When it comes to retirement planning, taxes are a crucial factor that can significantly impact your savings. A Roth conversion is one of the most powerful tools available to optimize your retirement income. The Tax Cuts and Jobs Act (TCJA), passed in 2017, created a unique window of opportunity that makes Roth conversions more attractive than ever.

Let’s explore how the TCJA influences Roth conversions, why this strategy is particularly beneficial today, and how you can maximize its advantages.

What is a Roth conversion?

A Roth conversion involves transferring funds from a traditional IRA or 401(k) to a Roth IRA. Unlike traditional retirement accounts, Roth IRAs allow for tax-free withdrawals in retirement. However, there’s a catch—you must pay income tax on the converted amount in the year of the conversion. The key question then becomes: When is the best time to convert?

How the Tax Cuts and Jobs Act created a prime opportunity

The TCJA introduced several tax benefits that make Roth conversions more appealing:

Lower tax rates : The law reduced individual income tax rates. The highest marginal tax rate dropped from 39.6% to 37%, and the 25% bracket was replaced with a 22% bracket. Lower rates mean Roth conversions cost less in taxes now than they might.

Wider tax brackets : The thresholds for tax brackets expanded, allowing many taxpayers to stay in lower brackets while converting larger amounts to a Roth IRA.

Elimination of recharacterizations : The TCJA removed the ability to “undo” a Roth conversion, which means careful planning is essential. However, the benefits of conversion outweigh this loss for many investors.

Sunset provisions : Most individual tax cuts under the TCJA expire at the end of 2025, meaning rates will revert to pre-2018 levels. If you wait too long, conversions could become more expensive.

Why Roth conversions are more attractive today

There are several reasons why Roth conversions are worthy of consideration.

Lock in today’s lower tax rates : Since tax rates are historically low under the TCJA, converting now means you’ll pay less tax than you might after 2025. Given that future rates are uncertain, taking advantage of the current lower rates could be smart.

Reduce future required minimum distributions (RMDs) : Traditional IRAs are subject to RMDs beginning at age 73 (or 75 for those born in 1960 or later). These mandatory withdrawals increase taxable income in retirement, potentially pushing retirees into higher tax brackets.

Roth IRAs are not subject to RMDs, allowing your money to grow tax-free for longer.

Optimize estate planning : Leaving heirs a Roth IRA instead of a traditional IRA can provide significant tax benefits. Under the SECURE Act, non-spouse beneficiaries must withdraw inherited IRA funds within 10 years. The tax hit could be substantial if those funds are in a traditional IRA. With a Roth IRA, beneficiaries receive tax-free income, maximizing their inheritance.

Hedge against rising tax rates : The national debt and ongoing government spending suggest that tax rates may increase. By converting now, you’re taking control of your tax liability rather than leaving it to future policymakers.

How to execute a Roth conversion strategically

While a Roth conversion can be beneficial, it requires careful planning to avoid unnecessary tax burdens. Here’s how to do it right:

Convert in lower tax years : If you expect lower taxable income in a given year—perhaps due to retirement, a job change, or lower business income—that could be an ideal time to convert.

Use tax bracket management : Avoid pushing yourself into a significantly higher tax bracket by converting only up to the top of your current bracket. For example, if you’re in the 22% bracket and a full conversion would push you into the 32% bracket, consider converting only up to the 24% bracket limit.

Spread conversions over multiple years : Instead of converting a large sum all at once, consider spreading it out over several years to manage tax liability effectively. This strategy helps control the amount of tax you owe each year.

Pay taxes from outside funds : To maximize the amount that continues growing tax-free, use taxable savings or a brokerage account to cover the tax bill rather than taking funds from the converted IRA.

Common concerns

Here are some common concerns with tips for how to address them.

“What if tax rates don’t increase?” : Even if tax rates stay the same, a Roth conversion still provides benefits like tax-free withdrawals, no RMDs, and estate planning benefits.

“I don’t have the cash to pay the tax on a conversion” : While paying taxes from outside funds is ideal, partial conversions allow you to benefit from Roth advantages without a large immediate tax burden. By converting smaller amounts over several years, you can manage the tax impact and still gain the long-term benefits of tax-free growth.

“What if I move to a lower-tax state in retirement?” : State taxes should be a consideration, but federal rates are often the primary concern. If you anticipate moving to a no-tax state like Florida, Texas, or Nevada, you may want to delay conversion until after the move to avoid unnecessary state taxes. However, if federal rates rise, waiting could cost more in the long run. The decision should balance both federal and state tax implications.

Final thoughts

Lower tax brackets, expanded thresholds, and the elimination of RMDs make Roth conversions compelling for many investors.

A Roth conversion is not a one-size-fits-all strategy. For many, it offers a unique opportunity to create tax-efficient income for retirement.

If you’re unsure whether a Roth conversion makes sense for your financial situation, consulting with a tax professional or financial advisor can help tailor the strategy to your unique needs.