ‘little bear’ market, you can continue regular small conversions until the indices rise back up and out of the ‘little bear’ market values for those indices.

Unlike a rollover from an employer-sponsored retirement plan into a traditional IRA that can only be done once per year, you can do many Roth conversions per year. There is no limit to the number of traditional IRA to Roth IRA conversions you do each year nor is there a limit to the amount that you can convert. However, it is important to remember that the money that you convert from a traditional IRA into a Roth IRA is taxable income by IRS definitions. Therefore, the money that you convert will not only be subject to federal income tax but it will also add to your total taxable income for that year. As your annual taxable income goes up, your effective income tax rate will also go up. At some point, the amount that you convert will result in a large enough increase in your federal income tax rate to outweigh the advantages of doing a bear market Roth conversion.

Which investments should I convert?

If you have been a prudent investor, then you will have a diversified retirement investment portfolio. Your deferred income accounts may include your 401(k), 401(a), 403(b), 457, 415(m), and traditional IRA accounts. Within these deferred income accounts, you should have a mix of U.S. stock mutual funds, foreign stock mutual funds, U.S. bonds, foreign bonds, real estate investment trusts, and cash. The best individual investments to convert are those that have lost the most value in a bear market. Because bonds are less volatile than stocks, the value of stock mutual funds will generally fall more than the value of bond mutual funds and thus it is generally not a good idea to convert bond funds. It is almost never a good idea to convert cash (including money market accounts and certificates of deposits) since there will be no (or very little) tax advantages to convert these accounts in a bear market.

Look at your deferred income portfolio and identify those investments that have lost the most value and convert those investments from your traditional IRA into your Roth IRA. For example, if your Emerging Markets Stock Index Fund is currently down 23% and your U.S. Total Stock Index Fund is down 16%, then convert the Emerging Markets Stock Index Fund. In order to maintain your portfolio diversification balance, put the converted money into a new Emerging Markets Stock Index Fund in your Roth IRA.

It is wise to regularly replenish your traditional IRA by doing rollovers from your employer-sponsored retirement plans (assuming you are eligible to do rollovers, as discussed above). Since you can only do one rollover per year, you will want to do a sizable enough rollover to allow you to maximize any Roth IRA conversions that you might do later that year. Ideally, you should start each year with enough money in your traditional IRA to fund bear market Roth IRA conversions later in the year since no one can predict when a bear market will occur. You want to be prepared so that you can take advantage of those bear markets to do your Roth conversions. As an example, on January 3, 2022 when the NASDAQ composite index closed at 15,832, investors did not anticipate that the NASDAQ would fall by 29% to 11,264 less than five months later on May 24, 2022.

It’s all about investment strategy


Your retirement investment goals are to have enough money to do the things you want to do when you are retired, to ensure that you do not outlive your retirement savings, and to pay as little in taxes as legally possible. A strategy of periodic rollovers from employer-sponsored retirement plans into a traditional IRA and conversions of the traditional IRA into a Roth IRA during bear markets can help you meet all three of these retirement investment goals.

May 27, 2022

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital