Pandemic Creates More Opportunity for Roth Conversions

COVID-19 makes 2020 a good year for clients to consider a Roth conversion, says leading financial advisor Elizabeth “Lizzie” Evans.

I caught up with Evans, founder and managing partner of Evans May Wealth in Indianapolis, after I heard her speak on April 22 as part of the virtual panel, “The Road to Recovery – How the New Economy Might Look.” Led by Sylvia Jablonski, managing director, capital markets—institutional ETF strategist, at Direxion, it included others who have made names for themselves in the advisory business, including Julia Carlson, CEO and founder of Financial Freedom Wealth Management Group; Jeanette Garretty, a managing director and chief economist at Robertson Stephen Wealth Management; and Carin L. Pai, CFA, an executive vice president and head of equity management at Fiduciary Trust International. The panelists covered a multitude of topics, including the financial advice that they are providing to clients in these troubling times.

Evans mentioned during the session that she thinks it’s an excellent time for young investors and high-net-worth families who want to maximize their financial legacy to consider converting traditional IRAs to Roth IRAs. Since most clients of advisors have tax-advantaged retirement accounts, I followed up with her on this point.

What circumstances might make it desirable for a young person to convert either an IRA or a 401(k) plan being rolled over to a Roth IRA? Can you include a specific example?

Roth IRAs are one of the best vehicles to save for retirement, given the tremendous benefit of tax-free growth. My general rule of thumb is that if you are young and can afford to pay the taxes on a Roth conversion, you should do it and the sooner, the better. Put your money to work and allow it to grow and compound for decades to come!

From a timing standpoint, the best time to do a Roth conversion is in a down market. This equates to a lower tax bill because you are paying tax on a smaller investment portfolio. There are many factors to weigh when converting pre-tax funds to a Roth IRA, and conversions should never be based solely on market timing.