Retirement Holdings Down Significantly? Consider A Roth Conversion

At this point, most investors have recovered the majority of their losses from the COVID-19 pandemic shock back in March. And while it appears that markets have generally returned to their pre-pandem- ic levels, you see a much different engine when you look under the hood.

For example, the Technology sector is up nearly 30 percent year to date while the Energy sector is down almost 50 percent on the year. Consumer Discretionary is up 25 percent in 2020, while the Financial sector is down more than 20 percent. Perhaps most surprisingly, growth stocks are up an average of 20 percent while value stocks are down an average of 20 percent.

Given that such a wide disparity can have a tremendous impact on your investment performance, it is important to rebalance your port- folio during such volatile times. Unfortunately, the rebalancing process may not always be sufficient. Another worthy consideration may be a Roth conversion.

First and foremost, a Roth con- version takes pre-tax investments from atraditional IRA and converts them to after-tax invest- ments that can continue to grow tax-free until withdrawn. Inves- tors should carefully look at their situation and consult their tax ad- viser before making any moves. Typically, a Roth conversion is considered a taxable event with ordinary income tax due on the amount converted in the year of the conversion, which could be a great bene?t to those concerned about future tax rates and those who do not have sources of tax- free income in retirement.

The bene?t of considering a Roth conversion during times like this is that investors can take highquality holdings that have recently suffered and convert a signi?cant amount of those positions to after-tax savings. If you have care- ?illy crafted your portfolio with a ?nancial adviser, these holdings are likely poised to recover as the economy changes. They also have a speci?c place in your overall ?nancial plan.

Converting sector-speci?c stocks while they are underperforming

can allow you to convert more shares while paying less tax on the conversion. Consider that to- day's tax rates are likely at their lowest. We are on the brink of an election, which could result in tax law changes should the administration change. Furthermore, with the amount of stimulus the government has created to sustain our economy through the pandemic shutdowns, taxes are more than likely to increase in the future.

One key to a successful Roth conversion is to specify to your custodian that you want to "transfer-inkind," which means your custodian will move the shares as-is, rather than selling them for cash, which would lock in your loss. You will also need money outside of the IRA accounts to pay the tax due. If you work closely with your ?- nancial adviser and tax consultant, you can convert just enough stock to a Roth IRA without bumping you into a new tax bracket.

As an added bene?t, if you are close to age 72, you'll also be re- ducing the balance in your tradi- tional IRA, which could reduce your required minimum distribu- tions (RMD) in the future. If your RMD age of 72 is several years away, you still bene?t: you should be able to withdraw contributions both tax free and penalty-free so long as you've held the Roth IRA for ?ve years.