IRA Strategies During Uncertain Markets

Recent tariff-related market gyrations caught the attention of many wary investors, including IRA owners. Although markets (and the tariff situation) have stabilized a bit, the outlook remains uncertain. For this reason, you may want to keep two key points in mind: First, market dips create opportunities for Roth IRA conversions, and second, the timing of a required minimum distribution (RMD) could benefit from additional scrutiny this year.

Why consider a Roth conversion?

Under current legislation, qualified Roth distributions are tax-free. A Roth distribution is generally considered qualified if you have held the account for at least five years, and you are age 59½ or older, become permanently disabled, or die.

Although anyone can contribute to a traditional IRA, the ability to contribute to a Roth IRA is limited by an investor’s modified adjusted gross income (MAGI). If you are single and have a MAGI of $165,000 or more, or married, filing jointly, with a MAGI of $246,000 or more, you cannot contribute to a Roth IRA. Since there are no income limits on conversions, if your income exceeds these thresholds, you might consider converting traditional IRA assets to a Roth instead.

The challenge is that converted assets are subject to federal income tax in the year of conversion and may also be subject to state taxes. Depending on the value of your account at the time of conversion, this could result in a substantial tax bill and may even bump you into a higher tax bracket. This is why, if you’ve been thinking about converting your traditional IRA to a Roth, a market downturn could be a prudent time to do so — a lower converted account value means a lower tax obligation. (You might want to talk to a tax professional about “filling your bracket,” a strategy in which you convert as much as possible without breaching the next bracket.)

Other reasons to consider converting:

• Unless Congress enacts further legislation (reportedly a high priority), tax rates will rise in 2026.
• Converting assets during market dips means that you’re essentially “buying low,” one of the primary
  tenets of stock investing.
• Unlike traditional IRAs, you won’t be subject to RMDs from your Roth accounts.

About those RMDs

RMDs are amounts that the federal government requires you to withdraw annually from traditional IRAs after you reach a certain age (currently 73). The distributions are spread out over your lifetime and are designed to prevent an account from continuing to grow tax deferred indefinitely. You can always withdraw more than the minimum in any year, but withdrawing less would likely trigger a federal tax penalty.

Each year, your RMD is calculated based on your age and the value of your account on the preceding December 31. For instance, a 2025 RMD would be based on the value of the account on December 31, 2024 — even if the value on the date of distribution is lower than it was then.

Although rare, Congress has periodically waived RMD requirements during periods of extreme market volatility. For example, this occurred during the Great Recession in 2009 and again in 2020 due to the COVID pandemic. If market fluctuations reach dramatic levels again in 2025, it may be beneficial to hold off on taking RMDs to see whether Congress acts.

A word of caution

If you are required to take an RMD in 2025 and would also like to convert traditional IRA assets to a Roth, note that the RMD must be taken prior to the conversion.
1) An inherited traditional IRA cannot be converted to a Roth, but a spouse beneficiary who treats an inherited IRA as their own can convert the assets.
2) Designated beneficiaries are required to take withdrawals based on certain rules and time frames, depending on their age and relationship to the original account holder, but such withdrawals would be free of federal tax.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.