Why My Most Successful Clients Are Focusing on Roth Conversions in 2024 and 2025
The best time to do a Roth conversion is when you will pay the least amount of taxes on it. As a quick reminder, Roth conversions involve moving money from Traditional retirement accounts like IRAs and 401(k) plans to Roth accounts. This conversion results in those dollars being treated as added income. Aka more taxes that you'll have to pay.
The hard part is we can't guarantee what tax rates will look like in the future (congress is a fickle bunch). We only know what we would pay if we did it TODAY.
So why are we focusing on conversions in 2024 and 2025? Because there is a BIG chance that tax rates will go up in 2026. When the Tax Cuts and Jobs Act was passed in 2017, the tax brackets changed and most Americans ended up paying less in taxes as a result. The law was designed to be temporary and those changes could come to an end in 2026 if nothing changes.
There are 2 outcomes if we decide to act now:
1. We convert, pay taxes, and then the brackets increase. Yay! More years of tax-free growth in a Roth account AND we took advantage of being in a lower tax bracket.
2. We convert, pay taxes, and then brackets DON'T increase. Yay! More years of tax-free growth. I guess it wasn't so urgent as we thought back in 2024, but we're probably making more money now anyway.
While many people should consider Roth conversions, you might want to look extra close if you:
- Have a significant percentage of your retirement savings in Traditional retirement accounts
- Are a "Married Filing Jointly" couple making $200k+/year (You could go from being in a 24% tax bracket to as high as a 33% tax bracket 😦)
WARNING: This is a common financial planning strategy, but lots can go wrong. Make sure you understand your tax consequences, the nature of your investment accounts, and what you're doing. Or consider working with someone who can help you understand if it makes sense for you. I like to partner with client's tax professionals to make sure everything is 👌
