August 3, 2025
The “One Big Beautiful Bill Act,” H.R. 1, (“OBBBA”) has made Roth IRA conversions more complicated due to the presence of phase-outs that can unexpectedly push taxpayers into a higher tax bracket in the year of conversion. The prime motivator for making a Roth conversion is to pay taxes at a lower tax rate at the time of conversion than expected at the time of distribution. That would allow a taxpayer to earn a higher compounded after-tax income compared with identically invested taxable or tax-deferred retirement accounts over time. However, many of the special tax breaks under the OBBBA may be lost when making a Roth conversion.
OBBBA generally provides an opportunity for retirement savers to convert their pre-tax retirement funds into Roth IRA and Roth 401(k) accounts at low marginal rates. A common expectation is that tax rates will eventually rise to cover continuing and/or accelerating budget deficits. However, retirement savers looking to convert pre-tax funds to Roth accounts under OBBBA should be aware that they might incur a higher marginal tax rate than anticipated due to phase-outs.
For example, a married couple ages 65 or older would get a special $12,000 tax deduction on their jointly filed return under the new law if their modified adjusted gross income were $150,000. However, they would be subject to a complete deduction phase-out if they made a Roth conversion of $100,000 that boosted their income to $250,000. In that case, with a nominal marginal tax rate of 22%, taxes would increase from $22,000 to $24,640, an effective marginal rate of 24.64%.
There are other tax breaks in the One Big Beautiful Bill, such as “No Tax on Tips,” “No Tax on Overtime,” “No Tax on Car Loan Interest,” and the “State and Local Tax Deduction” that phase out in a similar manner as the 65 and older tax deduction. These new tax breaks required financial planners to use sophisticated software to measure the effective tax rates for Roth conversions under the One Big Beautiful Bill. Tax planning is essential for avoiding unwelcome upward spikes in tax rates at the time of a Roth conversion.
For further reading, see:
https://www.thestreet.com/retirement/roth-ira-conversions-just-got-more-complicated
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