Best Time to Backdoor a Roth IRA

Bears are interesting animals. Bears are known to walk slowly but can be ferocious. If you’ve ever seen the power of a bear, you’d know what I mean. A perfect example of the power of a bear is the Hollywood movie scene “The Revenant” with Leonardo DiCaprio1 playing Hugh Glass getting mauled by a bear. He then survives the Dakota arctic cold by sleeping in the bear after being mauled to stay warm and survive. Although markets are powerful and dangerous, they do have some benefits with an IRA rollover to a Roth IRA .

The action of moving a large IRA to a Roth is typically called a Back Door Roth IRA. The reason is because large sums of money above typical IRA limits can be contributed by various means. Keep in mind, the transition is a taxable event but the benefit of the Roth is the future tax free withdrawal. During times of dragflation, this conversion event can be very important.

The best time to back door a IRA or retirement account to a Roth IRA depends.  When is the best time?

1. Bear Markets

Bear markets are sharp and painful meaning they have shorter time frames than bull markets and have very drastic quick movements that are very short lived. They also have very negative psychological elements of madness of the crowds. Because of these big percentage drops you have the ability to potentially move into a Roth account at market lows.  Transferring an account at markets lows is much better than market highs because of the tax consequences.

2. Company Specific

Insiders and executives in a unicorn company have concentrated risks. Instead of being diversified to manage risk, an executive may be heavily concentrated in a specific company with massive blocks of stock. This can be from being an early investor, insider executive, or stock incentives as an employee. Some of these risks can be seen with 2020 private companies going public with an initial public offering (IPO) as seen with high flyers like Affim, CoinBase, DocuSign, RobinHood, Oscar, Zoom, and more. With a backdoor Roth IRA, these sizable stock positions could of been exited out early and diversified across various assets to manage the volatility and future for non taxable distributions.

As seen in the movie Revenant, to the survive the frozen night, Leonardo DiCaprio’s character Hugh Glass climbed inside the warm bear carcass to survive the freezing cold night. Investors can do similar by embracing bear markets or concentrated stock positions with backdoor Roth IRA conversions.

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