Should you “get religion” on Roth conversions in this market downturn?
Should you “get religion” on Roth conversions in this market downturn?
Published: April 15, 2025
“Seriously? I’m pushing through Roth conversions for almost all my clients. One guy is even drawing down a credit line to pay taxes so he can convert more assets. He’s got the religion. You need to get that Roth religion!”
I was texting with a financial advisor buddy to check how his week was going with the “Trump thump” market volatility (and to send him baby pictures; I am now compelled to send people pictures of my baby.)
My friend’s teasing didn’t surprise me. Classically, there’s a bit of a financial advisor playbook for market nosedives, as we’re experiencing in April 2025:
Reach out to your clients to discourage panic selling
Go nuts with tax loss harvesting (there’s nuance here, a post for another day)
Scan your book for Roth conversion opportunities
And he isn’t the only one who sees Roth accounts with religious fervor: consider this week’s Wall Street Journal article, “This Family Spent Years Chasing the Holy Grail of a 100% Roth Retirement Portfolio.” In the article, an individual brags, “‘I consider myself a Roth evangelist.’” Get religion, the holy grail, a Roth evangelist — what’s going on here?
As we saw markets tumbling down, I gathered with my teammates Chris Casale and Hannah Farrow to discuss what actions we should recommend for specific families. We’d already reached out to our clients, and Betterment for Advisors was executing lot-level tax loss harvesting like the mosquito zapper taking down spring bugs in my backyard.
But how should we think about Roth conversions for our clients? Should we “get religion”? And what about you?
We came up with a “must believes” framework – can you tell I’m an ex-consultant? — and we’re happy to share it below.
Thanks to financial advisor Hannah Farrow, who codified this framework based on our team discussion.
Preamble: what is a “Roth conversion” and why could it be valuable?
There’s two main types of benefits associated with tax-protected investing accounts:
Pre-tax accounts lower your taxable income today, and then you’ll owe taxes on both that money and on its investment gains later when you withdraw those funds. 401(k) is the most common of these. (You see a certain number in your 401(k)? Remember, that’s a pre-tax value, and what you take out of that account one day will probably be less, much like your salary may be one number and your take-home paycheck a lower number.)
Post-tax accounts take money from your paycheck (money that you’ve already paid income taxes on) and when you withdraw those funds for approved uses, you don’t owe taxes on investment gains. Roth accounts work this way; so do 529 and ABLE accounts.
If you had the same tax rate your whole life, there would be no math difference between these two accounts (cit. Kitces “Tax Equivalency Principle”). But most people’s income – and thus their tax rate – varies widely throughout their life. Your income (and your tax rate) may be lower in your 20s, higher in your 30s, lower the year you start a new business or go to grad school, higher when you marry a spouse who is also a high earner, then lower your first years in retirement. Speaking generally, pre-tax accounts are good in those high-income years (they lower your taxable income) and post-tax accounts are good in your low-income years (they lock in that lower tax rate.)
A Roth conversion is when you take a pre-tax retirement account (e.g., 401(k) or a traditional IRA), pay all the taxes on that income today (because remember, you didn’t pay those taxes when you saved that money initially) and then rebirth that account as a Roth, ne’er to owe taxes yon.
Our framework for Roth conversion attractiveness
STEP ONE: Is there a market opportunity?
This is why Roth conversions sit inside that financial advisor playbook for market dips. Roth conversions are more attractive where a temporary market depression reduces the value per share, since taxes are paid on the total dollar value of the conversion: lower account value, lower taxes on the conversion. Alternatively: same dollars spent, more shares converted.
To pass this step and suggest that a Roth conversion may be appropriate, we must believe:
The market is depressed today, and
That decrease in value will persist for a few days, preferably a week (we don’t want it to pop right back up while our client’s funds are transitioning, such that they miss that increase)
The second bullet was challenging with this go-around: the market cratered on a Friday, jumped up on Monday, down on Tuesday, and then jumped up on Wednesday. Godspeed to everyone trying to trade in and out in these churning waters.
STEP TWO: Is a conversion tax-efficient for our client?
Remember, a Roth “locks in” your current tax rate. If your income is low (e.g., you’re in your 20s or you’re taking time off of work) then you have a lower tax rate and a Roth can be a great idea. If your income is high (e.g., you and your spouse both have high salaries and you’re vesting waves of RSUs) then you have a higher tax rate. You may not prefer your current tax rate to the rate available to you in retirement, especially those first few years after you stop working but before you start taking Required Minimum Distribution from pre-tax accounts (i.e., Roth Conversion Palooza.)
To understand Roth tax efficiency for our clients, we ask:
What is their current income? If it’s very high, we may not want to lock in that tax rate – or push them into an even higher bracket by taking on the income of a conversion
What is the trajectory of their income? If their income may increase (e.g., they’re about to complete a master’s degree that will accelerate their career) we may be happier with their current tax rate. If we know their income may decrease (e.g., one spouse plans to pause their career for childcare) we may think an imminent tax rate is more attractive.
Are there any other reasons to think their tax rate may be lower this year than other years? Income isn’t the only driver of a tax rate: sometimes high earning clients may have an engineered lower tax year: they may have a very large charitable contribution or meaningful medical bills such that itemizing pushes down their rate.
STEP THREE: Is this the best use of a client’s cash?
My financial advisor buddy’s client who decided to take out debt to pay Roth taxes is definitely a more extreme case. As stewards of our clients’ interests, we’d want to know that a client could cover these taxes from cash without causing privation or risking other goals.
But we don’t want to just ask, “Is this a good use of extra cash?” We want to ask, “Is this the best use of extra cash?” To understand that, we’d want to compare Roth conversion taxes to:
Should the client “buy the dip” and invest in taxable brokerage for greater liquidity and potential appreciation if the market bounces back?
Should the client fund other goals first, such as a 529 investment account for their children’s education?
Are we concerned that the client’s job may be at risk, such that we want them to hold onto extra cash for safety?
We’d want to be confident that those other opportunities were not more attractive than using that cash to pay taxes for the Roth conversion.
STEP FOUR: Does increasing Roth allocation serve a client’s strategic retirement needs?
When we talk about diversification, we usually are talking about underlying investments: diversification across equities and bonds, big companies and small companies, domestic and international.
But when we think about preparing clients for retirement, we also think about helping them diversify the tax profile of their savings to fill three buckets for retirement:
Pre-tax funds: These funds typically helped clients lower their tax rates during their highest-earning years, but will require careful management in retirement, as they require taxes and minimum distributions after a certain age.
Post-tax funds: In retirement, this bucket is low-fuss and ready to spend.
Taxable investments: These flexible funds can be tapped before retirement age qualifies withdrawals from tax-protected accounts, for clients who want to stop working before then – or, say, lose their job at 57 and feel like, “Eh, close ‘nuff.”
By having money in each bucket, our clients can pick and choose strategically to “create a paycheck” that maxes the tax profile of their years in retirement.
For clients who have nothing yet in post-tax funds, some Roth conversion – even if their rate is high today – can be helpful to get that “bucket” started for their strategic needs in retirement.
STEP FIVE: Is this aligned to the client’s long-term plan?
As the cliche goes, “personal finance is personal.” One value we have as advisors is going deeper than a yes-no framework; we can see the big picture and accommodate
One item that could fall in this bucket: for clients concerned about estate taxes, a Roth conversion can also reduce the size of their estate. This is less applicable for our client base, who are solidly under the ~$14M 2025 federal exemption — at least today, while they are in their earning years, and at least while this estate tax exemption is so high under the Tax Cuts and Jobs Act.
So broadly speaking, we’d be more likely to conclude that these groups would benefit from a Roth conversion in this downturn:
People whose income tax rates today are relatively low, perhaps because they are earlier in their career, in a lower-earning profession, or otherwise have low income (e.g., in grad school, starting a new business, between roles, the early years of retirement, etc.) AND they have cash to cover the taxes
People who have nothing saved yet in a Roth wrapper for their retirement, and getting that started can be helpful for their long-term retirement strategy. (Depending on their tax burden, we’d still be judicious here.)
However, for the majority of our clients — who are in their highest-earning years and therefore their highest-taxed years — we’re not pulling the trigger here.
If the answer can be so nuanced, then why do Roth accounts attract religious fervor?
Distinct a provable dollar-and-cents argument, my theory is that Roth accounts can create fanatical passions because of:
Concern that tax rates in the U.S. will shoot up: If your political beliefs are such that you think the U.S. is on a trajectory towards a Swedish liberal state, a Roth conversion may appeal to you since you can lock in today’s rates. From my perspective, and with affection, there’s some “prepper” energy here.
Preference for simplicity: Required Minimum Distributions (RMDs) from pre-tax accounts are fussy and nitpicky, and require lots of little choices in retirement. Similarly, inherited Traditional IRAs are also fussy for heirs (see this flowchart.) Roth accounts are much more straightforward.
A thread in both of these? A desire for control today over ambiguity later. No wonder the joke that Roths are “religion,” then, and no wonder they can seem especially comforting in a market downturn.
Curious about Roth accounts? Concerned by recent market “downs?”
RightWise is a financial planning-focused firm: while other firms may focus on investments and meet just once a year, our scope with clients is much broader, including budgeting, tax planning, insurance and end-of-life. So when the investing market jumps around, we can proactively adapt our advice for what we know about our clients: we know who is expecting a baby, who is thinking about starting a new business next year, who is sitting on extra cash and why.
When we look down a list of accounts to think about opportunities like Roth conversions, we see not just numbers: we see people.
If you’d like us to be looking out for your interests, reach out. We’d love to get to know you.
Author: Caitlyn Driehorst
Date Published: 4/14/2025
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