Roth IRA Conversions Before Taxes Increase

The clock is ticking on some of the lowest federal income tax rates we have seen in decades. With major tax cuts set to expire at the end of 2025, executing a strategic Roth IRA conversion today could save you thousands of dollars in the future. Here is exactly how to protect your retirement savings from looming tax hikes.

The 2026 Tax Hike Deadline

To understand why a Roth conversion makes sense right now, you have to look at the current tax code. The Tax Cuts and Jobs Act passed in 2017 temporarily lowered federal income tax brackets. However, these reduced rates are legally scheduled to “sunset” or expire on December 31, 2025.

Unless Congress passes new legislation, tax rates will automatically revert to their higher, pre-2018 levels starting in 2026.

This change will impact almost every taxpayer. For example, the current 12% tax bracket is scheduled to jump back to 15%. The 22% bracket will return to 25%. Most notably for high earners, the current 24% bracket will revert to 28% or even 33% depending on how the income thresholds are adjusted for inflation.

If you have money sitting in a Traditional IRA or a pre-tax 401(k), the IRS has not taxed that money yet. You will eventually owe taxes on every dollar you withdraw in retirement. If you wait until 2026 or later to take those withdrawals, you will likely pay a much higher percentage to the federal government.

How a Strategic Roth Conversion Works

A Roth IRA conversion is a financial maneuver where you transfer funds from a pre-tax retirement account, like a Traditional IRA, into a post-tax Roth IRA.

When you make this transfer, you must pay ordinary income tax on the amount you convert in the year you make the move. While paying taxes voluntarily might sound counterintuitive, the long-term math is incredibly powerful. Once the money is inside the Roth IRA, it grows completely tax-free. When you withdraw the money in retirement, you owe the IRS absolutely nothing.

By doing a Roth conversion right now, you lock in today’s historically low tax rates. You are essentially paying a known 22% or 24% tax bill today to avoid an unknown, but likely much higher, 25% or 28% tax bill tomorrow.

The Roth Conversion Ladder Strategy

You do not have to convert your entire retirement account at once. In fact, doing a massive lump-sum conversion is usually a bad idea because it can push your income into the highest federal tax brackets.

Instead, financial planners recommend a strategy called a Roth conversion ladder. This involves converting smaller, specific amounts over several years. The goal is to fill up your current tax bracket without spilling over into the next one.

For example, a married couple filing jointly in 2024 can earn up to $383,900 and stay within the 24% tax bracket. If this couple has $300,000 of expected taxable income from their jobs and investments this year, they have $83,900 of “room” left in the 24% bracket. They could choose to convert exactly $83,900 from their Traditional IRA to their Roth IRA. They pay 24% on that conversion today, completely sheltering that money from the expected 33% rate that same income level would trigger in 2026.

Major Benefits Beyond Lower Tax Rates

While beating the 2026 tax hike is the primary motivator, Roth conversions offer several distinct advantages for your long-term financial plan.

Eliminating Required Minimum Distributions

When you reach age 73, the IRS forces you to start taking withdrawals from your Traditional IRA and 401(k) accounts. These are called Required Minimum Distributions. You have to take this money out and pay taxes on it even if you do not need the cash to pay your living expenses.

Roth IRAs do not have Required Minimum Distributions during the original owner’s lifetime. You can leave the money in the account to grow tax-free indefinitely.

Protecting a Surviving Spouse

Many couples fail to plan for the “widow’s penalty.” When one spouse passes away, the surviving spouse must start filing their taxes as a single filer. The income brackets for single filers are much tighter than those for married couples. The surviving spouse often inherits the same amount of retirement income but is forced into a significantly higher tax bracket. Converting to a Roth IRA while both spouses are alive and filing jointly completely removes this future tax burden.

Tax-Free Inheritance

Under the SECURE Act passed in 2019, non-spouse heirs who inherit a Traditional IRA must completely drain the account and pay taxes on the money within 10 years. This can cause a massive tax burden for your children during their highest earning years. If they inherit a Roth IRA, they still must empty the account within 10 years, but every single withdrawal is 100% tax-free.

Hidden Traps to Watch Out For

Roth conversions are highly effective, but you must navigate the rules carefully to avoid costly mistakes.

First, you need to watch your Medicare premiums. Medicare Part B and Part D premiums are tied to your Modified Adjusted Gross Income. If a Roth conversion artificially spikes your income for the year, it can trigger an Income-Related Monthly Adjustment Amount surcharge. For instance, in 2024, married couples with an income over $206,000 will start paying higher Medicare premiums. You must factor this surcharge into the total cost of your conversion.

Second, always pay the tax bill using cash from a regular checking or brokerage account. Do not withhold taxes directly from the IRA conversion amount. If you are under age 59.5, withholding taxes from the IRA will trigger an additional 10% early withdrawal penalty on the withheld amount.

Third, keep the five-year rule in mind. While you can always withdraw your original Roth IRA contributions penalty-free, the money you convert from a Traditional IRA must sit in the Roth account for five full years before you can withdraw the principal without facing a 10% penalty.

Frequently Asked Questions

What is the deadline to do a Roth conversion for the current year?

The deadline to complete a Roth conversion is December 31 of the calendar year. Unlike regular IRA contributions, you cannot wait until Tax Day in April of the following year to do a conversion.

Can I undo a Roth conversion if the market drops?

No. Prior to 2018, you could use a process called “recharacterization” to undo a Roth conversion. The Tax Cuts and Jobs Act permanently eliminated this option. All Roth conversions are now permanent.

Is there an income limit for doing a Roth conversion?

No. While there are strict income limits for making direct contributions to a Roth IRA, there are absolutely no income limits for converting money from a Traditional IRA to a Roth IRA. Anyone can do it regardless of how much money they make.