What is A Roth IRA and Roth Conversion
In a previously published article, Elizabeth Hutton, CFP®, Financial Planner, provided an overview of the nature of what exactly a Roth IRA is. Elizabeth explains, A Roth IRA is an individual retirement account that is funded with after-tax dollars, with the expectation being that all contributions may then grow tax-free and serve as a means of tax-free retirement income, provided certain conditions are met. Because of the robust tax benefits that Roth IRAs offer, limitations are posed on contributions. To make a Roth contribution, you must have earned income; however, if your income is greater than a specific amount, then you are not permitted to contribute to a Roth IRA. For 2026, these limits are $168,000 for single filers and $252,000 for married couples filing jointly. However, a partial contribution is allowed for Modified Adjust Gross Income (MAGI) between $153,000 and $168,000 for individuals and MAGI between $242,000 and $252,000 for married couples filing jointly. In addition to the income restrictions, there is a limit on the amount you are allowed to contribute annually. In 2026, the contribution limit is $7,500 (plus an additional $1,100 for those 50 and older).
Elizabeth continues in her article, with these restrictions in mind, you may be thinking to yourself, “So as a high earner does that mean I will never have the opportunity to get funds into a Roth account?”. Another method can be used to get funds into a Roth IRA, and this is where Roth conversions come into the picture. If you have a tax-deferred retirement account such as a Traditional IRA, you can actually convert those dollars to a Roth IRA and pay income taxes on that amount in the current year. In other words, a Roth conversion is simply the process of moving Traditional IRA assets into Roth IRA assets. Unlike Roth contributions, Roth conversions do not have income or contribution limits.
Timing of Roth Conversions
With the overview of a Roth IRA and the mechanism of a Roth conversion defined, we can explore when it makes the most sense to consider doing this. In general, A Roth conversion may make the most sense when your current tax rate is lower than your expected future tax rate, such as during the “retirement gap” after you stop working but before Social Security, RMDs, or Medicare kick in. When considering a Roth conversion, it’s highly important to understand the tax rate for the current year as well as the expected tax rate when estimating all sources of income in the years ahead. It may be beneficial to wait until late in the 3rd quarter or early 4th quarter of the year for a Roth conversion. Waiting until later in the year to do a Roth conversion can allow one to see the total annual income first, like exact job pay, business profits, or investment gains for the year. This may help to convert the exact right amount to fill the current tax bracket without accidentally pushing yourself into a higher tax bracket or triggering extra Medicare costs if you’re in retirement.
One Big Beautiful Bill Act (OBBBA)
On July 4th, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law by President Donald Trump. This piece of legislation had been a key focus for the Trump administration, since taking office for their second term. Serving as the cornerstone legislative achievement of President Trump’s second term, the law enacted changes to the U.S. tax code alongside spending reductions for domestic programs
One of the main objectives of the OBBBA was to prevent the widespread automatic tax hikes scheduled for 2026 by permanently extending the individual tax brackets and standard deduction rules originally established under the 2017 Tax Cuts and Jobs Act (TCJA).
Given the permanent extension of lower tax rates and locking in lower individual tax brackets, the calculation on the financial impact of Roth conversions has also changed. Previously, part of the strategy for a conversion was to make sure money was moved over before the 2017 Tax Cuts and Jobs Act (TCJA), was set to expire at the end of 2025. Because lower brackets are now permanent, there is a greater multi-year flexibility to methodically spread conversions over without a looming automatic sunset date.
Also, within the OBBBA, there is a new $6,000 Senior Deduction (for Ages 65+) per person and $12,000 for married couples, subject to income limits, with the deduction starting to phase out if your MAGI is over $75,000 for single filers or $150,000 for joint filers. In some cases, this may create a temporary “tax-free window.” For example, a married couple over 65 earning under the income limit can in theory effectively convert up to $12,000 of a Traditional IRA to a Roth IRA tax-free by using this deduction to cancel out the conversion income.
As mentioned, this deduction begins to phase out at $75,000 of MAGI for single filers and $150,000 for married couples. If a large Roth conversion pushes total income over these limits, the deduction will be lost and there may be an effective 1.3% penalty tax bump.
Further, presently, the OBBBA increased the maximum State and Local Tax (SALT) itemized deduction cap from $10,000 to $40,000 ($40,400 adjusted) for households making under $500,000 Through 2029. Fidelity. This means that taxpayers in high-tax states receive a much higher itemized deduction, reducing their baseline taxable income. This may create some more “headroom” to execute lower-cost Roth conversions within a given tax bracket.
Although, if a massive Roth conversion pushes your MAGI past $500,000, the expanded $40,000 SALT cap rapidly phases back down to $10,000. This means a $100,000 conversion could accidentally expose $130,000 of income to taxes. JMCO
As we approach the end of the year and enter the window to analyze the financial impact of Roth conversions in the current year, the OBBBA signed into law in 2025 presents some new considerations to be aware of. Of course, it may be helpful to speak to your Wealth Manager or Financial Planner at Howe & Rusling, as well as your Tax Advisor to see how these provisions affect your personal financial plan.
Disclosures: This material is provided for informational and educational purposes only and should not be construed as individualized investment, tax, legal, or financial planning advice. The information discussed is general in nature and may not be appropriate for every investor. Roth IRA conversions can create current-year taxable income and may affect tax brackets, Medicare premiums, deductions, credits, and other aspects of a financial plan. Investors should consult with their tax advisor, legal advisor, and financial professional before implementing any Roth conversion strategy. Tax laws, contribution limits, income thresholds, deductions, and related rules are subject to change, and any examples are hypothetical and for illustrative purposes only. Howe & Rusling, Inc. is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. Past performance is not indicative of future results, and no strategy can guarantee future results or eliminate risk.
