Now might be a great time to convert some of your retirement savings from a traditional IRA to a Roth account.

While you might be unhappy about the declining value of your retirement account, you can make lemonade out of lemons. Right now is a great opportunity to convert funds, while stocks have come down in value. You'll only pay taxes on the value of the conversion, so depressed stock prices means a lower tax bill.

There are two groups of investors who can really make the most of a Roth conversion.

A notebook with Roth IRA conversion written in it.

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1. Young retirement savers

If you're in your late 20s or early 30s with a modest income, you're a prime candidate for the Roth conversion.

If you've managed to save in your 20s in a traditional IRA, taking full advantage of the tax deduction in years past, you may have a nice-sized nest egg. You may be in line to do some conversions this year and early next year while keeping the tax liability relatively low. Remember, you don't have to convert your entire IRA all at once.

For those with an average income, making a Roth conversion now will likely land you in the 22% tax bracket. Be sure you have funds outside your retirement accounts to pay the taxes. If you have to pay taxes from your retirement withdrawal, you'll end up taking money away from your retirement savings and paying the 10% early withdrawal penalty tax to do so.

Paying 22% now could be worth it if you foresee significant lifestyle inflation by the time you reach retirement. Keep in mind that the Tax Cut and Jobs Act tax reduction expires in 2025. Rates are set to revert to their prior standards at that time, although Congress could enact a new, more favorable tax code by then. Basically, performing a Roth conversion is a hedge against fluctuation in future tax rates, which may be unfavorable.

If you can convert funds at the 12% tax rate or lower, it's an even better deal. It may require you to make smaller conversions, but you can convert some today and some in early 2023 if it allows you to stay within that 12% bracket.

Once your funds are converted, they'll grow tax-free, and you won't have to pay any additional taxes on withdrawals from that account as long as you don't make an early withdrawal. What's more, you're able to withdraw the funds you converted (but not the earnings) after five years, which may allow you to retire early and still access your retirement savings.

2. The recently retired

If you just retired at the start of 2022, you may be reeling, looking at your retirement savings dwindle right before your eyes. But now is an opportunity to permanently lower your tax bill later in retirement.

One of the big factors in tax planning for retirees is balancing withdrawals from a retirement account like an IRA, a taxable brokerage account with capital gains, and Social Security. All three have different tax treatments, and they can all impact each other in significant ways.

But if you make a Roth conversion now, while the value of your portfolio is (temporarily) low and before you start collecting Social Security, you'll be at an advantage later. Since withdrawals from a Roth account don't impact your taxable income, they can bolster your retirement spending without impacting the tax you'll pay on Social Security or capital gains.

What's more, converting part of your IRA now will reduce the amount you'll have to withdraw when you reach 72 and start making required minimum distributions, or RMDs. Your RMD may end up being more than you need to live on, producing an unnecessarily high tax bill on funds you're just going to reinvest anyway.

Just like young investors are hedging against higher tax rates in the future when they make a Roth conversion, so too are newly retired people. Newly retired people with significant assets held in an IRA or lots of unrealized capital gains could find a big bump in their effective tax rate when they start collecting Social Security and taking RMDs later in retirement. Locking in a low tax rate on funds while the asset prices are low is a smart move.

Planning long term

A Roth conversion comes with an up-front sting, but the long-term benefits can be great.

A young investor who converts today is in line to see their assets grow significantly in value by the time they retire. Having a big nest egg that can be drawn on completely tax-free is an enviable position.

A new retiree has a few precious years to position their assets and accounts to help keep their tax bill low for the rest of their retirement. Roth conversions should be considered as part of their strategy.

If you keep the long term in mind, you can make the most of the current situation and perform a Roth conversion.