If you’ve experienced downside volatility in your traditional IRA recently, consider it an opportunity to increase your after-tax net worth down the road.
Let’s assume you own 100 shares of American Express (AXP) in your traditional IRA. At year’s end 2019, it closed at $124.49 per share or $12,449. The closing price on April 24, 2020 for AXP was $83.17 ($8,317.)
If you want to be a long term holder because it will be worth, let’s say, $200 per share in 5 years, you could just leave it untouched and have an asset that’s worth $20,000 at that time.
But since it’s in a traditional IRA, taking a withdrawal at that time for the entire $20,000 at a 24% tax rate will leave you with $15,200 after-tax.
Suppose you took advantage of the downside volatility of AXP and rolled it over into a Roth IRA on April 24, 2020. You’d have created a taxable event of $1,996, but 5 years down the road you would have an after-tax asset that is worth $20,000 or $18,004 after the taxes you paid to complete the Roth IRA rollover.
The increase in your after-tax return is $2,796 or 18+% more when you decide to take your ultimate distribution. In addition, any dividends that AXP pays during that time will be tax-free.