Stock market's silver lining: Good time to fund a Roth IRA

— -- Q: With the stock market so low, wouldn't it be a good time to move money from a traditional IRA to a Roth IRA to avoid high taxes on the transaction?

A: If there's one bright side to a nasty bear market, like the one we're in, it's that people start taking a hard look on how to optimize they money they have left. Your question is a great example.

You're exactly right. Many savers might have wanted to fund a Roth IRA, but selling everything and paying the taxes was too much to make it worthwhile. So the fact stocks and corporate bonds are down so much in price is a great opportunity.

Some quick background. With a Roth IRA, you contribute using dollars that have already been taxed. You then take the contributions and earnings out without paying taxes. Traditional IRAs work just the reverse. You put untaxed dollars into a traditional IRA, then pay tax when you take the money out.

Roth IRAs have some great advantages. You can read more about that here.

What if you have a traditional IRA, but want to turn it into a Roth? Since traditional and Roth IRA's are taxed so differently, moving money from a traditional to a Roth can incur a tax bill. You pay taxes on the money you move, or convert, in IRS lingo.

And that's why you're onto something. If you want to move money from a traditional IRA to a Roth, you want to do it when the prices are low. That way, the taxes you incur will be lower.

It's explained in more detail in the Pricewaterhouse Cooper's 2009 Guide To Tax and Financial Planning: "Consider converting (if your AGI makes you eligible) a traditional IRA invested in equities or stock market funds to a Roth IRA when stocks values are depressed. The tax cost will be based on the low valuations at the time of the conversion, and no tax will be owed on future value increases."

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.