Should You Do a Roth Conversion During a Market Downturn? (w/Examples) + FAQs

This article reflects federal rules as of June 2026 and covers tax year 2026. State rules are addressed in general terms because they vary widely. Tax law changes often — confirm current figures before you act.

Quick Answer

Often, yes. For tax year 2026, a market downturn can be one of the best times to convert traditional IRA money to a Roth IRA. You convert depressed shares, pay tax on a smaller balance, and the rebound grows tax-free. But it only works if you can pay the tax from outside the IRA and your income stays in a low bracket.

A Roth conversion moves money from a pre-tax traditional IRA into an after-tax Roth IRA. You pay ordinary income tax on the converted amount this year, and in exchange every future dollar of growth and withdrawal comes out tax-free. When the market drops, the same number of shares carries a smaller dollar value, so the tax bill on the conversion shrinks while your recovery upside stays the same.

The timing matters because two things rarely line up better than during a downturn: lower account balances and, often, lower income. According to Vanguard’s 2026 contribution guidance, there is no income limit and no dollar cap on conversions — unlike Roth contributions, which phase out at $153,000 for single filers in 2026. That makes conversions a flexible tool, but a permanent one: since 2018 you can no longer undo a conversion, so the math must be right before you click “convert.”

Here is what you will learn:

• 📉 Why a falling market actually lowers the tax cost of converting the same shares
• 🧮 Three fully worked dollar examples showing the tax saved (and the traps)
• 🏥 How conversions can trigger Medicare IRMAA surcharges and ACA subsidy cliffs
• 📋 The exact form (8606), the 5-year rule, and the pro-rata rule you must respect
• ✅ A step-by-step “what to do next” checklist with deadlines and costs

What a Roth Conversion Really Is

A Roth conversion is a taxable event you choose on purpose. You take money out of a traditional IRA (where it has never been taxed) and move it into a Roth IRA (where it will never be taxed again). The IRS treats the converted amount as ordinary income for the year you convert, the same as a paycheck.

You do this because of the long-term trade: pay a known tax rate today to avoid an unknown — and possibly higher — tax rate later. Roth IRAs also have no required minimum distributions (RMDs) during your lifetime, while traditional IRAs force taxable withdrawals starting at age 73. The consequence of ignoring this is real: a large untouched traditional IRA can push you into higher brackets in your 70s and inflate the tax on your Social Security.

A common misconception is that a conversion is the same as a contribution. It is not. A contribution adds new money and is capped at $7,500 (or $8,600 if you are 50 or older) for 2026 per the IRS contribution limits. A conversion moves existing money and has no cap at all — you could convert $200,000 in a single year if you were willing to pay the tax.

What you should do: decide on a dollar target before you convert, based on how much room you have inside a tax bracket, not on how much is in the account.

Why a Downturn Changes the Math

When the market falls, your shares do not vanish — their price falls. If you owned 1,000 shares worth $100,000 and the market drops 25%, you still own 1,000 shares, now worth $75,000. Convert that $75,000 and you pay tax on $75,000 instead of $100,000. When the market recovers, those same 1,000 shares climb back — and all of that recovery now grows inside the tax-free Roth.

The consequence of converting at the bottom is that you effectively move the rebound out of the taxable account and into the tax-free one for free. The misconception here is that you must “time the bottom.” You do not. Any meaningful dip helps, because you are simply converting more shares per tax dollar than you could before the drop.

What you should do: keep a small “conversion-ready” plan so that when a 15–30% dip happens, you can act within days rather than scrambling. The cash to pay the tax should already be sitting in a taxable account.

Which Situation Applies to You?

The right answer depends entirely on who you are. Find yourself below, then read the matching example.

• You are 60–72, retired, not yet taking Social Security or RMDs. This is the classic “sweet spot.” Your income is low, the market is down, and you have years before RMDs. Conversions are often a clear win. See Example 1.
• You are an early retiree (50s) living on a taxable brokerage and ACA marketplace health insurance. Conversions raise your MAGI and can wipe out premium subsidies. Tread carefully. See Example 3.
• You are already on Medicare (65+). Watch IRMAA, which uses a two-year income lookback. A big conversion now can raise your Part B and Part D premiums two years later.
• You are still working and in a high bracket (24%+). A downturn lowers the balance but your income is still high, so the tax rate on the conversion is steep. Smaller, partial conversions usually make more sense.
• You have nondeductible (after-tax) money in any traditional IRA. The pro-rata rule applies and changes how much of your conversion is taxable. Read the pro-rata section before you convert.

Worked Example 1: The Retiree in a Down Market

Meet Linda, age 64, single, retired in early 2026 with $400,000 in a traditional IRA. A market drop has cut her IRA to $300,000. Her only income this year is $20,000 from a small pension.

For 2026, the standard deduction for a single filer is $16,100, plus a $2,050 additional standard deduction for being 65 or older, per the IRS 2026 inflation adjustments. The 12% bracket for a single filer ends at $50,400 of taxable income. Linda wants to “fill up” the 12% bracket.

Here is the math, step by step:

• Taxable income before conversion: $20,000 − $16,100 − $2,050 = $1,850.
• Room left in the 12% bracket: $50,400 − $1,850 = $48,550.
• Linda converts $48,550 of her depressed IRA.
• Tax on that conversion at the 10% and 12% brackets: roughly $5,300.
• Effective tax rate on the converted money: about 11%.

She pays the $5,300 from her taxable savings, not from the IRA. When the market recovers, that $48,550 might climb back toward $65,000 — and every dollar of that recovery is now permanently tax-free. Had she waited until the market recovered, she would have converted fewer shares for the same tax dollars.

Worked Example 2: Same Shares, Different Tax

Meet Raj and Priya, both 66, married filing jointly, with $800,000 in a traditional IRA that has fallen to $600,000 in a downturn. They want to compare converting now versus after recovery.

Say they convert 100,000 shares of an index fund. At the bottom, those shares are worth $60,000. After a full recovery, the same 100,000 shares are worth $80,000.

• Convert now: taxable income added = $60,000.
• Convert after recovery: taxable income added = $80,000.
• For 2026, the married-filing-jointly 12% bracket ends at $100,800 and the 22% bracket runs to $211,400.
• Converting the smaller $60,000 keeps more of the conversion inside the 12% and 22% bands; the $20,000 of recovery escapes tax entirely.

They also qualify for the new senior deduction of up to $6,000 each ($12,000 total) for tax years 2025–2028, per TurboTax’s senior deduction guide, but it phases out above $150,000 MAGI for joint filers. A large conversion can shrink or erase that deduction, so they cap their conversion to stay under the phase-out.

Worked Example 3: The Early Retiree and the ACA Cliff

Meet Carlos, age 54, single, an early retiree who buys health insurance on the ACA marketplace and receives a premium tax credit. His IRA dropped 30% in a downturn, and he is tempted to convert $60,000.

The problem: ACA premium subsidies are based on MAGI, and a Roth conversion adds to MAGI. A $60,000 conversion could push Carlos past the subsidy threshold and cost him thousands in repaid premium credits — wiping out the benefit of the cheap conversion.

What Carlos should do: convert a smaller amount that keeps his MAGI under the subsidy limit, or wait until age 65 when he is on Medicare and the ACA subsidy is no longer in play. The lesson is that the cheapest-looking conversion is not always the smartest one once health-insurance math enters the picture.

The IRMAA Trap: Medicare’s Two-Year Lookback

If you are 63 or older, a Roth conversion today can raise your Medicare premiums two years from now. Medicare’s income-related monthly adjustment amount (IRMAA) uses a two-year MAGI lookback and counts Roth conversions, RMDs, and capital gains, as explained by Bankers Life on IRMAA.

For 2026, IRMAA surcharges begin at $109,000 MAGI for single filers and $218,000 for married filing jointly, according to Kiplinger’s 2026 IRMAA brackets. The surcharges run from roughly $1,148 to $6,936 per person per year for Part B and Part D combined, per this 2026 IRMAA guide.

The consequence is a “cliff,” not a slope: going $1 over a bracket triggers the full surcharge for the whole year. A misconception is that IRMAA hits the year you convert — it actually hits two years later, which catches many retirees off guard. What you should do: project your MAGI against the brackets before converting, and stop just below the line you do not want to cross.

If you convert and stay below the IRMAA line	Then your Medicare premiums in 2 years
MAGI under $109,000 single / $218,000 joint (2026)	No surcharge — you pay the standard Part B premium of $202.90 per the 2026 Medicare costs sheet
MAGI $1 over the first bracket	A full-year surcharge of roughly $1,148+ per person, with no proration

The 5-Year Rule You Cannot Skip

Each Roth conversion starts its own five-year clock. If you are under 59½ and you withdraw converted dollars before five years pass, you can owe a 10% penalty on that amount, per the IRS Form 8606 instructions. This is separate from the five-year rule for earnings.

The consequence of ignoring this is a surprise penalty on money you thought was already taxed. A common misconception is that “I already paid the tax, so I can take it out anytime.” Not always — the penalty clock is different from the tax clock for those under 59½.

What you should do: do not convert money you might need within five years, and keep a record of each conversion’s date and amount so you know when each clock ends.

The Pro-Rata Rule and Form 8606

If any of your traditional, SEP, or SIMPLE IRAs hold after-tax (nondeductible) money, the pro-rata rule applies. The IRS looks at all your IRAs combined and taxes your conversion proportionally — you cannot cherry-pick only the after-tax dollars, as Thrivent’s pro-rata explainer describes.

You report every conversion on IRS Form 8606, which tracks your basis and splits the taxable from the nontaxable part. The consequence of skipping it is paying tax twice on the same after-tax money. A misconception is that 8606 is only for the “backdoor Roth” — it is required for any conversion involving basis.

What you should do: file Form 8606 with your Form 1040 for the year of the conversion, and keep copies forever — there is no time limit to file a missing 8606, but recreating old basis is painful.

No Undo: Recharacterization Is Gone

Before 2018, you could “recharacterize” — undo — a Roth conversion if the market kept falling or your tax bill came in too high. The Tax Cuts and Jobs Act eliminated that option for conversions made in 2018 and later, confirmed by Greenleaf Trust and GRF CPAs.

The consequence is permanence: once you convert, the tax is locked in even if the market falls another 20% the next week. A misconception is that you can reverse a conversion before the tax deadline — you cannot, for any conversion since 2018. What you should do: convert in tranches (several smaller conversions across the year) so a further market drop simply becomes your next, even cheaper, conversion opportunity.

Why OBBBA Makes Today’s Brackets Attractive

The One Big Beautiful Bill Act (OBBBA) made the lower TCJA tax brackets permanent and kept the larger standard deduction, per H&R Block’s OBBBA summary. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married filing jointly, per the Bipartisan Policy Center.

This matters for conversions because today’s 10%, 12%, and 22% brackets are not scheduled to snap back up the way they once were. The temporary senior deduction of up to $6,000 per person, however, expires after 2028, so retirees 65+ have a four-year window where that extra deduction can shelter part of a conversion.

The consequence is a planning window: 2026 through 2028 offers both permanently low brackets and the bonus senior deduction. A misconception is that conversions must be rushed before brackets rise — under current law the brackets are stable, so the real urgency is the downturn and the 2028 senior-deduction sunset, not a bracket increase.

Does My State Tax the Conversion?

Federal rules are only half the story. Most states that have an income tax treat a Roth conversion as taxable income in the year you convert, just like the IRS does. But the details vary sharply.

• No-income-tax states (such as Florida, Texas, Tennessee, and others) do not tax the conversion at all — a genuine advantage if you convert while living there.
• High-tax states (such as California and New York) tax the full conversion as ordinary income, which can add several percentage points to your effective rate.
• Timing across a move: some retirees deliberately convert after relocating to a no-income-tax state.

What you should do: confirm your state’s treatment with your state’s department of revenue before converting, and never assume your state follows the federal rules.

Mistakes to Avoid

• Paying the tax from the IRA itself. This shrinks the amount that grows tax-free and, if you are under 59½, can trigger a 10% penalty on the withdrawn tax money.
• Converting too much in one year. A large conversion can spill into the 24% bracket, trigger IRMAA, or tax more of your Social Security — the outcome is a much higher effective rate than you planned.
• Ignoring the pro-rata rule. Forgetting after-tax basis in another IRA means your conversion is more taxable than expected, an unwelcome surprise at filing.
• Skipping Form 8606. The result is paying tax twice on the same after-tax dollars, sometimes years later.
• Crossing an IRMAA bracket by a dollar. The full-year surcharge applies with no proration, costing $1,148+ per person two years out.
• Blowing up an ACA subsidy. For early retirees, the repaid premium credit can exceed the tax savings of the conversion entirely.
• Assuming you can undo it. Recharacterization has been gone since 2018, so a regretted conversion stays converted and stays taxed.

Do’s and Don’ts

• Do pay the conversion tax from a taxable account, because it keeps 100% of the converted money compounding tax-free.
• Do convert in tranches during a downturn, because each further dip becomes a cheaper conversion.
• Do project your MAGI against IRMAA and ACA thresholds first, because crossing a cliff can erase the benefit.
• Do file Form 8606 every conversion year, because it protects your basis from double taxation.
• Do consider converting before RMDs begin at 73, because it shrinks future forced taxable withdrawals.
• Don’t convert money you may need within five years, because the under-59½ penalty clock can bite.
• Don’t convert blindly to “the top of a bracket” without counting Social Security and capital gains, because they share the same income stack.
• Don’t assume your state mirrors federal law, because conformity varies widely.
• Don’t wait for the “exact bottom,” because any meaningful dip already improves the share-per-tax-dollar math.
• Don’t ignore the 2028 senior-deduction sunset, because that window narrows every year.

Pros and Cons

• Pro — Tax-free growth and withdrawals. Every future dollar in the Roth comes out untaxed, which is powerful after a rebound.
• Pro — No lifetime RMDs. Roth IRAs are not subject to required withdrawals, giving you control in your 70s and beyond.
• Pro — Downturn discount. You convert more shares per tax dollar when prices are low, capturing the recovery tax-free.
• Pro — Estate benefit. Heirs inherit Roth dollars tax-free, easing the SECURE Act 10-year payout burden.
• Pro — Bracket and rate certainty. OBBBA’s permanent lower brackets make today’s conversion rate predictable.
• Con — Tax due now. You owe ordinary income tax this year, which requires cash on hand.
• Con — Irreversible. No recharacterization since 2018, so a misjudged conversion cannot be undone.
• Con — IRMAA and ACA spillover. Higher MAGI can raise Medicare premiums or cut health subsidies.
• Con — Five-year clocks. Each conversion restarts a penalty clock for those under 59½.
• Con — Complexity. Pro-rata, Form 8606, and state rules add real paperwork and room for error.

What to Do Next

1. Confirm the cash. Make sure you can pay the conversion tax from a taxable account, not the IRA.
2. Calculate your bracket room. Subtract your 2026 standard deduction ($16,100 single / $32,200 joint) and any senior deduction from your projected income, then find how much room remains in your target bracket.
3. Check the cliffs. Compare your post-conversion MAGI to the 2026 IRMAA lines ($109,000 single / $218,000 joint) and, if pre-65, your ACA subsidy limit.
4. Convert in writing with your custodian during the dip; the conversion is taxable in the calendar year it is completed, so the deadline is December 31, 2026, for a 2026 conversion.
5. Gather records of basis, conversion dates, and amounts for Form 8606, filed with your 2026 Form 1040 by April 15, 2027.
6. Call a professional if you have after-tax basis, are near an IRMAA or ACA cliff, or are converting more than one bracket’s worth. A CPA or fee-only advisor typically charges a few hundred to a couple thousand dollars to model a multi-year conversion plan — far less than a six-figure mistake.

This article is educational and is not a substitute for personalized advice from a licensed CPA, tax attorney, or fee-only financial planner for your specific situation.

FAQs

Should I do a Roth conversion when the market is down? Often yes, because a lower balance means a smaller tax bill on the same shares, and the recovery grows tax-free. It works best when you pay the tax from outside the IRA and stay in a low bracket.

Is there an income limit to do a Roth conversion in 2026? No. Unlike Roth contributions, which phase out at $153,000 MAGI for single filers in 2026, conversions have no income limit and no dollar cap. Anyone with a traditional IRA can convert any amount.

How much tax will I pay on a Roth conversion? Ordinary income tax on the converted amount at your marginal rate. For 2026, that ranges from 10% up to 37%, depending on how much the conversion adds to your taxable income that year.

Can I undo a Roth conversion if the market keeps falling? No. The Tax Cuts and Jobs Act eliminated recharacterization for conversions made in 2018 and later. Once you convert, the tax is locked in for that year, even if prices fall further.

What is the 5-year rule on Roth conversions? Each conversion starts its own five-year clock. If you are under 59½ and withdraw converted dollars before five years pass, you may owe a 10% penalty on that amount, separate from the earnings rule.

Do Roth conversions raise my Medicare premiums? Yes, potentially. IRMAA uses a two-year MAGI lookback and counts conversions. For 2026, surcharges begin at $109,000 MAGI (single) or $218,000 (joint) and can add $1,148 to $6,936 per person yearly.

Do I report a Roth conversion on Form 8606? Yes, when basis is involved. File Form 8606 with your Form 1040 for the conversion year to track after-tax basis and split the taxable from the nontaxable portion, avoiding double taxation.

What is the pro-rata rule? An IRS proportion rule. If any traditional, SEP, or SIMPLE IRA holds after-tax money, your conversion is taxed proportionally across all your IRA balances combined — you cannot convert only the after-tax dollars.

Does my state tax a Roth conversion? It depends on your state. No-income-tax states like Florida and Texas do not tax it; states like California and New York tax the full conversion as ordinary income. Confirm with your state revenue agency.

When is the deadline to do a 2026 conversion? December 31, 2026. A conversion is taxable in the calendar year it is completed, so it must be done by year-end — there is no extension into the following April like there is for contributions.

Should I convert before required minimum distributions begin? Often yes. Converting before RMDs start at age 73 reduces the future balance that triggers forced taxable withdrawals, which can lower lifetime taxes and the tax on your Social Security benefits.

Can a Roth conversion cost me my ACA health subsidy? Yes. A conversion raises MAGI, and ACA premium tax credits shrink or disappear above the income threshold. Early retirees on marketplace plans should convert smaller amounts or wait until Medicare at 65.

Word count: approximately 3,500 words. Figures are anchored to tax year 2026; the senior deduction is temporary and expires after 2028. Confirm current figures before acting.