A market crash allows you to buy your favorite assets at a cheaper price. If your financial situation allows you to continue making contributions to a Roth IRA, don't let the markets scare you. This may be the best time to contribute to the dream life you want during retirement. Contributing money to a Roth IRA is not the same as investing it.
When you contribute money, your money will stay there until you put it to work. That means it doesn't matter if the market goes up or down when you make a contribution. A contribution allows you to save money in a Roth IRA so you can have money to invest when you're ready. In this situation, you would convert a conventional IRA to a Roth IRA by paying the tax.
The Roth conversion makes sense when the owner is in a lower tax bracket than the beneficiary. This may be a retiree, who has not yet accepted the RMD, or an older parent from a lower category, with children who will inherit part or all of the IRA. In a falling market, when the market is expected to recover, it's the optimal time to convert an IRA to a Roth one. To make the conversion, you pay taxes on the fair market value of the taxable portion of the IRA.
So, if you have an IRA invested in XYZ stocks, which are down 30% and become a Roth, you pay fair value taxes. If it recovers, you'll have made the profit tax-free. You can save money on a Roth conversion if you complete it during a market downturn. Because the value of your investments is lower during a market crash, you'll pay a lower amount of taxes when you convert.
It's also a good strategy if your income is lower than usual in a given year. A Roth IRA allows the children of owners of an inherited IRA to grow the inherited Roth tax-free for ten years after the date of death of the last spouse. Roth IRA conversions are a great way to transfer money from a traditional taxable IRA to a tax-free Roth IRA. If you have them and you have the funds, set up Roth IRAs for you, your children or your parents, save more on your 401 (k) Roth options, think Mega-Roth or convert to Roth IRAs.
In this scenario, you would contribute to a non-deductible IRA and immediately convert the non-deductible IRA to a Roth one. Finally, any old 401 (k) plan from previous employers must be transferred to an IRA or an IRA annuity to have more control over how your money is invested.