all withdrawals from that day forward will be completely tax-free. His Roth IRA might grow to $500,000, $600,000, or more, as stocks recover, yet John can take out some or all of the money and owe no tax.
Small bites can provide a tasty meal. Of course, John might not have $105,000 lying around to pay tax on a $300,000 Roth IRA conversion. “Instead, he can do a partial conversion,” says Slott.
Suppose John converts one-quarter of his IRA ($75,000) in late 2008. He would owe tax on $75,000; if this smaller withdrawal reduces his effective tax rate from 35% to 33%, John would owe less than $25,000 in tax on this conversion, for 2008.
In January 2009, stocks might still be trading at depressed levels. John could convert another $75,000 of his IRA to a Roth IRA then and defer paying tax until 2010, when he files his 2009 return.
The more assets you can move from your traditional IRA to a Roth IRA at today’s paltry prices, the more tax-free gains you’ll enjoy when the stocks bounce back.