Roth IRA Conversions

E15: Should You Convert Your Traditional IRA to a Roth in a Down Market?

If you haven’t already heard me say it on this podcast, I believe that a Roth IRA is the best place for a hair salon owner’s retirement nest egg. And this year’s bear market has just put them on sale for you.

What I mean by that is the decline in the stock market means that the account values for traditional pre-tax accounts like IRAs and 401(k)s will be lower in most cases. When the value of assets like stocks and funds fall, the taxes on conversions to Roth IRAs often drop as well. Plus, there’s greater potential for future asset growth and withdrawals that are tax-free.

And the stock market will rebound at some point.

So, hair salon owners will be doing the conversion at a bargain rate. Let me give you an example of this.

If a hair salon owner converts $25,000 when shares are at $100 each, they will convert 250 shares, or 5% of their portfolio. Conversely, if a hair salon owner converts $25,000 when shares are $50 each, they will convert 500 shares, or 10% of their portfolio. In both situations, the hair salon owner is converting $25,000 and will have to pay income tax on that $25,000.

However, in the second scenario—converting after your account value has fallen—you are converting a larger portion of your portfolio. And the whole reason a hair salon owner is converting money to a Roth IRA in the first place is to be able to withdraw it tax-free in retirement.

Converting to a Roth IRA when the market is down allows hair salon owners to convert a larger portion of their account for the same cost.

You’ll pay income tax on the $25,000 either way. But the big question is how much you have to pay to get it.

So, for today’s episode, I’m going to dig into what’s involved with a Roth conversion, why and when you may want to consider one, and some common pitfalls to avoid.

Episode Highlights

[03:50] What is a Roth conversion, and how does it work?

[07:02] How to determine whether a Roth conversion makes sense for you.  

[09:44] Converting to a Roth IRA in a down market.

[14:11] Roth conversions, estate planning, and the SECURE Act.

[15:33] Why hair salon owners may want to consider a mega backdoor Roth.

Looking for more tips for how to grow, scale, and ultimately sell your hair salon business? Check out our other Unchained From the Chair podcast episodes.

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