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If you're panicking over Wednesday's market declines, here's your silver lining: You might have a great opportunity to save on taxes.
In particular, yields are now higher on 2-year Treasury bonds compared to the 10-year Treasury. The development has stoked fears of an impending recession.
There may be a bright spot for retirement savers, though — provided they don't obsess over their shifting balances: If your traditional individual retirement account fell in value, it might be time to think about converting to a Roth IRA.
"The optimal time to convert is when valuations in your traditional accounts are lower," said Suzanne Shier, chief tax strategist at Northern Trust.
That's because when you convert to a Roth, you pay income taxes in the present based on the amount converted from the traditional IRA. The tax bill will be lower if the value of the portfolio is down.
Further, your Roth IRA will benefit from future tax-free growth and withdrawals in retirement.
"If the market is tanking and you think it's going to go back up, right now is the time to do it," said Ed Slott, CPA and founder of Ed Slott and Co. "You have low tax rates and lower values."
There are two factors that might make a Roth conversion a good deal in the near term.
First, there are the declining share values. This means you can transfer a greater portion of your IRA portfolio — more shares — to the Roth for potential tax-free growth and withdrawals in retirement.
"Let's say we were going to convert $50,000, now we can do it with a greater number of shares," said David Oransky, a CPA and member of the American Institute of CPAs' Personal Financial Planning Executive Committee.
"This is the CPA getting excited about the market dip," he said.
Second, there are the lower income tax rates that are now in effect due to the Tax Cuts and Jobs Act.
This tax overhaul trimmed the individual income tax rates, so if you're converting in 2018, you're likely paying a lower income tax rate than you would have in previous years.
See below for your 2019 bracket.
Before you break out the bubbly, know that this strategy isn't necessarily for everyone.
For instance, prior to the tax overhaul, financial planners and CPAs used to recommend Roth conversions early in the year. Investors would then see how their Roth accounts performed over subsequent months.
If any of the converted accounts didn't perform well, they might undo — or recharacterize — the transaction.
The Tax Cuts and Jobs Act took that tool away, so any Roth conversions you do now are permanent.
It's something to bear in mind in the event you convert some of your savings now and the market tanks in 2019.
"You can't play both ends like you used to do," Slott said. "There are no do-overs anymore."
Perhaps the best contenders for a Roth conversion might be younger retirees who have deferred on Social Security but haven't yet reached 70½ — the age at which they must begin taking required minimum distributions from their traditional IRA and 401(k) plans, Oransky said.
"These are gap years in which they will be in the lowest tax brackets," he said.
Retirees should also make sure that the conversion amount doesn't inadvertently raise their Medicare Part B (medical insurance) and Part D (prescription drug) premiums in future years.
That's because the amount you pay for these premiums in a given year is based on your modified adjusted gross income from two years prior.
See below for details on Medicare Part B premiums in 2019, which will be based on MAGI for 2017.
Here are the premiums for Medicare Part D premiums in 2019.
Finally, be sure that you have the money available to pay the taxes owed on the conversion. Ideally, this should be money that you have in a taxable account or someplace other than the amount you're converting.
"If you pay the taxes out of the conversion, it reduces the efficacy," said Oransky. "The full amount should go into the Roth IRA."