Stocks and Bonds Are Down: Time to Convert My IRA to a Roth?

IRA expert Ed Slott answers your questions

Two piggy banks, labeled Traditional IRA and Roth IRA, stand face-to-face with a roll of money between them.

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Ed Slott,

En español

Published November 21, 2022

Q: Stocks and bonds are in a bear market. Is this a good time to convert my regular IRA to a Roth? -L.N.

Ask Ed Slott

Confused about IRAs, 401(k)s, Roths, taxes and more related to saving for retirement? Ed has the answers. Email your questions to IRAHelp@aarp.org.

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.

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.

Q: I turned 72 in October and I am still working. I would like to delay taking 401(k) distributions until I retire. Is this possible?

In addition, I'm rolling over a 401(k) from a former employer to my current employer 401(k) plan. I also have an IRA from a former employer. Can I roll this to my current 401(k)? Are both possible? If so, do I need to notify the IRS? Is there a form? -A.F.

A: Yes, you can delay your RMDs from your current (active) 401(k) under the so-called “still-working” exception, assuming your plan allows this option (they don’t have to, but most do, so you should ask). You should qualify since you are still employed at the company. However, you can’t use that exception if you own more than 5 percent of the company (which generally is only true if this is your own business or a family business).

Yes, the tax law allows you to roll over another 401(k) or even your IRA funds to your active 401(k), but again, this is optional to the plan, so you’ll need to check if rollovers into your plan are allowed.

Even if they are allowed, be careful. Since you are already age 72, you are subject to RMDs from your former employer’s 401(k) and your IRA. The first dollars paid out of those accounts are considered your RMD for the year of distribution. Those RMDs must be taken from those accounts first, and they cannot be rolled over to your active 401(k). That’s because RMDs are never eligible to be rolled over.

Once your RMDs from those plans are satisfied, though, any part or all of the balance can be rolled over to your active 401(k), if your plan allows rollovers. By doing this, you can delay future RMDs on those rolled-over amounts until you retire (assuming the plan allows the “still-working” exception).

In addition, if your IRA contains any after-tax funds, say from making nondeductible IRA contributions, those funds cannot be rolled over to your company plan. If the plan allows rollovers, only pretax funds can be moved over. That’s actually a tax benefit for you, since it leaves only posttax funds in your IRA that can be withdrawn income tax free.

If you roll over any funds from your former employer or IRA to your current (active) 401(k), you should do the rollover as a direct rollover. The funds should move directly to your active 401(k) without you touching the money in between. That will avoid mandatory tax withholding.

You do not have file any form to notify the IRS that you did these rollovers because the IRS will be notified by the custodian (bank, broker or fund company where your retirement funds are) that you withdrew funds from your retirement accounts. However, you will need to show the rollovers as nontaxable distributions on your tax return.

Q: I inherited a traditional IRA from my father who died in November 2011. I am his daughter (non-spouse, with no disabilities). I was born in May 1956 (66 years old). I have been taking RMDs annually from the inherited IRA since 2012.

Can I continue to withdraw the RMD annually, using the IRS life expectancy table or possibly withdraw a large amount of money as needed? Also, do I need to take all of my money out of the IRA within 10 years? -D.G.

A: Yes, you can continue with the so-called “stretch IRA” where you are taking annual required minimum distributions based on your own life expectancy. And yes, you can take a larger amount if you wish. The RMD is only the minimum amount you must withdraw.

However, if you wish to stick only to the minimum amount that must be withdrawn based on your life expectancy, you should make sure you are using the new 2022 IRS Single Life Expectancy Table. For 2022, that table was updated to add a year or two of life expectancy, which will slightly lower the RMD you need to take.

To update to the new table, you look up your age from the Single Life Expectancy Table found on page 48 of IRS Publication 590-B. The factor for 2012 began at 30.6 years (for a 56-year-old in 2012) and is now reduced to 20.6 years for your 2022 RMD.

The SECURE Act eliminated the ability to do the stretch IRA, but that does not apply to you since you inherited the IRA before the law was effective. You get to continue taking RMDs over your lifetime, the same as before. The SECURE Act eliminated the stretch IRA for inheritances in 2020 or later and replaced it with a 10-year rule for most beneficiaries in the same category as you. Under that rule, the inherited funds would have to be withdrawn by the end of the 10th year after death. But that 10-year rule does not apply to you since you inherited before 2020.

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