Roth Conversions in a Down Year: What to Review

A market decline can reduce the value of investments you are considering converting to a Roth IRA. That may reduce the taxable amount of a conversion of those same investments. Whether a conversion makes sense still depends on your income, available cash, retirement plans, and expected future tax circumstances.

This article focuses on a traditional IRA-to-Roth IRA conversion. Employer-plan rollovers and other retirement accounts can have additional rules. Our Tax & Accounting and Wealth Management pages explain the firm’s related services.

What happens when you convert?

A conversion transfers money or investments from a traditional IRA to a Roth IRA. The portion that would be taxable if withdrawn is generally included in federal income for the conversion year. Any nondeductible basis requires a separate calculation; do not assume the whole balance is taxable or that you can select only after-tax dollars.

Qualified Roth IRA withdrawals are tax-free. A Roth IRA also has no required minimum distributions for its original owner, although beneficiary rules apply after the owner’s death. Withdrawal timing and five-year rules need attention if you expect to use the money soon.

How does a lower account value affect the decision?

Suppose investments in a wholly pretax IRA decline from $100,000 to $80,000. Converting those investments at the lower value would generally create $80,000 of federal taxable income instead of $100,000. This illustration assumes no nondeductible basis and does not predict future returns.

The lower value alone does not establish a tax advantage over leaving the funds in the traditional IRA. Compare the cost now with the likely cost of future withdrawals, how long you expect to keep the assets invested, and the cash needed to pay tax. Investments can decline further after a conversion.

Does Illinois tax the conversion?

Illinois allows a retirement-income subtraction for the federally taxed portion of a traditional IRA converted to a Roth IRA that is included in federal adjusted gross income on Form IL-1040, Line 1. In other words, an eligible conversion can create federal taxable income without creating Illinois income tax on that same amount.

The Illinois Department of Revenue’s guidance explicitly includes traditional IRA-to-Roth conversions. Publication 120 explains reporting and documentation. Confirm how the subtraction applies to your return, particularly if you moved during the year or have tax obligations in another state.

What should a projection include?

Review more than the amount of room in a federal tax bracket:

Expected income and deductions. Include wages, business income, investment gains, retirement distributions, and other relevant items for the year.
Medicare premiums. Additional income can affect income-related Medicare surcharges. Social Security generally uses tax information from two years before the premium year.
Cash for taxes. Consider estimated payments and whether taxes can be paid without using funds needed for living expenses.
IRA basis and required distributions. Confirm any nondeductible contributions. An amount required to be distributed for the year cannot be converted.
Future withdrawals. Consider when you may need the money and how the Roth withdrawal rules apply.

The Social Security Administration’s Medicare guidance explains income-related premiums. A federal tax projection and the Medicare calculation use different income measures, so reaching a chosen tax bracket does not settle every question.

Is a partial conversion an option?

Yes. You can evaluate converting part of an eligible IRA balance. Comparing several amounts, including no conversion, can help show the tax and cash-flow effects.

Spreading conversions over more than one year may be useful, but future income, tax rules, and investment values can change. Review the numbers again before each conversion instead of assuming the same amount will remain appropriate.

What should you confirm before proceeding?

Ask the custodian about its processing deadlines and the tax year in which the transaction will be reported. For a direct conversion intended for the current calendar year, arrange completion before year-end and allow time for processing.

A conversion cannot be reversed by recharacterizing it back to a traditional IRA under current rules. If tax is withheld from an IRA distribution rather than transferred to the Roth, the amount retained for tax can have separate distribution consequences. Review the transfer method and tax-payment plan before giving instructions.

Discuss the tax and investment decisions together

Bring recent returns, IRA statements, any records of nondeductible contributions, and your expected income for the year. Those details support a discussion of whether a conversion fits your circumstances.

Tax services are provided by NRACPA LLC. Investment advisory services are offered through Archer Investment Corporation under a separate engagement. Coordinating the analysis does not require you to engage both firms.

Prospective clients can book a free initial consultation. If you already work with the firm, book a meeting to discuss a possible conversion.

Sources

Tax information reflects the guidance available as of October 5, 2026. This article provides general information, not an individual recommendation to convert or investment advice.

This article provides general information. Tax and investment decisions depend on your individual circumstances and current rules. Contact the office to discuss your situation.