Trump's ‘big beautiful bill' makes Roth conversions more complicated — here's what to know
Roth conversions transfer pretax or nondeductible individual retirement account funds to a Roth IRA, which starts future tax-free growth. The trade-off is paying regular income taxes on the converted balance.
Trump's new tax cuts could make Roth conversions more appealing for some investors, experts say. But incurring too much income could impact eligibility for certain tax breaks.
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When weighing Roth conversions, you need to know the multi-year state and federal tax impact, said Judy Brown, a certified financial planner who works at SC&H Group in the Washington, D.C., and Baltimore area.
For example, if you're nearing Medicare age or already enrolled, boosting your earnings could increase income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums.
The strategy is "looking at a lot of different pieces, and figuring out the optimal place for each client," said Brown, who is also a certified public accountant.
Roth conversions have always been about "tax bracket management," said CFP Patrick Huey, owner of Victory Independent Planning in Portland, Oregon.
When making Roth conversions, advisors typically incur enough regular income to "fill up the lowest brackets," he said.
Your federal brackets are based on each part of your "taxable income," which you calculate by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
Before Trump enacted the One Big Beautiful Bill Act, lower federal income tax brackets were scheduled to sunset after 2025, which would have made converted balances more expensive.
Trump's legislation made the lower tax rates permanent, but several new tax breaks — deductions for older Americans, tipped workers and consumers with overtime pay and car loan interest — are temporary with varying earnings limits.
These tax breaks, which are available from 2025 through 2028, could offer more room for Roth conversions before hitting the next tax bracket, experts say.
Once these cuts expire, you could be "paying more for the exact same Roth conversion," said CFP Ashton Lawrence at Mariner Wealth Advisors in Greenville, South Carolina.
While Trump's new tax cuts could make more space in the lower tax brackets, higher income from Roth conversions can impact eligibility, experts say.
For example, the additional $6,000 deduction for older Americans starts to phase out, or get smaller, once modified adjusted gross income exceeds $75,000 for single filers or $150,000 for married couples filing jointly.
It probably still makes sense to convert funds at 22% or 24% tax rates now — and skip the $6,000 deduction — to avoid the 30% brackets for large pre-tax required withdrawals later, Brown said.
Most retirees must take required minimum distributions, or RMDs, from pretax retirement accounts starting at age 73 or face an IRS penalty.
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