As markets churn and the economic and tax outlook appears uncertain, your clients might be asking: Should I do a Roth IRA conversion?
Potential Roth conversion benefits include reducing or eliminating future required minimum distributions; providing tax diversification in retirement; reducing or eliminating taxes for those who will inherit the account; and offering a hedge against higher future tax rates.
While 2025 might have some distinct circumstances, such as low tax rates and market volatility, that make Roth conversions desirable for some clients, most of the issues that apply in other years as to whether a Roth conversion is a good move apply in 2025 as well.
Let’s look at what makes a conversion more or less advantageous this year.
Market Volatility
Doing a Roth conversion when the stock market is down can be a good idea. A higher percentage of the traditional IRA can be converted when the market is down, and the converted amount can grow under the Roth umbrella once the market recovers.
U.S. markets took a downturn from late February to late April in conjunction with the announcements of new tariffs by the Trump administration. This could have been an appropriate time for a Roth conversion for some clients, although this short-term opportunity has gone away as the markets have largely recovered.
This isn’t to say that we won’t see more market volatility in 2025. For clients for whom a Roth conversion makes sense, you might discuss doing the transaction if the market drops again during the year.
It is a good idea to agree on parameters that might trigger the conversion, such as a drop in the S&P 500 of X percent. Be sure that the client fully understands this, so there is no ambiguity.
Tax Rates
During the first Trump administration, the 2017 tax overhaul known as the Tax Cuts and Jobs Act lowered income tax rates. The legislation is set to expire at the end of 2025, although Congress could extend these lower rates or even make them permanent.
Regardless of what happens on this front, tax rates are relatively low and that might make 2025 a good year for clients to consider a Roth conversion. Since the conversions are taxable, doing a conversion in a year with relatively low tax rates can be advantageous.
This can be even more advantageous if a client’s income is a bit lower than normal. The combination of lower income and lower tax rates is a powerful combination when doing a Roth conversion.
Your Client's Situation
Beyond tax rates and the performance of the stock market, there are a number of client considerations to weigh for 2025 or any other year to determine if doing a Roth conversion during the current year makes sense for them.
Overall tax situation: A key factor to consider in Roth conversion timing is a client’s overall tax situation for the year, and perhaps for future years. Certainly it is better to do a Roth conversion in a year in which a client’s expected tax liability is lower than normal, or at least not higher than normal. This can allow for a larger amount to be converted than in a year when the client might be in a higher tax bracket.
It is important to look not only at 2025 but also what the next few years potentially look like. Will the client continue working? If so, what are the income expectations over the next few years?
Is the client retired fully or in part? For many clients, the period between retirement and claiming Social Security can be a good time to consider a Roth conversion.
Charitable deductions: Does the client plan on making significant charitable contributions? Will these contributions be significant enough to allow the client to itemize deductions for 2025? If so, the client can offset some of the tax liability from the Roth conversion.
Effect on Medicare premiums: For clients receiving Medicare benefits or who will be soon, a large bump in their income for 2025 could result in them being assessed a Medicare IRMAA surcharge that would increase their Part B and Part D premiums in 2027.
Being hit with an IRMAA surcharge — officially, an income-related monthly adjustment amount — is likely not a Roth conversion dealbreaker, but this is something to discuss if it applies.
Estate planning: With the changes to the rules for inherited IRAs for most non-spousal beneficiaries, a Roth conversion can allow a client to build up a larger Roth IRA balance to pass on to non-eligible beneficiaries.
A client may wish to cover the taxes on an inherited IRA for children or other beneficiaries, and a Roth conversion is an excellent way to accomplish this. As long as the client has satisfied the five-year rule before death, the inherited Roth IRA can be tapped tax-free by non-eligible, non-spousal beneficiaries.
Reducing future RMDs: If a client is approaching the required beginning date for RMDs, currently age 73, or is already taking them, a Roth conversion can be a key tool for reducing these taxable distributions in the future.
The amount converted is no longer subject to RMDs, and any future appreciation of the converted assets will not be, either.
QCDs vs. Roth conversions: Clients who are at least age 70.5 have the option to do a qualified charitable distribution. This allows them to donate funds in their traditional IRA to a qualified charitable organization. A QCD is withdrawn tax-free from the IRA.
A qualified charitable distribution is a tax-efficient way to make charitable contributions for eligible clients, and they also help reduce future RMDs. The distributions, in fact, can be used to satisfy some or all of a client’s RMD in the year taken if done correctly.
If the goal is reducing future RMDs, a QCD and a Roth conversion can be useful tools. Which to use in a given year should depend on a client’s situation and goals. If appropriate, a client can do both in the same year.
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