Ed Slott: How to Weigh Roth Conversions Against Trump's New Tax Cuts

ED SLOTT: OBBBA does not include any IRA tax changes, but some of the new provisions can indirectly impact Roth conversion decisions, beginning this year. OBBBA includes several new provisions that can reduce the cost of Roth conversions or allow more conversions at lower tax rates, but navigating the planning will be challenging. Some conversions may be more costly than they originally appear if the Roth conversion pushes income above phase-out levels for some of the new deductions.

THINKADVISOR: What should advisors be doing now?

SLOTT: Advisors should be well versed on the OBBBA-Roth conversion connection. There are more moving parts now, and advisors who address this with clients will be in demand. The Roth conversion decision cannot be analyzed in a vacuum due to the many competing provisions that need to be addressed. This is something that even AI cannot do, but advisors can, once they are up to speed. Advisors can do this by contacting clients and having conversations laying out all the tax provision puzzle pieces, to help clients come up with the right Roth conversion elixir — or maybe no conversions at all. This is valuable because the solution here is personal to each client. There is no one size fits all.

Some of the new provisions are permanent, like the extension of the reduced tax rates. Some are temporary, and some have different effective dates and income limitations. Advisors are needed here to help clients step back and prioritize based on what is most important to them in the long run. Instead of getting stuck in the weeds analyzing each of the new OBBBA provisions, have them look ahead at their bigger retirement and estate planning goals. That will help them focus better on what to do now.

For example, ask clients where they want to end up in retirement, and what do they want to leave their beneficiaries, as far as taxes are concerned. If they do Roth conversions now, they will have to pay tax now, but in retirement those Roth funds will be available income tax free for the rest of their lives and 10 years beyond for their beneficiaries (under the Secure Act’s 10-year rule for most non-spouse beneficiaries).

In addition, there are no lifetime RMDs for Roth IRA owners. If worry or uncertainty about future taxes are an issue, then Roth conversions will take precedence now over qualifying for some of the new tax benefits. Partial annual Roth conversions can help optimize the new benefits while still moving IRA funds to Roths.

THINKADVISOR: Where does the new $6,000 senior deduction come in?

SLOTT: One example is the new $6,000 deduction for seniors, available now in 2025 and through 2028, even for those who itemize deductions.

Seniors age 65 or over qualify, and a married couple where each spouse is 65 or over, gets a $12,000 deduction. This is a below-the-line deduction, meaning it does not reduce AGI (adjusted gross income), but it does reduce taxable income. However, once AGI exceeds certain limits, the $6,000/$12,000 deduction can be phased out or lost. It phases out once modified adjusted gross income (MAGI) exceeds $75,000 for individuals, and $150,000 for married filing joint (MFJ), and is completely lost when MAGI exceeds $175,000 for individuals and $250,000 for MFJ. Luckily, for most of the OBBBA provisions, MAGI is the same as AGI, unless there is any foreign income excluded, so AGI will be the number to keep an eye on.

Here's where planning comes in. If the priority is to do yearly conversions to avoid RMDs in retirement and have access to tax-free funds, then the Roth conversion will pay off now, even if the amounts converted push AGI over the threshold limits for the full $6,000/$12,000 deduction. Or, do a series of smaller, partial conversions over several years to retain the full deduction, and still move funds to the Roth at lower rates. But keeping conversions low now to qualify for a relatively small tax benefit (compared to the much bigger long-term Roth benefit both during life and for beneficiaries) may be short-sighted, resulting in a larger tax bill later on.

It’s all up to what the client wants now versus long term. This is one example where advisors can add real tangible value to manage and balance the current and long-term impact of Roth conversions on the various new tax deductions available. Advisors will need tax planning programs to work out each of the scenarios. The tax planning program providers are surely the biggest winner under OBBBA.

Clients under age 65 do not qualify for the senior deduction (even if they are receiving Social Security benefits), but advisors should identify clients ages 62-64, because the deduction ends after 2028. So, a client who is age 62 now (in 2025) will qualify for at least one year (in 2028 at age 65). The plan here would be to do more conversions at ages 62, 63, and 64 and maybe still qualify for the senior deduction at age 65.

THINKADVISOR: How about Roth conversions and the increased SALT deduction?

SLOTT: In addition, for those clients who are worried about a Roth conversion increasing their Medicare IRMAA (income-related monthly adjustment mmount) surcharges for Parts B and D, a conversion at age 62 will avoid that issue. Under the Medicare two-year lookback rule, a conversion at age 63 could increase IRMAA charges even though Medicare doesn’t begin until 65.

But once again, after I’ve gone a bit into the weeds here, step back and see if a larger Roth conversion would still be worth it in the long run even if deductions could be lost and Medicare charges would spike in the short run.

The same planning idea is true for those who can now take advantage of the increased SALT (state and local tax) deductions. Starting now, and through 2029, these itemized deductions increase from $10,000, to $40,000 (both for married and single — so there is a marriage penalty here). But the income limitations here are much higher than the senior deduction, so there’s more room for Roth conversions before losing any SALT deductions. The SALT deductions don’t begin phasing out until AGI exceeds $500,000 and after $600,000, the $30,000 increase is lost completely, and the SALT deduction reverts to $10,000. Again, here is an opportunity to do conversions, while keeping an eye on AGI, because the increased SALT deductions are more valuable now, allowing more taxpayers to itemize, especially in high-tax states.

Advisors should gauge the benefits of deductions now based on their current value vs. the bigger benefit of Roth conversions for life and beyond.

They really need a checklist of all the new OBBBA provisions to see which ones they want to keep, and which ones the client might want to give up, in order to increase their Roth conversions while tax rates remain low.

That said, the larger the tax benefit, the more careful advisors must be about managing Roth conversions (or partial conversions) so as not to lose a big tax benefit like the SALT deductions or the 20% qualified business income deduction for self-employed and small business owners (which was extended permanently and enhanced under OBBBA). This QBI deduction is an example of a big deduction that can either be increased or lost with a Roth conversion, so planning is critical for these clients. Tax advisors will need to be consulted on this since they will have a better idea of the projected business income for the year.

THINKADVISOR: What about partial or full Roth conversions?

SLOTT: Advisors can go through the various other new OBBBA provisions and see where there may be room for partial or full Roth conversions. Advisors also need to look at the end date on some of these temporary new deductions based on their effective dates, so they can be taken advantage of while they last.

The overall challenge with managing the optimal Roth conversion for the year while considering the new OBBBA impact is that Roth conversions must be completed during the year, even though the exact amount of income is not truly known until the following year when the tax return is filed. Accurate income projections are essential here — before year-end.

Also, remember that Roth conversions cannot be undone. Once the funds are converted, the Roth conversion income is locked in, and an unexpected income spike from other sources combined with the Roth conversion income could knock out some of the new OBBBA tax deductions. That’s a real challenge for advisors and tax planners, even with tax planning programs.

After looking at a client’s long-term tax plan, it may be that Roth conversions should be limited so as not to lose any of the new OBBBA benefits. This is why clients with larger IRAs will need to review all of this with advisors who can take them through the now expanded tax planning maze. I don’t think this is something the average client — even the do-it-yourselfer — can do on their own anymore. There are too many tax hurdles to overcome and getting past one could trigger another one. Tax planning for Roth conversions has now devolved into a game of “whack-a-mole.”

Next year when the first tax returns are being prepared for 2025, we will have a clearer picture on how the OBBBA deductions have played out with respect to the impact on Roth conversions. That should be interesting to see.

THINKADVISOR: What else is on your radar?

SLOTT: Beginning next year 401(k)s and other employer plan catch-up contributions must go to the Roth 401(k) if wages are greater than $145,000 (indexed) in a prior year.

This provision was initially supposed to begin in 2024, but institutions asked for more time to implement this, so IRS delayed the effective date to 2026. Many employees may be taken by surprise on this. It’s not the worst thing going to a Roth 401(k), but the idea of being forced to may not sit well. Most employees would rather have it be their choice. Some higher income employees might want to keep their catch-up contributions in their 401(k), but beginning next year they won’t be able to.