You can convert a regular IRA to a Roth IRA. When you convert a regular IRA to a Roth IRA, the deferred income tax must be paid. After five years or age 59 1/2, whichever comes later, all withdrawals are tax-free.
However, there are restrictions. You can’t convert if your annual income is more than $100,000.
Recent stock market weakness makes a Roth IRA conversion more appealing now. Suppose you had a $500,000 IRA last March; converting to a Roth IRA would have cost you $200,000 in tax.
Now suppose that your IRA has fallen to $400,000, as a result of sagging stocks. Conversion would cost you $160,000 in tax: a $40,000 saving.
If you meet the income test, converting to a Roth IRA will work best if you can pay the tax from other funds. This will leave the full amount inside the Roth IRA, for tax-free accumulation over the long term.
What’s more, there are no required minimum distributions from a Roth IRA so you can maintain the tax-free buildup as long as you wish.
