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The Power Of Zero Show

The Power of Zero Show was created with the express purpose of helping 100,000 Americans get on the road to the 0% tax bracket in retirement within the next 10 years.

When the stock market crashes, most people freeze.

Today, David McKnight explains why a Roth conversion may be one of the smartest retirement moves you can make while prices are down.

Find out how to turn a market downturn into a chance to build tax-free income for the rest of your life.

In this episode, David McKnight asks whether a stock market crash is really a better time to do a Roth conversion.
Every time the market crashes, you hear the same advice from financial advisors: this is a great opportunity to do a Roth conversion.
The argument goes like this: if you have $1 million in your IRA and the market falls 30%, you can convert while it’s worth only $700,000, pay taxes on the lower value, and let the recovery happen inside your Roth IRA, tax-free.
Is a market crash really a better time to do a Roth conversion? David’s answer is “not really.”
To understand why, remember that your traditional IRA isn’t one pile of money but two piles commingled in the same account: your pile and the IRS’ pile.
If you have $1 million in your IRA and a 24% tax rate today and in retirement, $760,000 belongs to you and $240,000 belongs to the IRS.
When the market falls 30%, your share drops from $760,000 to $532,000, but the IRS’ share also drops from $240,000 to $168,000 – the IRS participates in the decline right alongside you.
So when someone says it’s a great time to convert because your tax bill just went down, they’re only telling you half the story: the bill is lower because the account you’re converting is worth less.
If you convert the $700,000 at the bottom at 24%, you’re effectively paying the IRS $168,000 to buy out its interest, leaving you with $532,000 after tax.
When the market recovers, that $532,000 grows proportionally back to $760,000, the same result you’d have gotten without converting.
David believes this is where much of the conventional advice about Roth conversions during crashes goes wrong: the market shouldn’t determine the tax bracket you’re willing to pay, your lifetime tax analysis should.
If you’ve concluded that 24% is an attractive rate and 32% isn’t, a 30% decline in the stock market doesn’t suddenly make 32% a good deal.
So you stick with your plan and still convert $200,000, filling the tax bracket you’ve already determined makes sense.
But something interesting has happened: if your IRA was worth $2 million before the decline, a $200,000 conversion was 10% of the account, and after a 30% drop to $1.4 million, that same conversion is more than 14%.
Same conversion, same taxable income, same tax bracket, but you’ve moved a substantially larger percentage of your remaining tax-deferred account to tax-free.
That’s the real opportunity: the market decline hasn’t created more wealth for you, your existing conversion strategy is now accomplishing more of its objective for the same amount of taxable income.
When the market falls, don’t say “let’s do a bigger Roth conversion”, say “let’s continue executing the strategy our financial plan already told us makes sense”.
And don’t do a Roth conversion you weren’t otherwise planning to do simply because stocks happen to be down.
Ultimately there are two completely separate decisions: at what tax rate are you willing to buy out the IRS, and how much of your IRA can you convert at that rate before tax rates go up for good?
The stock market doesn’t answer the first question, but a major market decline can affect the second.
Is converting your IRA during a market crash a mistake? No, but the crash shouldn’t determine whether you convert or what tax bracket you’re willing to pay.