Should you convert to a Roth IRA when the market declines? Experts weigh in.

• Financial experts suggest that stock market drops may make a Roth IRA conversion more appealing for those considering it.
• Consider the tax implications and the potential impact on adjusted gross income when making decisions about increasing income.

Financial experts suggest that stock market drops may make a Roth conversion more appealing when considering it.

The Build Back Better spending package stalled in December, putting the popular move that lets higher earners bypass income limits for Roth individual retirement account contributions in jeopardy.

Amid stock market volatility caused by the Russia-Ukraine conflict, the move may be attractive, said certified financial planner Jordan Benold, partner at Benold Financial Planning in Prosper, Texas.

To avoid levies on pretax contributions or earnings from Roth conversions, investors must have a plan in place to cover the bill.

If you have a pretax traditional IRA worth $100,000 and the entire market goes down, the value drops to $65,000.

Benold suggested that it could be a suitable moment to convert $65,000 instead of $100,000, but it's important to consider more than just asset values when making the decision.

Upfront taxes

Ashton Lawrence, a CFP with Goldfinch Wealth Management in Greenville, South Carolina, advised being mindful of taxes incurred based on conversion.

Marianela Collado, a CFP and CPA at Tobias Financial Advisors in Plantation, Florida, stated that if you're willing to pay upfront taxes on a Roth conversion, you can estimate how long it will take to break even.

To calculate your bill for IRA accounts, you must consider the "pro-rata rule," which takes into account your total pre-tax and after-tax funds.

Collado stated that it's something that cannot be examined in isolation.

Watch for the five-year rule

The "five-year rule" is an exception to the tax and penalty-free withdrawal of contributions from Roth IRAs.

The timeline for withdrawing converted balances is five years, starting from Jan. 1 of the year of conversion, and investors will face a 10% penalty if they withdraw before the end of the period.

Increasing adjusted gross income

Another potential issue with a Roth conversion is that it may increase that year's adjusted gross income, triggering other problems, according to Lawrence.

The monthly premiums for Medicare Part B are determined using the modified adjusted gross income (MAGI) from two years ago, which means that the 2022 income will result in higher costs in 2024.

The monthly base amount for Medicare Part B in 2022 is $170.10, and payments rise when your MAGI exceeds $91,000 or $182,000 for joint filers.

In 2022, the highest Medicare Part B surcharge for single filers is $578.30 when MAGI exceeds $500,000, while for couples filing together, the maximum surcharge is $578.30 when MAGI exceeds $750,000.

Lawrence explained, "Squeezing one end of a balloon inflates it at another end."