If you thought Roth conversions were confusing before, buckle up, because it just got more complex. President Donald Trump’s “One, Big, Beautiful Bill Act” (OBBBA) has changed the tax playbook so much that nearly every tax maneuver has been altered.
This is especially true if you’re over the age of 65 and not yet retired. You and your financial adviser now face a messy and tangled web of tax credits, income thresholds and time limits that could make the Roth conversion maneuver even more tricky to pull off. Making the wrong move could cost you thousands of dollars extra.
Here’s what you need to know to prevent that.
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Tax bracket management
As a quick refresher, a Roth conversion is a financial strategy that involves moving money from a traditional IRA or 401(k) plan to a Roth IRA. The intention is to pay taxes upfront on the amount of money converted but allow your funds to grow tax-free over the long-term.
The maneuver’s success hinges on timing and your effective tax rates over several years. In other words, it’s all about “tax bracket management,” CFP Patrick Huey, owner of Victory Independent Planning in Portland, Oregon, told CNBC [1].
Advisors like him often encourage clients to “fill up the lowest brackets” with conversion income before climbing into higher tax territory. Managing tax brackets like this was already difficult, but Trump’s new tax rules have made the maneuver a lot more tricky to pull off.
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
Trump’s new tax rules
The One, Big, Beautiful Bill Act has dropped a slew of new tax rules on Americans of all ages. But this legislation also includes several incentives for American seniors, who are most likely to be considering Roth conversions.
For instance, Americans over the age of 65 now qualify for an additional seniors tax deduction, according to the IRS [2]. Individuals can claim up to $6,000 in this new deduction while a married couple filing their taxes together can claim up to $12,000 combined.
This gives seniors more room to pull off a Roth conversion. However, this new deduction has both a time and income limit. The tax break is only available from from 2025 through 2028. The deduction also phases out beyond a modified adjusted gross income (MAGI) of $75,000 for individuals and $150,000 for couples. It is fully phased out at $150,000 for individuals and $250,000 for couples [1].
For high-income taxpayers over the age of 65, there’s a clear dilemma. Should you maximize your deductions by converting less or maximize conversions as quickly as possible to take advantage of this temporary window? For many seniors, the answer lies in a complex calculation conducted by either an expert advisor or tax planning software.
For some high-income couples near those upper thresholds, it probably makes sense to convert funds at their current tax bracket (whether its 22% or 24%), forgoing the $6,000 deduction, instead of facing 30% tax brackets later on required minimum distributions, or RMDs, Judy Brown, a certified financial planner who works at SC&H Group in the Washington, D.C. told CNBC.
The bottom line: Roth conversions are a powerful financial tool for seniors and this maneuver could be boosted by Trump’s new changes to the tax code. However, if you and your partner earn a relatively high income and are old enough to worry about RMDs, being careful and strategic with your conversion plan is absolutely essential.
Make sure you speak to an advisor before you make a costly mistake.
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[1]. CNBC. “Trump’s ‘big beautiful bill’ makes Roth conversions more complicated — here’s what to know”
[2]. IRS. “One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors”
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